Lake Monticello Service Co. v. Board of Sup'rs of Fluvanna County

• Decision Date: 03 March 1989
• Docket Number: No. 880934,880934
• Citation: 237 Va. 434,377 S.E.2d 446
• Parties: LAKE MONTICELLO SERVICE COMPANY v. BOARD OF SUPERVISORS OF FLUVANNA COUNTY and State Corporation Commission. Record
• Court: Virginia Supreme Court

Page 446

377 S.E.2d 446

237 Va. 434

LAKE MONTICELLO SERVICE COMPANY v. BOARD OF SUPERVISORS OF FLUVANNA COUNTY and State Corporation Commission.

Record No. 880934.

Supreme Court of Virginia.

March 3, 1989.

Francis L. Buck (Buck & Hogshire, Charlottesville, on brief), for appellant.

Frederick W. Payne, Charlottesville, Wayne N. Smith (Lewis S. Minter; Anthony Gambardella, Richmond, on briefs), for appellees.

Present: CARRICO, C.J., COMPTON, STEPHENSON, RUSSELL, THOMAS and WHITING, JJ., and HARRISON, Retired Justice.

WHITING, Justice.

In this appeal of right from a decision of the State Corporation Commission (the Commission), we deal with a water and sewer utility company's challenge to the Commission's tax assessments. To decide the issue, we must resolve a conflict between the Commission's evaluation method of cost-less-depreciation, producing values in excess of $6,900,000, and the evidence of market value produced by the taxpayer, Lake Monticello Service Company (the service company), showing that most of its properties have no value. ¹

The development of Lake Monticello began a number of years ago. As a condition of approval of the subdivision, Fluvanna County required the developer to provide central water and sewer systems. The developer installed 60 miles of each system's lines, and included those costs in the prices of the lots that were sold.

In 1975, the service company was formed as a subsidiary of the developer, and was granted a Certificate of Convenience and Necessity by the Commission. The water distribution and sewer collection lines were given to the service company. The sewer treatment facilities, wells, and water tanks were sold to the service company. The expansion of the water and sewer treatment facilities was paid for out of the connection fees paid by the lot owners.

In 1981, the service company applied to the Commission, the assessing authority, pursuant to Code §§ 58.1-2604 and -2633, to reduce the 1978 to 1981 tax assessments of its real and personal property to what it contended were their fair market values. In that proceeding, the service company claimed the Commission's assessment method of cost-less-depreciation was unconstitutional and also introduced evidence of what it alleged were sales of comparable properties in other states. The Commission held the method was constitutional, and rejected the evidence of comparable sales as irrelevant and incompetent. Lacking evidence of market data, the Commission then employed its cost-less-depreciation method to sustain the assessment. We dismissed the service company's appeal of that ruling on procedural grounds.

In 1984, the service company again applied to the Commission for similar relief from its 1984 assessment. The Commission denied relief on the grounds of collateral estoppel because it had previously considered, and rejected, the same arguments in the 1981 case. We affirmed the Commission in its holding that the service company was collaterally estopped to attack the constitutionality of the Commission's assessment method. Lake Monticello Service Co. v. Board of Sup., 233 Va. 111, 114-15, 353 S.E.2d 767, 769-70 (1987). We said, however, that competent market data was the best method of determining fair market value, if such evidence was available, and that the doctrine of collateral estoppel did not apply to the service company's effort to introduce what it said was new evidence of market transactions relevant to proof of the 1984 fair market value of its property. Id. at 115-16, 353 S.E.2d at 770. Therefore, we reversed that portion of the Commission's holding which denied an evidentiary hearing for that purpose.

In June 1985, the Lake Monticello Homeowners Association acquired all the assets of the service company through a purchase of all of its stock. It paid nothing for the stock. There is no claim that this was not an arm's-length transaction.

While the appeal to this Court was pending, the service company filed similar claims for relief from the 1985 and 1986 assessments. Upon remand, the Commission consolidated the claims for the years 1984, 1985, and 1986, and referred the matter to one of its hearing examiners. At the examiner's hearing, the service company introduced evidence of the sale of the company in June 1985, and of the sales prices and circumstances of what expert witnesses said were comparable sales of three water and sewer companies in Virginia during the period from February 1983 to November 1985. The service company claimed that this evidence established the fair market value of most of its property.

The hearing examiner agreed, and found that the service company's evidence established a lower value than that assessed by the Commission. The Commission, however, held that because the sales relied upon by the hearing examiner were not sales to " 'willing purchaser[s]' ... willing to pay a price approaching the original investment cost" they could not be considered as comparable sales. Therefore, the Commission adopted its staff's assessments of more than $6,900,000 for the three-year period in question. Those assessments were based on a computation of fair market value: (1) by taking the original cost of the improvements and personal property and applying a percentage condition factor to that cost; and (2) by comparing the value of comparable locally appraised real estate.

Familiar principles govern our decision. The burden is on the service company to show that the Commission's assessment is erroneous. Winchester & West. RR. v. State Corp. Comm'n, 236 Va. 473, 476, 374 S.E.2d 66, 68 (1988). We will not reverse the findings of the Commission unless they are based on inherently incredible evidence, are unsupported by the evidence, id. at 476, 374 S.E.2d at 68, or are based on a mistake of law, First Virginia Bank v. Commonwealth, 213 Va. 349, 351, 193 S.E.2d 4, 5 (1972). The Constitution of Virginia, art. X, § 2, and Code §§ 58.1-2626 and -2633 require that all property of a public service corporation, such as the service company, be assessed at fair market value. We have said that "[f]air market value is the price property will bring when offered for sale by a seller who desires but is not obliged to sell and bought by a buyer under no necessity of purchasing." Clarke Associates v. County of Arlington, 235 Va. 624, 626, 369 S.E.2d 414, 415 (1988) (quoting Arlington County Board v. Ginsberg, 228 Va. 633, 640, 325 S.E.2d 348, 352 (1985)).

We must decide whether the Commission properly rejected the evidence of allegedly comparable sales because the purchasers were not willing to pay a price "approaching the original investment cost." As we said in the earlier case, if there is evidence of competent market data, the Commission must use that evidence to determine fair market value, rather than evidence of the property's cost less depreciation. Lake Monticello Service Co., 233 Va. at 115, 353 S.E.2d at 770. Our decision will turn on whether the evidence of comparable sales ² was properly rejected on the ground assigned. First Virginia Bank, 213 Va. at 351, 193 S.E.2d at 5-6.

The Commission's reasoning is based on evidence which showed that the sellers of those allegedly comparable properties were under "considerable compulsion to get rid of the properties at any price" and that the buyers were not "willing to buy." Although most of the properties were not profitable because of the Commission's rules limiting the utility's rates to a formula based on invested capital, resulting in a...