Puget Sound Energy Inc. v. State

• Decision Date: 21 June 2011
• Docket Number: No. DA 10–0394.,DA 10–0394.
• Citation: 255 P.3d 171,361 Mont. 39,2011 MT 141
• Parties: PUGET SOUND ENERGY, INC., Petitioner and Appellee,v.STATE of Montana, DEPARTMENT OF REVENUE, Respondent and Appellant.
• Court: Montana Supreme Court

361 Mont. 39

255 P.3d 171

2011 MT 141

PUGET SOUND ENERGY, INC., Petitioner and Appellee,

v.STATE of Montana, DEPARTMENT OF REVENUE, Respondent and Appellant.

No. DA 10–0394.

Supreme Court of Montana.

Argued and Submitted May 17, 2011.Decided June 21, 2011.

For Appellant: C.A. Daw (argued), Derek Bell, and Courtney Jenkins, Special Assistant Attorneys General, Montana Department of Revenue, Helena, Montana.For Appellee: Michael Green (argued), Crowley Fleck, PLLP, Helena, Montana, David J. Crapo, Crapo Smith, LLC, Salt Lake City, Utah.Justice BRIAN MORRIS delivered the Opinion of the Court.

[361 Mont. 40] ¶ 1 Montana Department of Revenue (Department) appeals the judgment of the Thirteenth Judicial District Court, Yellowstone County that concluded that the State Tax Appeal Board (STAB) could not assess Puget Sound Energy's (Puget) market value in excess of the Department's original assessment. We reverse.

¶ 2 We review the following issue on appeal:

¶ 3 Did the District Court correctly conclude that STAB may not assess Puget's market value in an amount that exceeds the Department's original assessment?

FACTUAL AND PROCEDURAL BACKGROUND

¶ 4 The Department issued final ad valorem assessments of Puget for the 2005, 2006, and 2007 tax years. Puget petitioned STAB for review of the Department's assessments. STAB held a hearing over eight days. STAB determined that the Department inaccurately had assessed Puget's value. STAB assessed Puget's value in excess of the Department's original assessment. Puget petitioned the District Court for review. The court concluded that STAB could not adopt an assessment value that exceeded the Department's original assessment and remanded to STAB. The Department appeals only the court's determination that STAB improperly had increased Puget's taxable values.

¶ 5 The Department's appraiser, John Cameron, appraised Puget for the tax years 2005, 2006, and 2007. Cameron's original-cost-less-depreciation method valued Puget at $3.76 billion for 2005, $4.09 billion for 2006, and $4.69 billion for 2007. Cameron correlated the original-cost-less-depreciation values with the other indicators of value to reach correlated unit values of $3.74 billion for 2005, $4.09 billion for 2006, and $4.66 billion for 2007.

¶ 6 Puget directly petitioned STAB for review of Cameron's determinations of value. Puget did not request an administrative hearing with the Department's Office of Dispute Resolution. Puget's petition to STAB contended that “[t]he Department has over-valued [Puget's] Montana property for all years at issue. In each case, the assessed value determined by the Department exceeds the fair market value of [Puget's] Montana properties.” Puget's pre-hearing brief and post-hearing brief, as well as the agreed-upon pre-hearing conference order, state that Puget had requested that STAB make an “ultimate determination of market value” and assess Puget in an amount that reflects market value.

¶ 7 Puget and the Department each retained expert witnesses for the STAB proceedings. Puget's expert, John Davis, issued an independent expert appraisal that the parties admitted into evidence as a stipulated exhibit. Davis used an historical-cost-less-depreciation approach to reach values of $3.17 billion for 2005, $3.17 billion for 2006, and $3.34 billion for 2007. Davis calculated correlated unit values of $2.85 billion for 2005, $2.86 billion for 2006, and $3.00 billion for 2007.

¶ 8 The Department's expert, Brent Eyre, prepared an independent expert appraisal. Puget deposed Eyre regarding his appraisal before the STAB hearing. The parties stipulated to the admissibility of Eyre's appraisal report. Eyre's original-cost-less-depreciation approach produced values of $3.77 billion for 2005, $4.17 billion for 2006, and $4.69 billion for 2007. Eyre reached correlated unit values of $3.98 billion for 2005, $4.32 billion for 2006, and $4.68 billion for 2007. Puget's witnesses challenged the validity of Eyre's calculations. Puget also used Eyre's calculations to contest the calculations of the Department's original appraiser, Cameron.

¶ 9 STAB informed the parties that it felt “some independent responsibility” to determine the “appropriate value” for Puget. STAB identified several flaws in Cameron's assessment. STAB discredited Cameron's assessment due to a number of deficiencies. Cameron never had prepared a utility appraisal before 2005. Cameron did not hold any appraisal designations. Cameron had attended only one workshop before completing the Puget appraisal. The Department had failed to show that it supervised Cameron properly in the preparation of his appraisal. STAB pointed to testimony from Eyre that had identified material mistakes in Cameron's assessment. STAB concluded that it could not afford the Department's appraisal a presumption of correctness.

¶ 10 STAB relied instead on the appraisals prepared and submitted by Eyre and Davis. STAB found Eyre's independent assessment of market value more credible and persuasive than Davis's assessment. STAB determined that Eyre's appraisals most closely comported with the evidence presented during the STAB hearing. STAB adopted Eyre's values as those that most closely reflected Puget's market value.

¶ 11 STAB did not adopt Eyre's assessments wholesale. STAB disagreed with an adjustment made by Eyre under the original-cost-less-depreciation method. Eyre believed that Puget's contract to transport power on Bonneville Power Administration's (BPA) power lines constituted a beneficial use taxable under § 15–24–1203, MCA. Section 15–24–1203, MCA, imposes a tax on the possession or beneficial use of electric transmission lines. The Department and Eyre had not included the value of the beneficial use of the BPA's lines in their original-cost-less-depreciation method. The Department and Eyre both believed that the value of the contract could be taxed separately under § 15–24–1203, MCA, and added to the Montana allocated value.

¶ 12 Puget argued that this approach constituted double taxation. Puget advocated that STAB incorporate the BPA contract value into the original-cost-less-depreciation indicator of value. This change would decrease Puget's ultimate tax liability. STAB agreed. STAB reached an original-cost-less-depreciation value of $3.80 billion for 2005, $4.19 billion for 2006, and $4.71 billion for 2007. STAB's correlated unit value for Puget resulted in a value of $3.98 billion for 2005, $4.33 billion for 2006, and $4.68 billion for 2007. STAB's adoption of the slightly higher Eyre values, coupled with STAB's addition for the BPA contract value, resulted in original-cost-less-depreciation indicators and correlated unit values for Puget that exceeded both Cameron's and Eyre's assessments.

¶ 13 Puget petitioned the District Court for judicial review. Puget argued that STAB lacked the authority to raise the appraised values or adopt an appraised value greater than the Department's original assessment. The District Court agreed that STAB could not adopt a market value that exceeded the Department's original assessment. The District Court also remanded several legal issues to STAB for further consideration, explanation, or clarification. The Department appeals only the issue of whether STAB has the authority to determine that Puget's market value exceeds that of the Department's original assessment.

STANDARD OF REVIEW

¶ 14 We review for correctness a district court's conclusions of law. PacifiCorp v. State, 2011 MT 93, ¶ 15, 360 Mont. 259, 253 P.3d 847. A district court reviews an administrative decision in a contested case to determine whether the findings of fact are clearly erroneous and whether STAB correctly has interpreted the law. Id.; O'Neill v. Dept. of Revenue, 2002 MT 130, ¶ 10, 310 Mont. 148, 49 P.3d 43. We apply the same standard of review to an administrative appeal as the district court applies. O'Neill, ¶ 10.

¶ 15 Section 15–2–302, MCA, governs direct appeals to STAB from Department appraisals of centrally assessed property. Courts conduct judicial review according to the Montana Administrative Procedures Act (MAPA) and § 15–2–303, MCA. Section 15–2–302(5), MCA. MAPA sets forth the standard of judicial review in administrative proceedings at § 2–4–704, MCA.

¶ 16 We defer to STAB's findings unless they are clearly erroneous, because STAB is particularly suited for settling disputes over the appropriate valuation of property. PacifiCorp, ¶ 15. A decision of STAB may be affirmed or remanded for further proceedings. Section 2–4–704(2), MCA. A court also may reverse or modify a decision of STAB if STAB's findings, inferences, or conclusions are clearly erroneous in view of the reliable, probative, and substantial evidence on the whole record and prejudices the taxpayer's substantial rights. Id.

DISCUSSION

¶ 17 Did the District Court correctly conclude that STAB may not assess Puget's market value in an amount that exceeds the Department's original assessment?

¶ 18 Montana law requires the Department to assess taxable property at 100% of its market value. Section 15–8–111(1), MCA. Section 15–8–111(2)(a), MCA, defines market value as “the value at which property would change hands between a willing buyer and a willing seller.” The Department centrally assessed Puget's value according to the unit method of valuation. Section 15–23–101, MCA; Admin. R.M. 42.22.102 to 42.22.111. The unit method of valuation calculates the value of a business's entire operating system as a going concern and as a single entity. Admin. R.M. 42.22.101(32). This calculation includes all tangible and intangible operating assets of the company. Admin. R.M. 42.22.101(33).

¶ 19 The unit method authorizes the appraiser to consider cost, income, and market approaches to determine a business's market value. Admin. R.M. 42.22.111(1). The Department calculated five separate indicators of value for each of the subject years. Puget argued to the District Court that...