Matter of McCannel, 50428

CourtSupreme Court of Minnesota (US)
Citation301 NW 2d 910
Docket Number49488 and 50122.,50469,No. 50428,50446,50428
PartiesIn the Matter of the Petitions of Malcolm A. McCANNEL, to Review Objections to Real Estate Taxes Payable in 1973, 1974, 1975, 1976 and 1977. Malcolm A. McCANNEL et al., Relators (50446)-Respondents (50428 and 50469), v. COUNTY OF HENNEPIN, Relator (50428)-Respondent, State of Minnesota, Relator (50469)-Respondent. In re OBJECTIONS AND DEFENSES TO REAL PROPERTY TAXES FOR 1972-1975 ASSESSMENTS. NORTHWEST AIRLINES, INC., petitioning taxpayer, Appellant, v. STATE of Minnesota, Respondent, County of Hennepin, Respondent. In re OBJECTIONS AND DEFENSES TO REAL PROPERTY TAXES FOR the 1973, 1974 AND 1975 ASSESSMENTS, Taxes Payable in 1974, 1975 and 1976, Respectively. R. E. SHORT COMPANY (Calhoun Towers), petitioning taxpayer, Appellant, v. STATE of Minnesota, Respondent, County of Hennepin, Respondent.
Decision Date05 September 1980

Johnson & Eastlund and Ralph W. Peterson, Minneapolis, for relator Malcolm McCannel et al.

Thomas L. Johnson, County Atty., Donald Lalor, Senior Asst. County Atty., Civil Div., Minneapolis, for County of Hennepin.

Warren Spannaus, Atty. Gen., C. H. Luther, Deputy Atty. Gen., James Neher, Sp. Asst. Atty. Gen., Dept. of Revenue, St. Paul, for State.

Mann, Green, Hayes, Simon, Murray & Johanneson, John A. Murray and Richard M. Gaalswyk, St. Paul, for amicus curiae.

Heard, considered and decided by the court en banc.

SCOTT, Justice.

Several cases have been consolidated for purposes of this appeal. The Northwest Airlines case involves real estate tax assessments for the years 1972, 1973, 1974, and 1975 on property leased by Northwest Airlines from the Metropolitan Airports Commission. Northwest Airlines challenged the Commissioner of Revenue's appraisal of the property, claiming that the commissioner had overvalued it and that other property within the same taxing district had been systematically undervalued by application of Minn.Stat. § 273.11,1 resulting in discriminatory and unequal distribution of property taxes in violation of Minn.Const. art. X, § 1 and U.S.Const. amend. XIV. The trial court made findings as to the values of the properties in question, and held that Minn. Stat. § 273.11 is not unconstitutional. We affirm the decision of the trial court on the constitutional issue, but remand this case to the trial court for new valuation findings based on our conclusion that the court was not free to adopt valuation figures higher than those placed on the property by the assessor.

The R. E. Short Co. case involves real estate tax assessments for the years 1973, 1974, and 1975 on Calhoun Towers, a 21-story apartment tower owned by Short in Minneapolis. Short claims that the property was overvalued in all three years; that it had been subject to unconstitutional discrimination in valuation by application of § 273.11, subd. 2; and that subd. 2 is unconstitutional under Minn.Const. art. X, § 1, and U.S.Const. amend. XIV. The trial court concluded that the property had not been overvalued; that § 273.11, subd. 2, is constitutional; and that therefore Short's property had not been unconstitutionally discriminated against. We affirm the decision of the trial court.

The McCannel case arises from Malcolm A. McCannel's challenge to property tax assessments on his residence in Minneapolis for the years 1972, 1973, 1974, 1975, 1976, and 1977. McCannel claimed that the assessor for the City of Minneapolis overvalued his property; that his property was discriminated against in violation of Minn. Const. art. X, § 1, and U.S.Const. amend. XIV by virtue of the application of § 273.11, subd. 2; and that § 273.11, subd. 2, is unconstitutional. The case was transferred to the tax court pursuant to Minn.Stat. § 271.01, subd. 5 (1978). There, the case was combined for trial on the constitutional issue with a similar petition filed by taxpayer Edward N. Nelson. The court concluded that although the assessor's valuation of McCannel's property was not excessive, the undervaluation of similar residential property due to assessment practices impermissibly discriminated against McCannel. The tax court also held that the operation of § 273.11, subd. 2, discriminated against McCannel, and that the statute is unconstitutional. We reverse on the issue of the constitutionality of § 273.11, subd. 2, but we agree with the tax court that the procedures used to assess other residential property may have resulted in discrimination in fact against McCannel's property. We remand this case for the introduction of more complete evidence on the issue of the undervaluation of other property resulting from assessment practices.

The tax court refused to grant any relief to petitioner Nelson on the basis of its decision that § 273.11, subd. 2, is unconstitutional. The court stated that the market value of Nelson's property must be judicially determined before the appropriate measure of relief could be calculated for Nelson's property. Because we hold that § 273.11, subd. 2, is constitutional, we conclude that Nelson is not entitled to recover on his claim of statutory discrimination.

The factual background to the valuation issues in each of these cases can be summarized briefly. Northwest Airlines' leased property at the Minneapolis-St. Paul International Airport consists of two parcels: Parcel 8000 containing Northwest's main base facilities, and Parcel 8010 containing Northwest's cargo handling facility. Northwest is treated as feeholder of the property for purposes of the taxing statute. Extensive testimony from several expert witnesses was introduced at trial concerning various methods of valuation and the valuation figures arrived at by the experts.2 Essentially, the valuation problem in this case stems from the property's character as unique, special purpose property. It is significantly more valuable as an airplane facility than it would be if used for any other purpose.

Three standard approaches to valuing property-the income approach, the market data approach, and reproduction cost less depreciation-yield widely varying results when applied to special purpose property. At trial, the experts agreed that although an appraisal is usually a synthesis of all three approaches, the reproduction cost approach is best suited for estimating the value of special purpose property. The major difference in the experts' methods of valuation was that Northwest's expert witnesses substantially reduced their estimates under the reproduction cost approach by allowing for economic obsolescence and functional depreciation.

The property at issue in the Short case, Calhoun Towers, was acquired by Short out of receivership in 1968. At trial, Short challenged the city assessor's conclusions and methods. The experts who testified stated that they considered all three approaches to valuation (income, market data, and reproduction cost less depreciation), but relied most heavily on the income approach. Michael Livingston, a certified assessor from the Minneapolis Assessor's Office, primarily used market or economic rent figures to value the property under the income approach; that is, in addition to considering the actual income and expense figures offered by Short for Calhoun Towers, he considered potential income and expenses derived from comparisons with similar properties. Livingston concluded that the property was worth $3,200,000 in 1973 and 1974, and $3,600,000 in 1975. Short's expert, Howard Lawrence, relied on the actual income and expense figures put forward by Short and valued the property at $2,500,000 in 1973, $2,200,000 in 1974, and $2,500,000 in 1975.

Finally, in the McCannel case, the city assessor valued McCannel's residence at $213,000 for the years 1972 through 1976, and $230,000 for 1977. At trial, McCannel challenged the assessor's findings, claiming that the discount allowed by the assessor for the distinctive nature of his residence was too low. The tax court adopted the city assessor's findings, and McCannel does not challenge these valuation findings on appeal.

Several issues are raised in these cases for our consideration:3

(1) Is Minn.Stat. § 273.11, subd. 2, unconstitutional under Minn.Const. art. X, § 1, or U.S.Const. amend. XIV?

(2) Did the tax court in the McCannel case have jurisdiction to determine the constitutionality of a tax statute?

(3) Was McCannel's property unconstitutionally discriminated against because of the way in which property values were determined?

(4) Are the trial court's findings as to the value of the property in question in the Short case supported by the evidence?

(5) Are the trial court's findings as to the value of the property in question in the Northwest Airlines case supported by the evidence?

(6) Was it proper for the trial court in the Northwest Airlines case to adopt valuation figures higher than those placed on the property by the assessor?

1. In 1906, the Minnesota Constitution was amended to state that "taxes shall be uniform upon the same class of subjects." Minn.Const. art. X, § 1. This amendment expressly enabled the legislature to classify property for purposes of taxation and thereby tax different classes of property at different rates. Section 273.13 (1978) outlines the basic present-day classification system. However, the underlying basis for valuing and taxing real property remains "market value" or "estimated market value"; certain classes of property are then taxed on a percentage of market value. Market value is defined in Minn.Stat. § 272.03, subd. 8 (1978): "`Market value' means the usual selling price at the place where the property to which the term is applied shall be at the time of assessment; being the price which could be obtained at a private sale and not at a forced or auction sale." Minn.Stat. § 273.11, subd. 1, provides that subject to certain limitations, all property shall be valued at its market value.

In 1973, the Minnesota Legislature enacted a new...

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