Inland Steel Co. v. State Bd. of Tax Com'rs

• Decision Date: 22 November 2000
• Docket Number: No. 49T10-9803-TA-00027.,49T10-9803-TA-00027.
• Citation: 739 N.E.2d 201
• Parties: INLAND STEEL COMPANY, Petitioner, v. STATE BOARD OF TAX COMMISSIONERS, Respondent.
• Court: Indiana Tax Court

739 N.E.2d 201

INLAND STEEL COMPANY, Petitioner, v. STATE BOARD OF TAX COMMISSIONERS, Respondent.

No. 49T10-9803-TA-00027.

Tax Court of Indiana.

November 22, 2000.

Stephen H. Paul, Matthew R. Gutwein, Baker & Daniels, Indianapolis, Indiana, Michael B. Shapiro, Honigman Miller Schwartz & Cohn, Detroit, Michigan, Attorneys for Petitioner.

Karen M. Freeman-Wilson, Attorney General of Indiana, Vincent S. Mirkov, Deputy Attorney General, Indianapolis, Indiana, Attorneys for Respondent.

FISHER, J.

Inland Steel Company (Inland) appeals the final determination of the State Board of Tax Commissioners (State Board) fixing the assessed value of its property (Plant 2) as of March 1, 1993. Inland presents several issues for this Court's consideration. The Court consolidates and restates these issues as follows:

I. Whether the State Board properly calculated Plant 2's functional obsolescence due to excess construction costs, excess operating expenses, and excess inventory and capital costs;

II. Whether the State Board applied the appropriate model in calculating the base reproduction costs for Plant 2's Major Buildings; and

III. Whether the State Board applied the proper grades to Plant 2's Basic Oxygen Furnace (BOF) Buildings and Major Buildings.¹

FACTS AND PROCEDURAL HISTORY²

Inland is a Delaware corporation engaged in business in the State of Indiana. Inland owns a large integrated steel production plant located in East Chicago, Indiana. The plant was initially constructed in 1901 and has been modified over the years; it consists of facilities designated as Plant 1, Plant 2, Plant 3 and Plant 4. Inland owns several hundred buildings, which are located on several parcels of land. The overwhelming majority of Inland's improvements—including the plant's principal operating segments—are part of Plant 2, which is the subject of this original tax appeal.

On January 24, 1995, Inland filed a Form 131 petition for review challenging Plant 2's assessment as of March 1, 1993. A hearing regarding Inland's petition was held on October 30, 1995. Supplemental hearings were held on June 17-19, 1996. On February 19-20, 1997, the State Board's hearing officers met with Inland's representatives to "analyze and audit the supporting data to certain answers to questions the State Board had submitted to Inland." (Resp't Br. at 2). The State Board, on July 29, 1997, issued its proposed final assessment determination. Another supplemental hearing was held on August 28, 1997, and on November 4, 1997, the State Board conducted a final hearing. On February 16, 1998, the State Board issued its final determination, assigning Plant 2 a total value of $35,834,200 ($2,950,430 for land and $32,883,770 for improvements).

Inland filed its original tax appeal petition on March 27, 1998. The Court conducted a trial in this matter on January 12, 1999. Oral arguments were heard on October 5, 1999. Additional facts will be supplied as necessary.

ANALYSIS AND OPINION

Standard of Review

This Court gives the final determinations of the State Board great deference when the State Board acts within the scope of its authority. Wetzel Enters., Inc. v. State Bd. of Tax Comm'rs, 694 N.E.2d 1259, 1261 (Ind.Tax Ct.1998). Accordingly, this Court reverses final determinations of the State Board only when those decisions are unsupported by substantial evidence, are arbitrary or capricious, constitute an abuse of discretion or exceed statutory authority. Id. The taxpayer bears the burden of demonstrating the invalidity of the State Board's final determination. Clark v. State Bd. of Tax Comm'rs, 694 N.E.2d 1230, 1233 (Ind.Tax Ct.1998).

Discussion

I. FUNCTIONAL OBSOLESCENCE

Inland argues that the State Board erroneously calculated Plant 2's functional obsolescence. Specifically, Inland contends that it presented a prima facie case supporting its identification and quantification of functional obsolescence and that the State Board failed to sufficiently refute this prima facie case. According to Inland, the State Board did not support its final determination with substantial evidence. In response, the State Board asserts that it properly used its discretion in calculating Plant 2's functional obsolescence.

Inland presents various sub-issues for consideration. These involve challenges to the State Board's calculation of functional obsolescence due to excess construction costs, excess operating expenses, and excess inventory and capital costs. First, the Court will review the definition of functional obsolescence and the methodology for calculating functional obsolescence. Next, the Court will consider the evidence needed to support a prima facie case of functional obsolescence. Finally, the Court will address each of Inland's sub-issues.

Obsolescence, which is a form of depreciation, is defined as a loss of value and is classified as either functional or economic. Freudenberg-NOK Gen. Partnership v. State Bd. of Tax Comm'rs, 715 N.E.2d 1026, 1029 (Ind.Tax Ct.1999) (citing IND.ADMIN.CODE tit. 50, r. 2.1-5-1 (1992) (codified in present form at id., r. 2.2-10-7(e) (1996))), review denied. Functional obsolescence is either a physical element that buyers are unwilling to pay for or a deficiency that impairs the utility of a property when compared to a more modern replacement, leading to a loss in value.³ Id. (citing Michael D. Larson, Identifying, Measuring, and Treating Functional Obsolescence in an Appraisal, 10 J. PROP.TAX MGMT. 42, 44 (1999)). It is caused by factors internal to the property and is evidenced by conditions within the property. Pedcor Invs. v. State Bd. of Tax Comm'rs, 715 N.E.2d 432, 435 (Ind. Tax Ct.1999) (citations omitted). As the State Board's regulations explain, "Functional Obsolescence may be due to a poor floor plan, mechanical inadequacy or superadequacy, functional inadequacy or superadequacy due to size, style, age, or other losses." IND.ADMIN.CODE tit. 50, r. 2.1-5-1. Functional obsolescence works as a penalty against the property's value. Larson, supra at 44. The State Board expresses this penalty in terms of a percentage reduction from the subject property's value; the obsolescence deduction can range from 0% to 95%.⁴ IND.ADMIN.CODE tit. 50, r. 2.1-5-1.

The determination of obsolescence is a two-step inquiry. Freudenberg-NOK, 715 N.E.2d at 1029. The regulations require that an assessor first identify the causes of obsolescence and then quantify the amount of obsolescence to be applied. Id.; see also IND.ADMIN.CODE tit. 50, r. 2.1-5-1 (stating that accurate determination of obsolescence requires an assessor to "recognize the symptoms of obsolescence and exercise sound judgment in equating his observation of the property to the correct deduction in value. . . ."). The State Board's regulations provide no specific guidance as to how obsolescence should be quantified. Clark, 694 N.E.2d at 1240. However, one permissible means of quantifying obsolescence under the true tax value system is the use of "generally recognized appraisal methods." Id. at 1242 n. 18 (citations omitted). Ultimately, the State Board must support its quantification of obsolescence with substantial evidence.⁵Id. at 1240.

As with all challenges to final determinations issued by the State Board, a taxpayer challenging the State Board's quantification of obsolescence must submit probative evidence sufficient to establish a prima facie case demonstrating the invalidity of the State Board's final determination. See Western Select Properties v. State Bd. of Tax Comm'rs, 639 N.E.2d 1068, 1075 (Ind.Tax Ct.1994)

; King Indus. Corp. v. State Bd. of Tax Comm'rs, 699 N.E.2d 338, 343 (Ind.Tax Ct.1998). A prima facie case is one consisting of evidence that is "sufficient to establish a given fact and which if not contradicted will remain sufficient [to establish that fact]." Canal Square Ltd. Partnership v. State Bd. of Tax Comm'rs, 694 N.E.2d 801, 804 (Ind. Tax Ct.1998) (citation omitted). The evidence needed to make a prima facie case "depends on the issues raised by the [taxpayer's] challenge."⁶

Clark, 694 N.E.2d at 1234.

Probative evidence is evidence that "tends to prove or disprove a point in issue." Sterling Management-Orchard Ridge Apartments v. State Bd. of Tax Comm'rs, 730 N.E.2d 828, 833 (Ind.Tax Ct.2000) (quoting BLACK'S LAW DICTIONARY 579 (7th ed.1999)), reh'g denied. Cf. Phelps Dodge v. State Bd. of Tax Comm'rs, 705 N.E.2d 1099, 1104-05 (Ind. Tax Ct.1999)

(providing examples of probative evidence that taxpayer could submit regarding physical depreciation), review denied. Conclusory statements are not probative evidence. CDI, Inc. v. State Bd. of Tax Comm'rs, 725 N.E.2d 1015, 1019 (Ind.Tax Ct.2000). Cf. Heart City Chrysler v. State Bd. of Tax Comm'rs, 714 N.E.2d 329, 333 (Ind.Tax Ct.1999) (stating that references to photographs and regulations, without explanation, are not probative evidence). A taxpayer's appraisal, if it quantifies obsolescence according to generally recognized appraisal principles, may constitute probative evidence that supports a prima facie case. Canal Square, 694 N.E.2d at 807. When a taxpayer offers probative evidence, the State Board must deal with the evidence in some meaningful manner. Clark, 694 N.E.2d at 1235. Once the taxpayer has submitted probative evidence establishing a prima facie case, the burden of production shifts to the State Board; the State Board must then rebut the taxpayer's evidence and support its final determination with substantial evidence. Id. at 1233. See also Thorntown Tel. Co. v. State Bd. of Tax Comm'rs, 629 N.E.2d 962, 965 (Ind.Tax Ct.1994) (observing that, while a taxpayer's burden of proof may not shift, the duty of going forward may shift several times). "If the State Board fails to make any findings as to evidence rebutting the taxpayer's prima facie case, or enters unsupported conclusions or findings, the State Board's decision will be reversed." Canal Square, 694 N.E.2d at 805.⁷

A. Excess...