Mohave County v. Duval Corp.

• Decision Date: 10 April 1978
• Docket Number: No. 13068,13068
• Citation: 119 Ariz. 105,579 P.2d 1075
• Parties: MOHAVE COUNTY, a body politic; Mohave County Treasurer; and Arizona Department of Revenue, Appellants, v. DUVAL CORPORATION, a corporation, Appellee.
• Court: Arizona Supreme Court

Page 1075

579 P.2d 1075

119 Ariz. 105

MOHAVE COUNTY, a body politic; Mohave County Treasurer; and Arizona Department of Revenue, Appellants, v. DUVAL CORPORATION, a corporation, Appellee.

No. 13068.

Supreme Court of Arizona,In Banc.

April 10, 1978.

Rehearing Denied May 9, 1978.

Bruce E. Babbitt, former Atty. Gen., by James D. Winter, Donald P. Roelke, Mary Z. Chandler, Asst. Attys. Gen., Phoenix, for appellants.

Bilby, Shoenhair, Warnock & Dolph by Michael Lacagnina, David A. Paige, Tucson, for appellee.

STRUCKMEYER, Vice Chief Justice.

This appeal focuses on the ad valorem assessment practices of the Arizona Department of Revenue in the mining industry. Pursuant to A.R.S. §§ 42-146, 42-151 and 42-152, appellee, Duval Corporation, sought a refund of ad valorem property taxes assessed against its Mineral Park Mine near Kingman in Mohave County, Arizona for the year 1975. On appeal to the State Board of Tax Appeals, the value was fixed as $35,000,000. On further appeal to the Superior Court, that value was found to be excessive. The court made an independent determination that the full cash value was $14,300,000. We hold the valuation as fixed by the Board of Tax Appeals was not excessive. The judgment of the Superior Court is reversed and the valuation of appellee's Mineral Park Mine as fixed by the Board of Tax Appeals is affirmed.

At the outset, certain principles should be emphasized. We have held:

"It is clear that before the superior court may change the valuation it must first find that the valuation of the assessing authority is excessive." Graham County v. Graham County Electric Coop., Inc., 109 Ariz. 468, 470, 512 P.2d 11, 13 (1973).

and

" * * * in order to overturn the valuation fixed by the taxing authority there must be a finding substantiated by competent evidence that such valuation was 'excessive.' " Navajo County v. Four Corners Pipe Line Company, 107 Ariz. 296, 298, 486 P.2d 778, 780 (1971).

In Navajo County v. Four Corners Pipe Line Company, 106 Ariz. 511, 522, 479 P.2d 174, 185 (1970), we quoted with approval this language:

" 'It is generally recognized that a taxpayer is not entitled to relief * * * simply because the value of his property would be fixed substantially lower if computed by a different method even if the court thought such method to be preferable to the one adopted by the taxing authority. * * * ' State Board of T. Comm'rs v. Chicago M., St. P. & Pac. R. Co., 121 Ind.App. 302, 96 N.E.2d 279, 283."

By statute A.R.S. § 42-201, 4, for property tax purposes "market value" and "full cash value" are synonymous and mean:

" * * * that estimate of value that is derived annually by the use of standard appraisal methods and techniques."

The trial court, in rejecting the State's valuation, found:

" * * * the court considered all the evidence but put little or no weight on the State's appraisals because of the inappropriate method used." (Finding No. 12)

The dispositive question, then, is whether the State's appraisal was inappropriate as not having been derived through the use of standard appraisal methods and techniques.

There are three accepted approaches to estimating value: (1) the reproduction cost of the property, (2) income projected into the future (capitalization of income), and (3) market data appraisal which is the comparison of sales of similar property. Navajo County v. Four Corners Pipe Line Company, 106 Ariz. 511, 479 P.2d 174 (1970). The State's method of appraisal is a form of capitalization of income. Appraisal by capitalization of income is "an approved appraisal method." Graham County v. Graham County Electric Co-op., Inc., 109 Ariz. 468, 471, 512 P.2d 11, 14 (1973). James Bonbright, in his treatise on the Valuation of Property, Volume 1 at page 230, makes this observation:

"The 'capitalized-income method' of valuation refers to any procedure whereby the appraiser measures the value of the property by a calculation or estimate of the income or services derived or derivable from the property by its present or potential owner. In its more usual form, it involves a capitalization or discounted valuation of the realized or prospective net monetary income derivable by continuous exploitation rather than by resale."

In fixing the value of the Mineral Park Mine, the State did not estimate the mine's net income for 1975 by estimating its probable gross revenues and deducting the estimated probable cost of production. Rather, the State averaged the net income received from the last five years of the mine's operation and after comparing past years of operation with the mine's probable operations in 1975 concluded that a projection of the average rate of income over the remaining life of the mine would fairly represent its net earnings for 1975. For the year 1974, the Mineral Park net earnings were $6,666,243; for 1973, $7,334,851; for 1972, $5,707,403; for 1971, $6,475,039; for 1970, $9,485,660; a five-year average of $7,133,839. The life of the Mineral Park Mine at the then current rates of production was estimated as approximately ten years, with leaching operations extending its life five years more at reduced earnings. We note that under the Superior Court's determination of value of $14,300,000, unless economic conditions radically changed from the preceding years, Duval's shareholders would recover the entire value of the mine in the two-year period 1975 and 1976.

Roland Parks, in his work, "Examination and Valuation of Mineral Property," discusses extensively the Michigan mining appraisal system. In Michigan, a five-year average of income has been used to estimate the value of copper mines since 1924.

"The industrial and economic conditions under which the mines have operated have changed time and time again during the past quarter of a century, but throughout all this period the fundamental principles used in the valuation of mines in Michigan for tax purposes have not been altered. This would indicate that these principles are sound, and for that reason they are of interest to anyone studying the appraisal of mines.

It is logical to expect that past records of production, cost of mining, and profits will give some clue to future production, cost of mining, and profits. In the Michigan appraisal, all this background is gone over carefully, especially for the five years preceding the appraisal. This is a long enough period so that the average result usually gives a representative picture of the condition of the mine. A longer average would often cover phases of the history that are not representative of what may be expected in the future.

* * * In Michigan a five-year period was decided upon as a fair measure of past performance. The experience in this State shows that five years is not too long and only infrequently too short. " R. Parks, Examination and Valuation of Mineral Property, 448-455 (4th ed.).

Examination of past earnings is an appropriate means of determining future earning ability. As the Supreme Court of California said:

"Earnings data for the past several years is useful and used to assist an appraiser in projecting and determining future net income and earning ability, and is needed and used to determine a trend and help avoid error which could be caused from examining a short, possibly abnormal, period." California Portland Cement v. State Bd. of Equalization, 67 Cal.2d 578, 582, 63 Cal.Rptr. 5, 8, 432 P.2d 700, 704 (1967).

We think it is plain that the examination of net income of past years, modified where necessary by consideration of probable changes in economic conditions, is a recognized, standard appraisal technique by which full cash value may be fairly determined.

Duval's position is that "the State mechanically used the average of the previous five years' profits at Mineral Park", meaning that the State did not consider the differences in the mine's future operations to determine its earning ability. But we do not think so.

The testimony in the Superior Court established that Duval's 1974 shareholders' report contained this statement:

"No material adverse changes in the nature of the ore reserves being mined by Duval or in the general mining conditions at Duval's mines which would tend significantly to affect mining costs have occurred or are anticipated."

The State did not, however, rely solely on Duval's statement that no adverse changes in mining costs were anticipated. The State's appraiser, Donald E. Ross, examined the Mineral Park Mine in February of 1975. He investigated virtually every phase of the operation of the mine as to what was to be expected in the future. He testified concerning a discussion with the mine superintendent and geologist:

"Q. Did you have a conversation with the mine superintendent regarding the conditions or the operations at the mine?

A. Yes, I did.

Q. What was related to you in that conversation?

A. He related to me that ore reserves had increased; that the grade was decreasing; the stripping ration (sic) was increasing. He indicated several areas of molybdenum content that had been abandoned in the past. This type of thing.

Q. Did you have a conversation with the geologist?

A. Yes, I did.

Q. What was related to you in that conversation?

A. Essentially, we discussed ore reserves; the increases in the ore reserves; changes in grade, stripping ratio; and so forth, and we looked at some cross sections, a few bench plans to determine what could be expected in the future."

and:

"The mill superintendent indicated that they have had problems with the mill in the past; in other words, this mill was designed to be an autoganous mill. Autoganous grinding, essentially the rock grinds itself. They have converted the mill to a ball mill in which they add iron balls, and this grinds the rock. This has caused problems in the past. These problems for the most part have been resolved and they can be expected to be eliminated in the future."

Ross further testified:

Q. Utilizing this approach, how...