INDIAN INDUS. INC. v. DEPT. OF LOCAL GOVERNMENT FINANCE

• Decision Date: 19 May 2003
• Docket Number: No. 49T10-9811-TA-165.,49T10-9811-TA-165.
• Citation: 791 N.E.2d 286
• Parties: INDIAN INDUSTRIES, INC., Petitioner, v. DEPARTMENT OF LOCAL GOVERNMENT FINANCE, Respondent.
• Court: Indiana Tax Court

791 N.E.2d 286

INDIAN INDUSTRIES, INC., Petitioner, v. DEPARTMENT OF LOCAL GOVERNMENT FINANCE,¹ Respondent.

No. 49T10-9811-TA-165.

Tax Court of Indiana.

May 19, 2003.

Publication Ordered June 30, 2003.

David L. Pippen, Indianapolis, Attorney for Petitioner.

Steve Carter, Attorney General of Indiana, Kathryn Symmes Kirk, Deputy Attorney General, Indianapolis, Attorney for Respondent.

FISHER, J.

Indian Industries, Inc. (Indian) appeals the final determination of the State Board of Tax Commissioners (State Board) valuing its real property for the March 1, 1992 assessment date.

ISSUES

I. Whether the State Board erred in applying a 35% obsolescence depreciation adjustment to Indian's improvement;

II. Whether the State Board erred in grading Indian's improvement; and

III. Whether the State Board erred in valuing Indian's land?²

FACTS AND PROCEDURAL HISTORY

Indian owns land and an improvement in Evansville, Indiana. For the 1992 assessment date, the Vanderburgh County Board of Review (BOR) assigned Indian's property an assessed value of $794,230 (land at $70,630 and the improvement at $723,600). In arriving at that value, the BOR: 1) applied a 35% obsolescence adjustment to Indian's improvement; and 2) assigned sections 1, 2, and 3 of Indian's improvement a grade of C-2, and section 4 a grade of C+1. (See Ex. L at 2-3.) The BOR also valued Indian's land at $17,424 per acre. (See Ex. L at 1.)

Believing the assessment to be too high, Indian filed a Petition for Review of Assessment (Form 131) with the State Board on December 22, 1993. In its Form 131, Indian raised one issue: that "[a]n additional amount of obsolescence depreciation should be applied based on type of construction, plant layout and functional utility." (Ex. J.)

Following an administrative hearing, the State Board issued a final determination on Indian's Form 131, affirming the BOR's decision. Dissatisfied with the result, Indian filed an appeal with this Court on January 3, 1997. On June 19, 1998, the Court remanded the action to the State Board for further proceedings.³ (Ex. A at 3.)

On September 3, 1998, the State Board conducted a remand hearing. At the hearing, Indian offered testimony describing certain errors in its property assessment that were in addition to the obsolescence issue originally alleged in its Form 131. These additional errors included improper land value, overstated grade, improper computation of a framing adjustment and sprinkler pricing, and erroneous assessment of a dock floor. On September 22, 1998, the State Board issued its final determination, lowering the assessed value of Indian Industries' improvement to $686,430. The lowered valuation resulted from the State Board's reductions to the improvement's framing and sprinkler pricing.

Indian Industries again appealed the State Board's final determination to this Court on November 5, 1998. Trial was held on October 14, 1999. Oral arguments were heard on December 4, 2000. Additional facts will be supplied as necessary.

STANDARD OF REVIEW

This Court gives great deference to the final determinations of the State Board when it acts within the scope of its authority. Thousand Trails, Inc. v. State Bd. of Tax Comm'rs, 757 N.E.2d 1072, 1075 (Ind. Tax Ct.2001). Thus, this Court will reverse a final determination of the State Board only when its findings are unsupported by substantial evidence, arbitrary, capricious, constitute an abuse of discretion, or exceed statutory authority. Id.

Furthermore, a taxpayer who appeals to this Court from a State Board final determination bears the burden of showing that the final determination was invalid. Id. The taxpayer must present a prima facie case by submitting probative evidence (i.e., evidence sufficient to establish a given fact that, if not contradicted, will remain sufficient). Id. Once the taxpayer presents a prima facie case, the burden shifts to the State Board to rebut the taxpayer's evidence and support its findings with substantial evidence. Id.

DISCUSSION

I. Obsolescence Depreciation

Indian contends that the State Board's final determination affirming the BOR's application of a 35% obsolescence depreciation adjustment is "baseless or otherwise in error." (Pet'r Post-Hr'g Br., Findings of Fact and Conclusions of Law at 3.) More specifically, Indian argues that it submitted probative evidence indicating that it was entitled to a 70% obsolescence adjustment. Indian is incorrect.

"Obsolescence, which is a form of depreciation, is defined as a loss of value and classified as either functional or economic." Freudenberg-NOK Gen. P'ship v. State Bd. of Tax Comm'rs, 715 N.E.2d 1026, 1029 (Ind. Tax Ct.1999), review denied. See also IND. ADMIN CODE tit. 50, r. 2.1-5-1 (1992). Functional obsolescence is caused by factors internal to the property and is evidenced by conditions within the property itself. See 50 IAC 2.1-5-1. Economic obsolescence is caused by factors external to the property. Id. The State Board's regulations cite several examples of causes of obsolescence, such as limited use or excessive material and product handling costs due to an irregular or inefficient floor plan (functional) and the location of the building is inappropriate for the neighborhood (economic). Id.

This Court has previously explained that when a taxpayer seeks an obsolescence adjustment, it must make a two-pronged showing. See Clark v. State Bd. of Tax Comm'rs, 694 N.E.2d 1230, 1238 (Ind. Tax Ct.1998). First, the taxpayer must identify specific factors that are causing, or have caused, its improvement to suffer a loss of value. See id. Only after this showing does the taxpayer proceed to the second prong: quantifying the amount of obsolescence to be applied.⁴ See id.

It is important to recognize, however, that each of these prongs requires a connection to an actual loss in property value. For example, when identifying factors that cause obsolescence, a taxpayer must show through the use of probative evidence that these factors are causing an actual loss of value to its property.⁵ See Miller Structures v. State Bd. of Tax Comm'rs, 748 N.E.2d 943, 954 (Ind. Tax Ct.2001). Furthermore, when a taxpayer quantifies the amount of obsolescence to which it believes it is entitled, it is required, through the use of professional appraisal techniques, to convert that actual loss of value (shown in the first prong) into a percentage reduction and apply it against the improvement's overall value. See Clark, 694 N.E.2d at 1238.

During the administrative hearing, Indian presented an "Assessment Review and Analysis" in which it argued that its property suffered from both functional and economic obsolescence because the building lacked thermal pane windows and insulation, its layout was inefficient, it did not facilitate a network of computer and phone lines, it lacked adequate parking, and it was in an older declining neighborhood with narrow streets and "a mix of inharmonious uses." (Ex. B at 5-6.) As a result, Indian claims the property "is at an economic disadvantage in the market place, incurring higher utility, maintenance, material handling, and labor costs." (Ex. B at 6.) Indian's "Assessment Review and Analysis" also contains: 1) a cursory mathematical calculation showing how it arrived at 70% (see Exs. B at 30, and D); 2) a "statement of consolidated income" for Escalade, Inc. and its subsidiaries for fiscal years 1990 and 1991 (see Ex. E);⁶ and 3) an analysis of "cost of sales" for 1989-1992. (See Ex. F.)

All Indian has done in this case is provide the State Board with a laundry list of factors that may cause obsolescence to its improvement and then say "as a result, we're entitled to a 70% obsolescence adjustment." However, Indian needed to link one with the other by showing an actual loss of value. See Miller Structures, 748 N.E.2d at 954. Instead, the administrative record, as well as the case Indian presented at trial, is completely devoid of any evidence indicating and explaining Indian's actual loss of value. Because Indian has not shown how or why its improvement's value is negatively impacted by the factors that generally cause obsolescence, it has not satisfied its burden. Thus, the State Board's final determination on this issue is AFFIRMED.⁷

II. Grade

Indian also alleges that the State Board erred in grading various sections of its improvement. Specifically, Indian alleges that while the State Board assigned sections 1, 2, and 3 a grade of C-2, and section 4 a grade of C+1, it (Indian) submitted probative evidence to support respective grades of D, D-1, D, and C. Indian is incorrect.

The grading of improvements is an important part of Indiana's property assessment system. Under that system, assessors use improvement models and cost schedules to determine the base reproduction cost of a particular improvement. See Whitley Prods., 704 N.E.2d at 1116. Improvements are then assigned various grades based on their materials, design, and workmanship. Id. See also IND. ADMIN. CODE tit. 50, r. 2.1-4-3(f) (1992) (providing that grade is "used to adjust the total base reproduction cost determined [by using the improvement models and cost schedules] to account for variations in the quality of materials, workmanship, and design[ ]"). The grades represent multipliers that are applied to the subject improvement's base reproduction cost. Whitley Prods., 704 N.E.2d at 1116.

There are times, however, when an improvement deviates from the applicable improvement model or cost schedule. Such a deviation impacts the improvement's base reproduction cost. Id. at 1117. As this Court has previously explained, there are two methods by which to account for such deviations:

The preferred method ... is to use separate schedules that show the costs of certain components and features present in the model. This allows an assessor to adjust the base reproduction cost of the improvement objectively.

The other means of accounting for an improvement's

...