Lea Power Partners, LLC v. N.M. Taxation & Revenue Dep't (In re Consol. Protests to State Assessed Prop. Tax Bureau's Notices of Prop. Value for 2012 through 2016)

• Decision Date: 06 January 2021
• Docket Number: No. A-1-CA-37707,A-1-CA-37707
• Parties: LEA POWER PARTNERS, LLC, Protestant-Appellant/Cross-Appellee, v. NEW MEXICO TAXATION & REVENUE DEPARTMENT, Respondent-Appellee/Cross-Appellant, IN THE MATTER OF THE CONSOLIDATED PROTESTS TO STATE ASSESSED PROPERTY TAX BUREAU'S NOTICES OF PROPERTY VALUE FOR 2012 THROUGH 2016.
• Court: Court of Appeals of New Mexico

LEA POWER PARTNERS, LLC, Protestant-Appellant/Cross-Appellee, v. NEW MEXICO TAXATION & REVENUE DEPARTMENT, Respondent-Appellee/Cross-Appellant,IN THE MATTER OF THE CONSOLIDATED PROTESTS TO STATE ASSESSED PROPERTYTAX BUREAU'S NOTICES OF PROPERTY VALUE FOR 2012 THROUGH 2016.

No. A-1-CA-37707

COURT OF APPEALS OF THE STATE OF NEW MEXICO

January 6, 2021

This decision of the New Mexico Court of Appeals was not selected for publication in the New Mexico Appellate Reports. Refer to Rule 12-405 NMRA for restrictions on the citation of unpublished decisions. Electronic decisions may contain computer-generated errors or other deviations from the official version filed by the Court of Appeals.

APPEAL FROM THE DISTRICT COURT OF SANTA FE COUNTY

Gregory S. Shaffer, District Judge

Brownstein Hyatt Farber Schreck, LLP

Harold D. Stratton, Jr.

Cassandra R. Malone

Debashree Nandy

Lorena B. Hutton

Albuquerque, NM

Norton Rose Fulbright US LLP

William T. Sullivan

San Antonio, TX

for Appellant

Hector H. Balderas, Attorney General

David Mittle, Special Assistant Attorney General

Santa Fe, NM

for Appellee

MEMORANDUM OPINION

HANISEE, Chief Judge.

{1} This appeal and cross-appeal arise in response to an Administrative Hearing Officer's (AHO's) decision regarding the valuation of Lea Power Partners (LPP's) electric plant for property tax purposes. For the reasons that follow, we affirm.

BACKGROUND

{2} LPP, a wholesale electricity generator, operates the Hobbs Generating Facility (the Facility) in Hobbs, Lea County, New Mexico. The Facility delivers electricity into the Southwest Power Pool (SPP). The SPP is not a "capacity market," which means that the SPP does not guarantee any payments to LPP for its production of electricity at the Facility. In such scenarios, wholesale generators like LPP produce revenues by entering into private contracts with customers through power purchase agreements (PPAs) to secure compensation in exchange for having the capacity to produce or provide electricity.

{3} In 2006, LPP negotiated and entered into a PPA (the PPA) with Southwest Public Service (SPS). Pursuant to the PPA, LPP agreed to sell to SPS all of the electric capacity and associated energy produced by the Facility for twenty-five years, beginning September 2008. Under the PPA, SPS is obligated to purchase all of the electric capacity and associated energy produced by the Facility and supply LPP with all the natural gas required to produce such electric capacity and associated energy. Significantly, the PPA guarantees that LPP receives annual revenue whether or not the Facility produces any electricity.

{4} In 2012, LPP's owner initiated and completed the sale of LPP, including the Facility. During this time, LPP submitted its 2012 property tax return and received a notice of valuation from the New Mexico Property Tax Division (the NMPTD). Following receipt of the notice of valuation, LPP timely filed a protest of the NMPTD's 2012 valuation. After the sale of LPP, an accounting firm performed a purchase price allocation. The resulting report was not prepared for property tax purposes, but the accounting firm's purchase price allocation was relied upon by LPP in financial statements to determine the "tangible costs" of the Facility as related to property taxes.

{5} In each of the years following the sale of LPP—2013, 2014, 2015, and 2016—LPP timely submitted property tax returns, the NMPTD sent LPP notices of valuation in response, and LPP timely filed protests to the notices of valuation. LPP's protests asserted that the property value of LPP—and crucially, the Facility—was significantly lower in each reported year than was reflected in the NMPTD's notices of valuation. In June 2016 the AHO consolidated LPP's filed protests for each of the 2012 through 2016 tax years. In June 2017 a protest hearing on the consolidated protests was held before the AHO. The AHO ultimately granted in part and denied in part LPP's protests, finding that: (1) the PPA is intangible property and is subject to neither taxation nor inclusionwithin calculation of tangible property cost; (2) the tangible property costs were accurately reflected in KPMG's price allocation report as adopted in LPP's audited financial statements; (3) while the PPA is intangible property not subject to taxation, the PPA could be considered for purposes of determining whether LPP was entitled to a property tax deduction; and (4) partly because of the economic protection provided by the PPA, LPP was not entitled to any further property tax deductions. LPP and the New Mexico Taxation and Revenue Department (NMTRD) subsequently filed a joint motion in district court to certify the case to the Court of Appeals pursuant to Rule 1-074(S) NMRA, and the district court granted the motion finding that the case involves an issue of substantial public interest. Having accepted certification, this appeal and cross-appeal followed.

DISCUSSION

{6} On appeal, LPP raises three arguments: (1) the AHO misinterpreted NMSA 1978, Section 7-36-29 (1975, amended 2016)¹ such that the PPA—intangible property—was erroneously included in the total value of the Facility used for property tax purposes and, consequently, LPP was denied tax deductions to which it was otherwise entitled; (2) the AHO's decision allowing the PPA to be considered in relation to deductions resulted in a violation of the Uniformity Clause of the New Mexico Constitution; and (3) the AHO improperly disregarded certain expert testimony and the AHO's consideration of expert testimony was arbitrary, capricious, not supported by substantial evidence, and not in accordance with the law.

{7} On cross-appeal, NMTRD likewise raises three arguments: (1) the PPA is not intangible property but rather is an intangible cost and is therefore subject to property taxation; the AHO erred by relying on the cost of acquisition, rather than the cost of construction to determine LPP's tangible property costs under Section 7-36-29(B)(6); and (3) the AHO erred in setting aside the doctrine of administrative gloss by straying from long-standing NMTRD interpretation of statutes, including Section 7-36-29. We resolve each point of appeal, albeit in a different order than presented by parties in order to ease understanding.

I. Overview of Relevant Statutory and Administrative Code Provisions

{8} This case involves interpretation of provisions of the Property Tax Code. Before addressing the parties' arguments on appeal and cross appeal, we briefly outline the relevant statutes and provisions of the New Mexico Administrative Code. The Property Tax Code defines "property" as "tangible property, real or personal." NMSA 1978, § 7-35-2(J) (2018). Regulation 3.6.1.7(D) of the Administrative Code clarifies that the term "property" as defined by Section 7-35-2 "does not include intangible property[.]" 3.6.1.7(D) NMAC. Under Regulation 3.6.5.21(G) of the Administrative Code, intangibleproperty is not subject to property tax valuation because it is not included within the definition of "property." 3.6.5.21(G) NMAC.

{9} Section 7-36-29 establishes the special method of valuation for property such as the Facility here. Under Section 7-36-29(A), "[a]ll property used for the generation, transmission or distribution of electric power or energy subject to valuation for property taxation purposes shall be valued in accordance with the provisions of this section." Section 7-36-29(C) provides three requirements for the valuation of an electric plant, the first two of which are at issue in this case:

(1) the department shall determine the tangible property cost of the electric plant;

(2) such tangible property cost shall then be reduced by the related accumulated provision for depreciation and any other justifiable factors, including functional and economic obsolescence, such as the limitation on the use of the property based on the available reserves committed to the property; and

(3) notwithstanding the foregoing determination of value for property taxation purposes, the value for property taxation purposes of an electric plant shall not be less than twenty percent of the tangible property cost of the electric plant.

(Emphasis added.) Section 7-36-29(B)(6) defines "tangible property cost" as:

the actual cost of acquisition or construction of property, including additions, retirements, adjustments and transfers, but without deduction of related accumulated provision for depreciation, amortization or other purposes[.]

II. The PPA is Intangible Property Not Subject to Property Taxation

{10} In support of its argument that the PPA is subject to property taxation, NMTRD contends: (1) the PPA cannot be considered intangible property because the PPA—a long-term contract—does not fit into the applicable statutory definition, and (2) that even if the PPA is considered to be intangible, it is an intangible cost rather than intangible property. Whether the PPA is tangible property is a question of law which we review de novo. See Rio Grande Chapter of the Sierra Club v. N.M. Mining Comm'n, 2003-NMSC-005, ¶ 17, 133 N.M. 97, 61 P.3d 806 (explaining that even in an appeal of an administrative decision, we review questions of law de novo).

{11} NMTRD first argues that the PPA cannot be considered intangible property because it does not conform to the meaning of intangible property as set forth by case law and the Administrative Code. To support this proposition, NMTRD cites to Cutter Flying Serv., Inc. v. Prop. Tax Dep't in which intangible property was defined as "suchproperty as has no intrinsic and marketable value, but is merely the representative or evidence of value, such as certificates of stock, bonds, promissory notes, and franchises." 1977-NMCA-105, ¶ 44, 91 N.M. 215, 572 P.2d 943 (Sutin, J. specially concurring) (internal quotation marks omitted). NMTRD similarly cites to the Administrative Code, which states that the term "property" as defined by Section 7-35-2 "does not include intangible property including, but not limited to,...