SALT LAKE CITY SO. R. CO. v. State Tax Commission

• Decision Date: 14 September 1999
• Docket Number: No. 970529.,970529.
• Citation: 1999 UT 90,987 P.2d 594
• Parties: SALT LAKE CITY SOUTHERN RAILROAD COMPANY, INC., Petitioner, v. UTAH STATE TAX COMMISSION, Respondent. Utah Association of Counties, Intervenor.
• Court: Utah Supreme Court

987 P.2d 594

1999 UT 90

SALT LAKE CITY SOUTHERN RAILROAD COMPANY, INC., Petitioner, v. UTAH STATE TAX COMMISSION, Respondent.

Utah Association of Counties, Intervenor.

No. 970529.

Supreme Court of Utah.

September 14, 1999.

Robert A. Peterson, Milo Steven Marsden, Kevin Joseph Simon, Salt Lake City, for petitioner.

Jan Graham, Att'y Gen., Gale K. Francis, Michelle Bush, Asst. Att'ys Gen., Salt Lake City, for respondent.

Bill Thomas Peters, Salt Lake City, for intervenor.

RUSSON, Justice:

¶ 1 Petitioner Salt Lake City Southern Railroad Company seeks review of a ruling of the Utah State Tax Commission upholding the 1994 valuation of petitioner's taxable property. The Property Tax Division of the Tax Commission had determined that, as of January 1, 1994, the fair market value of petitioner's taxable property was $1 million. We affirm.

BACKGROUND

¶ 2 Salt Lake City Southern Railroad Company (the "Company") is in the business of "spotting" railcars, which involves shuttling railcars to and from local customers of Union Pacific Railroad ("UPRR") for loading and unloading. By contract with UPRR, the Company receives a fee for each railcar spotted. The Company began performing its services in April of 1993 and realized a net operating income that year of $84,621. ¶ 3 The Company owns an old locomotive and various items of office furniture and office equipment. It also leases a second locomotive. The railcars it shuttles are owned by UPRR. Although the Company owns no real property, it has a "Permanent Freight Railroad Operating Easement" (the "Easement") that gives it the exclusive right to conduct freight railroad operations (spotting railcars) on the railroad tracks it uses. UPRR granted the Easement to the Company free of charge and can extinguish it upon payment to the Company of $5,000.

¶ 4 In a notice of assessment dated May 1, 1994, the Property Tax Division of the Tax Commission (the "Division") valued the Company's taxable operating property at $1 million.¹ In reaching this valuation, the Division relied on an appraisal of the Company's property prepared by Charles Peterson, a licensed appraiser. Peterson appraised the property using an "income approach" to valuation, which calculates property value by computing the present value of anticipated income from the property. Under this approach, Peterson appraised the Company's operating property at a value of $1,053,356, which the Division rounded to $1 million. Peterson employed this approach to capture the fair market value of the Company's collective property operating together in what is known as a "unitary appraisal." Peterson included the Easement as part of the Company's taxable property.

¶ 5 The Company appealed the Division's assessment to the State Tax Commission (the "Commission"). The Company contended that its Easement constituted intangible property that by state law is not subject to property tax. The Company argued, alternatively, that even if the Easement was taxable, its fair market value was only $5,000 — the price UPRR would have to pay to extinguish it — and that the Division's assessment was therefore excessive. The Company did not present an alternative appraisal, contending instead that its own balance sheets represented an accurate value of its taxable property. Those balance sheets assigned a combined value of approximately $7,000 to its property, exclusive of the Easement. Finally, the Company asserted that the Division's use of the income approach to valuation was improper.

¶ 6 After conducting a formal hearing on the matter, the Commission rejected the Company's challenges, concluding that the Company did not sustain its burden of establishing that the fair market value of its taxable property was other than the value assessed by the Division. The Commission noted that the Company's balance sheets, which indicated the purchase cost of its locomotive and office materials, did not account for the value of the Easement or its leased locomotive, nor did they reflect the value of the Company's property items operating together as a unit. The Commission concluded that the Easement constituted a legal right and interest in real property and, as such, was subject to taxation. The Commission also determined that the Division's use of the income approach of appraisal was proper and that the resulting valuation did not unlawfully include the value of intangible property. Pursuant to our decision in Evans & Sutherland Computer Corp. v. State Tax Commission, 953 P.2d 435, 443 (Utah 1997), the Company directly petitioned this court for review of the Commission's decision.

STANDARD OF REVIEW

¶ 7 The relevant standard of review is specified by statute. We are to "grant the [C]ommission deference concerning its written findings of fact, applying a substantial evidence standard on review," and "no deference concerning its conclusions of law, applying a correction of error standard."² Utah Code Ann. § 59-1-610(1) (1996); see also Zissi v. State Tax Comm'n, 842 P.2d 848, 852 (Utah 1992) (noting that Commission's factual findings will be upheld if they "are supported by substantial evidence based upon the record as a whole"). "`Substantial evidence' is that quantum and quality of relevant evidence that is adequate to convince a reasonable mind to support a conclusion." First Nat'l Bank of Boston v. Board of Equalization, 799 P.2d 1163, 1165 (Utah 1990).

DISCUSSION

¶ 8 We first address the correctness of including the Company's Easement as part of its taxable property. The Utah Constitution mandates that all tangible property within the state be taxed. It provides, "All tangible property in the state, not exempt under the laws of the United States, or under this Constitution, shall be taxed at a uniform and equal rate in proportion to its value, to be ascertained as provided by law." Utah Const. art. XIII, § 2(1). Consistent with this provision, section 59-2-103 of the Property Tax Act provides, "All tangible taxable property shall be assessed and taxed at a uniform and equal rate on the basis of its fair market value...." Utah Code Ann. § 59-2-103 (1996). "Intangible property," on the other hand, is exempt from taxation. See id. § 59-2-1101(2)(g). The issue before us, then, is whether the Easement is considered tangible or intangible property for property tax purposes.

¶ 9 The Property Tax Act does not define tangible as opposed to intangible property. The Act, however, does provide a representative list of items of intangible property. It states that "property" is "property which is subject to assessment and taxation according to its value, but does not include moneys, credits, bonds, stocks, representative property, franchises, goodwill, copyrights, patents, or other intangibles." Id. § 59-2-102(19). The "intangibles" identified by this provision accord with generally accepted definitions of intangible property. Black's Law Dictionary, for instance, defines "intangible property" as follows: "As used chiefly in the law of taxation, this term means such property as has no intrinsic and marketable value, but is merely the representative or evidence of value, such as certificates of stock, bonds, promissory notes, copyrights, and franchises." Black's Law Dictionary 809 (6th ed.1990). By contrast, "tangible property" is defined as "[p]roperty that has physical form and substance...." Id. at 1456. From these definitions, it is reasonable to conclude that tangible property, for tax purposes, has a physical aspect and has value in and of itself.

¶ 10 This court has not addressed whether easements constitute tangible property for property tax purposes. In general, an easement "is a right to use another's land for special purposes.... [It] is a right in land rather than a mere privilege.... An easement is property." George W. Thompson, 2 Real Property § 315 (1980). An easement holder has the right to use the designated land for specific purposes and exclude others therefrom who would interfere with those purposes. See Roger A. Cunningham et al., The Law of Property § 8.1, at 437 (2d ed.1993). Although "all interests in land are non-physical concepts, ... the uses that may be exercised by [an easement holder] are as physical as the possession that goes with an estate; they are simply different kinds of physical acts." Id. On previous occasions, this court has characterized easements as "interest[s] in land" for purposes of the takings clause of the Utah Constitution,³ see Colman v. State Land Bd., 795 P.2d 622, 625 (Utah 1990), and for purposes of the Utah Statute of Frauds.⁴ See Wells v. Marcus, 25 Utah 2d 242, 480 P.2d 129, 130 n. 1 (1971); see also Crane v. Crane, 683 P.2d 1062, 1066 (Utah 1984) (describing easement as personal interest in real estate).

¶ 11 The Company's Easement gave it "the exclusive right to conduct freight railroad operations" on the specified railroad tracks "for the purpose of providing common carrier rail freight service to all freight customers." The Easement "include[d] the right to operate [the Company's] trains, locomotives, railcars and rail equipment with [the Company's] own crews." The Easement also included a right of entry "for any and all [of the Company's] employees, agents or representatives, machinery, vehicles or equipment."

¶ 12 The Commission did not err in concluding that the Easement was tangible property subject to taxation. The Easement constituted an interest in the designated land and railroad tracks. It gave the Company the exclusive right to make use of the land and trackage for freight railroad operations. Although the Easement, in the abstract, was nonphysical, it gave the Company the right to use and occupy the physical property involved. Moreover, the Company's various rights under the Easement had intrinsic value. Without them, the Company could not have carried on its business of shuttling railcars to and from UPRR's local customers. The Easement enabled the Company's other...