O'NEILL v. Department of Revenue

• Decision Date: 18 June 2002
• Docket Number: No. 00-791.,00-791.
• Parties: Daniel J. and Sheila M. O'NEILL, As Trustees of the Sheila M. O'Neill Family Trust, Petitioners and Respondents, v. The DEPARTMENT OF REVENUE, State of Montana, Respondent and Appellant.
• Court: Montana Supreme Court

49 P.3d 43

2002 MT 130

310 Mont. 148

Daniel J. and Sheila M. O'NEILL, As Trustees of the Sheila M. O'Neill Family Trust, Petitioners and Respondents, v. The DEPARTMENT OF REVENUE, State of Montana, Respondent and Appellant.

No. 00-791.

Supreme Court of Montana.

Submitted on Briefs August 16, 2001.

Decided June 18, 2002.

Daniel J. Whyte, Tax Counsel, Montana Department of Revenue, Helena, Montana, for Appellant.

Mollie A. Maffei, Maffei Law Firm, Butte, Montana, for Respondents.

Justice PATRICIA O. COTTER delivered the Opinion of the Court.

¶ 1 The Department of Revenue (DOR or Department) appraised three properties owned by Daniel and Sheila O'Neill and assessed a value to each property. The O'Neills claimed the properties had been overvalued and challenged the values through appropriate administrative procedures and then to the Montana Second Judicial District Court. The District Court agreed with the O'Neills and assigned significantly lower values to the subject properties. The DOR appeals the District Court's ruling. We reverse.

¶ 2 The issue before this Court is whether the District Court erred in overturning the State Tax Appeal Board and substituting its assessment of value in place of the Department of Revenue's.

FACTUAL AND PROCEDURAL BACKGROUND

¶ 3 At issue are two parcels of property, designated for purposes of this decision as the Dental Clinic and Vacant Land. In the original administrative proceeding, the value of a third parcel known as Big A was also disputed. This parcel was subsequently sold and will not be addressed here.

¶ 4 In 1989, the O'Neills purchased over twenty-five contiguous and non-contiguous lots in Block Number 11 of the Atherton Place on the Lakes Addition in Butte, Montana, for $85,000. Six contiguous lots were subsequently used in 1991 for construction of the Dental Clinic at a completed construction cost of $177,762. The remaining undeveloped lots constitute the Vacant Land parcel. At the time of the District Court proceedings, the O'Neills were attempting to sell the Vacant Land for approximately $179,000.

¶ 5 In 1993, the DOR performed an original assessment of the properties and assigned market values to the Dental Clinic land, the Dental Clinic itself, designated the "Dental Clinic improvements," and the Vacant Land. The O'Neills, believing that the properties had been overvalued, requested that the DOR review and revise its original assessments. After review in 1994, the Department reduced the land values for both parcels but did not change the assessed value of the Dental Clinic improvements.

¶ 6 The O'Neills continued to maintain that the properties had been overvalued and appealed to the Silver Bow County Tax Appeal Board (CTAB). CTAB denied their appeal.

¶ 7 The O'Neills then appealed to the State Tax Appeal Board (STAB) which granted further reductions to the land values and ordered that the properties be entered into the Silver Bow County tax rolls.

¶ 8 Dissatisfied with the reductions assessed by STAB, the O'Neills, in accordance with § 15-2-303, MCA, appealed STAB's ruling to the Montana Second Judicial District Court. The District Court conducted a hearing in November 1996 during which additional evidence was presented in the form of the testimony of appraiser Jack McLeod, who testified on behalf of the O'Neills. McLeod, who had appraised the Dental Clinic in 1990 but had not appraised the Vacant Land, testified that the DOR had overvalued the O'Neills' properties and that comparable sales in the area proved a lower value should have been applied. The District Court vacated STAB's values and assigned significantly lower values to the O'Neills' properties. DOR appeals.

¶ 9 The table below reflects the various values assigned to these two parcels and the Dental Clinic improvements from the time of purchase to June 2000 when the District Court issued its ruling.

------------------------------------------------------------------------------------- Dental Clinic- Dental Clinic- land improvements Vacant Land ------------------------------------------------------------------------------------- Purchase/construction Included in price 177,762 85,000 price of Vacant Land ------------------------------------------------------------------------------------- DOR 1993 62,790 220,200 357,750 ------------------------------------------------------------------------------------- DOR Review 1994 45,450 220,200 289,350 ------------------------------------------------------------------------------------- CTAB denied appeal — no reassessment ------------------------------------------------------------------------------------- STAB 1995 44,250 220,200 246,000 ------------------------------------------------------------------------------------- Requested by O'Neills 21,617 175,975 81,066 ------------------------------------------------------------------------------------- District Court $190,000 85,000 June 26, 2000 -------------------------------------------------------------------------------------

STANDARD OF REVIEW

¶ 10 A district court reviews an administrative decision in a contested case to determine whether the findings of fact are clearly erroneous and whether the agency correctly interpreted the law. Laudert v. Richland County Sheriff's Dept., 2000 MT 218, ¶ 14, 301 Mont. 114, ¶ 14, 7 P.3d 386, ¶ 14. We employ the same standards when reviewing a district court order affirming or reversing an administrative decision. Laudert, ¶ 14 (citing Langager v. Crazy Creek Products, Inc., 1998 MT 44, ¶ 13, 287 Mont. 445,

¶ 13, 954 P.2d 1169, ¶ 13.)

DISCUSSION

¶ 11 The Legislature has mandated that the DOR assess all property subject to taxation at 100% of its "market value," except under certain circumstances that do not apply to this case. Sections 15-8-101 and 15-8-111, MCA. "Market value" is statutorily defined as "the value at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts." Section 15-8-111(2)(a), MCA. In addition to defining "market value," the Legislature also addressed approaches to be used to determine market value:

(b) If the department uses construction cost as one approximation of market value, the department shall fully consider reduction in value caused by depreciation, whether through physical depreciation, functional obsolescence, or economic obsolescence.

(c) If the department uses the capitalization of net income method as one approximation of market value and sufficient, relevant information on comparable sales and construction cost exists, the department shall rely upon the two methods that provide a similar market value as the better indicators of market value. (Emphasis provided) Sections 15-8-111(2)(b) and (c), MCA.

¶ 12 The DOR explained that it consistently utilizes, as it did in this case, one of the three approaches specified by the Legislature when appraising property to determine market value, i.e., the cost approach (§ 15-8-111(2)(b), MCA), the market data approach (i.e., comparable sales, § 15-8-111(2)(c), MCA), and the income capitalization approach (§ 15-8-111(2)(c), MCA). The DOR maintained that this Court has specifically accepted these appraisal approaches in Albright v. Montana Dept. of Revenue (1997), 281 Mont. 196, 933 P.2d 815.

¶ 13 The Department explained that it appraised the Vacant Land as well as the land on which the Dental Clinic is located at $500 per foot of Monroe Avenue street frontage, and a significantly lesser per foot figure for lots not facing Monroe Avenue. The DOR claimed that its "per foot land values" were appropriately derived from market data acquired from the sales of comparable property between 1988 and 1992. Using this market data, the DOR then utilized the Computer Assisted Land Pricing program and derived the square foot land values.

¶ 14 For the Dental Clinic improvements, the DOR had no comparable sales available. Therefore, the Department used the cost approach which took the estimated value of the land, based on market data, and added to it the current construction or replacement costs of the improvements. The Department then subtracted the amount of depreciation from the improvements. This method is known as "Replacement Cost New Less Depreciation."

¶ 15 The O'Neills argued that the Dental Clinic improvements should have been assessed at the same value as the neighboring veterinary clinic's improvements. Both clinics had been built at approximately the same time, on the same size parcel of land, for approximately the same construction costs, and were similarly structured. The DOR contended, however, that while similarities did exist, the clinics were not comparable for several reasons, including but not limited to, major differences in construction, interior finish, layout, roof structure, partitions, type of plumbing, the existence of Dental Clinic outbuildings, as well as paving and landscaping differences.

¶ 16 The O'Neills presented the DOR with various "comparable properties" in an effort to show that their parcels had been overvalued compared to these other properties. The DOR concluded, however, that the presented properties were not ...