Midwest Processing Co., a Subsidiary of Archer Daniels Midland Co. v. McHenry County By and Through McHenry County Bd. of Com'rs

• Decision Date: 02 April 1991
• Docket Number: No. 900377,900377
• Citation: 467 N.W.2d 895
• Parties: MIDWEST PROCESSING COMPANY, A SUBSIDIARY OF ARCHER DANIELS MIDLAND COMPANY, Plaintiff and Appellant, v. McHENRY COUNTY, acting By and Through the McHENRY COUNTY BOARD OF COMMISSIONERS, Defendant and Appellee. Civ.
• Court: North Dakota Supreme Court

Page 895

467 N.W.2d 895

MIDWEST PROCESSING COMPANY, A SUBSIDIARY OF ARCHER DANIELS MIDLAND COMPANY, Plaintiff and Appellant, v. McHENRY COUNTY, acting By and Through the McHENRY COUNTY BOARD OF COMMISSIONERS, Defendant and Appellee.

Civ. No. 900377.

Supreme Court of North Dakota.

April 2, 1991.

Pringle & Herigstad, P.C., Minot, for plaintiff and appellant, argued by David J. Hogue.

Lyle Gregory Witham (argued), State's Atty., Towner, for defendant and appellee.

Appearance by Robert W. Wirtz, Asst. Atty. Gen., State Tax Dept., Bismarck, amicus curiae on behalf of State Tax Dept.

ERICKSTAD, Chief Justice.

Midwest Processing Company, a subsidiary of Archer Daniels Midland Company (Midwest), appeals following a judgment of the District Court for the Northeast Judicial District, dated August 15, 1990, which affirmed the decision of the McHenry County Board of Commissioners (Board), dated June 5, 1990, which denied Midwest's request for an abatement of its taxes. We affirm.

On August 16, 1988, Midwest was purchased by Archer Daniels Midland Company. The property had an assessed value of $6,963,320, which was based upon an appraisal performed by the State Tax Commissioner's Office, dated March 24, 1988.

In February of 1989, Midwest requested an abatement of its 1988 taxes. Subsequent to a recommendation for denial of the abatement request by the Governing Board of Brown Township, the McHenry County Board of Commissioners held a hearing to consider Midwest's application for abatement. The hearing was conducted on February 27, 1989, and was scheduled to be continued on May 2, 1989. However, because both parties failed to provide additional evidence concerning the value of the plant, the hearing was continued until such material could be provided. On May 18, 1989, additional materials were provided by the State Tax Commissioner's appraiser. During July 1989, Midwest provided its additional material. On August 21, 1989, the Board made an on-site inspection of the plant.

On August 28, 1989, the Board reconvened to conclude the hearing. At the close of the evidence, the Board requested both sides to provide additional evidence concerning the issue of economic obsolescence. The State Tax Commissioner's appraiser provided supplemental evidence in the form of a letter on September 8, 1989. Midwest provided additional evidence on September 18, 1989. On November 7, 1989, the Board signed its findings of fact and conclusions of law, and determined the value of the property to be $6,948,694.

Midwest appealed the decision of the Board to the District Court for the Northeast Judicial District. On March 21, 1990, the district court remanded the case to the Board for the consideration of additional evidence.

In early 1990, Midwest initiated a request for an abatement of its 1989 taxes. A hearing was subsequently held on April 30, 1990, before the Board. At that time, both parties agreed that any evidence provided during either the 1988 or 1989 hearings would be considered in both requests for abatement.

On June 5, 1990, the Board determined that the value of the property for both requests, considering an economic obsolescence factor of 35%, to be $6,948,694. The two requests were combined for appeal. On August 1, 1990, the district court affirmed the Board's decision. This appeal followed.

Our standard of review, when considering the decision of a local taxing authority, is limited to determining whether or not the Board acted in an arbitrary, capricious, or unreasonable manner. Koch Hydrocarbon v. Bd. of Equalization, 454 N.W.2d 508 (N.D.1990); Riverview Place, Inc. v. Cass County, 448 N.W.2d 635 (N.D.1989); Ulvedal v. Board of County Commissioners, 434 N.W.2d 707 (N.D.1989); Shaw v. Burleigh County, 286 N.W.2d 792 (N.D.1979).

Midwest makes the following two assertions on appeal:

"I. McHENRY COUNTY ARBITRARILY RELIED ON ECONOMIC OBSOLESCENCE AT THE RATE OF 35 PERCENT WITHOUT ANY EVIDENCE

II. THE JOHNSON--SOO LINE--SHAW STANDARD OF REVIEW SHOULD NOT APPLY TO VALUATION OF UNIQUE INDUSTRIAL PROPERTY"

I. Economic Obsolescence.

Midwest asserts that the state appraiser (Barry Hasti) failed to adequately explain how he determined the amount of economic obsolescence. Mr. Hasti asserted that there are at least three methods of calculating the amount of economic obsolescence: 1) the amount of available production resources divided by the amount of production capacity; 2) the actual rate of return divided by the projected rate of return; and, 3) the original cost of the plant divided by the sales price of the plant. Mr. Hasti's appraisal, adopted by the Board, utilized the first of the above methods; i.e., the available supply of sunflower seeds was divided by the available processing capacity. The following table was provided by Mr. Hasti to illustrate his calculation of economic obsolescence under this method:

"Table II

SUNFLOWER PRODUCTION AS PERCENT OF CRUSH CAPACITY

North Dakota Percent of

Production, North Dakota

Year metric tons Crushing Capacity

                                            (000)
                1985                         892                                          73.4%
                1986                         731                                           60.2
                1987                         814                                           66.9
                1988                         499**                                         41.0
                

These calculations are based upon an optimum crushing capacity of 1,215,450 metric tons per year. ¹

** Production was down in 1988 compared to 1987 in spite of an increase in

the number of acres planted. The cause of the decrease may be attributed to

the dry weather conditions for the 1988 crop year."

Midwest contends that Mr. Hasti subjectively determined the amount of economic obsolescence as opposed to utilizing an accepted mathematical formula. We disagree.

When we consider the table, the following estimates of economic obsolescence are shown: 1985 - 26.6% (100% - 73.4% = 26.6%); 1986 - 39.8% (100% - 60.2% = 39.8%); 1987 - 33.1% (100% - 66.9% = 33.1%); 1988--a discussion of Mr. Hasti's exclusion of 1988 figures from his estimate can be found in the following section of this opinion. An average of the years 1985-1987 yields an economic factor of 33.17%. Estimates of economic obsolescence necessarily involve appraisal judgment and the very nature of economic obsolescence defies measurement. See generally, Truitt Bros., Inc. v. Department of Revenue, 302 Or. 603, 732 P.2d 497, 502 (1987); Appeal of Colonial Pipeline Co., 318 N.C. 224, 347 S.E.2d 382, 389 (1986). We cannot conclude Mr. Hasti acted subjectively in estimating economic obsolescence at 35% when that figure only varies 1.83% from the average of the calculations provided in the above table. The above table, which was included within a three-page memorandum concerning economic obsolescence, submitted to the Board by Mr. Hasti at the request of the Board, adequately shows that Mr. Hasti did not "subjectively" determine the amount of economic obsolescence.

Mr. Hasti's memorandum does raise two related questions. Our first question is whether or not it was proper for the state appraiser to ignore the low level of production in 1988 on the basis that the low production during that year was due to dry weather conditions; the above table indicates that in 1988 only 41% of the crushing capacity was used which appears to indicate an economic obsolescence factor of 59%.

Midwest, in a letter to the McHenry Board of County Commissioners dated September 18, 1989, defines economic obsolescence as:

"Economic Obsolescence may be defined as follows: 'Impairment of desirability or useful life arising from factors external to the property, such as economic forces or environmental changes which affect supply-demand relationships in the market. Loss in the use and value of a property arising from the factors of economic obsolescence is to be distinguished from loss in value from physical deterioration and functional obsolescence, both of which are inherent in the property. Also referred to as Locational or Environmental Obsolescence.' Boyce, Byrl N., Real Estate Appraisal Terminology."

A similar definition was provided by the Supreme Court of Kansas:

" 'The loss in usefulness of an asset, occasioned by the approach to the stage of economic uselessness through progress of the arts; economic inutility arising from external causes. Obsolescence refers to disappearing usefulness resulting from invention, change of style, legislation, or other causes having no physical relation to the object affected....' (Emphasis added.)"

Northern Natural Gas Company v. Dwyer, 208 Kan. 337, 492 P.2d 147, 163 (1971) (quoting E.L. Kohler, "A Dictionary for Accountants" (3rd Ed.)). See Ames v. C.I.R., 626 F.2d 693, 696 (9th Cir.1980); Governours Square Apts. v. State Bd. of Tx Com'rs, 528 N.E.2d 864, 866 (Ind.Tax 1987); Meridian Hills Country Club v. State Bd. of Tax Com'rs, 512 N.E.2d 911, 915 (Ind.Tax 1987); Truitt Bros., Inc. v. Dept. of Revenue, 302 Or. 603, 732 P.2d 497, 502 (1987); Anaconda Co. v. Property Tax Dept., 94 N.M. 202, 207, 608 P.2d 514, 519 (N.M.App.1980); Piazza v. Town Assessor of Town of Porter, 16 A.D.2d 863, 228 N.Y.S.2d 397, 398 (1962). Essentially, economic obsolescence is a form of depreciation which may be applicable when physical depreciation fails to adequately recognize the decline in value. Anaconda, 94 N.M. at 207, 608 P.2d at 519 (quoting 4 Martens, Law of Federal Income Taxation Sec. 23.104 (1973)). Like physical depreciation, economic obsolescence provides a method for determining the remaining value of the useful life of an asset. Id.; Ames, 626 F.2d at 695.

Economic obsolescence may result from a number of different factors, but an element of incurable or permanent impairment prevails throughout all of the potential causes. ² See Governours Square Apts., 528 N.E.2d at 866; Meridian Hills Country Club, 512 N.E.2d at 915; Anaconda, 94 N.M. at 207, 608 P.2d at...