Stewart Title & Trust of Tucson v. Pima County

• Decision Date: 20 October 1987
• Docket Number: CA-CV,No. 2,No. 2969,2969,2
• Citation: 751 P.2d 552,156 Ariz. 236
• Court: Arizona Court of Appeals
• Parties: STEWART TITLE & TRUST OF TUCSON, an Arizona corporation, as Trustee under that certain trust known as Trust; Hughes 523 Associates, an Arizona joint venture; and Nationwide Resources Corporation, an Arizona corporation, Plaintiffs/Appellees, v. PIMA COUNTY, a body politic; the State of Arizona, and Arizona Department of Revenue, Defendants/Appellants. 87-0104.

Page 552

751 P.2d 552

156 Ariz. 236

STEWART TITLE & TRUST OF TUCSON, an Arizona corporation, as Trustee under that certain trust known as Trust No. 2969; Hughes 523 Associates, an Arizona joint venture; and Nationwide Resources Corporation, an Arizona corporation, Plaintiffs/Appellees, v. PIMA COUNTY, a body politic; the State of Arizona, and Arizona Department of Revenue, Defendants/Appellants.

No. 2 CA-CV 87-0104.

Court of Appeals of Arizona Division 2, Department A.

Oct. 20, 1987.

Review Denied March 30, 1988.

[156 Ariz. 237] O'Connell, Wezelman, Poston & Bosse, P.C. by Steven L. Bosse and James D. Wezelman, Tucson, for plaintiffs/appellees.

Stephen D. Neely, Pima Co. Atty. by Peter E. Pearman, Tucson, Robert K. Corbin, Atty. Gen. by Michael G. Prost, Phoenix, for defendants/appellants.

OPINION

HOWARD, Presiding Judge.

This appeal is from the judgment of the superior court, following a trial de novo, reversing the decision of the state board of tax appeals. The board had affirmed the Pima County Assessor's decision reclassifying appellees' property as class four non-agricultural, with a valuation of $2,227,260 for 1985. The trial court held that the property was properly classified as agricultural, with a value of $3,455. The appellants concede that the latter valuation is correct if the property is classified as agricultural. The question to be resolved is the proper classification of the property.

The superior court trial was held de novo pursuant to A.R.S. § 42-178. That authority to conduct de novo review of the board's decision is broad, and if the trial court concludes from competent evidence that the classification is erroneous, it must determine the correct classification. A.R.S. § 42-178(C). Similarly, if the court finds that the statutory presumption of correctness has been overcome and the valuation is excessive, it may proceed to find a new cash value. Inspiration Consolidated Copper Co. v. Arizona Department of Revenue, 147 Ariz. 216, 709 P.2d 573 (App.1985). The trial court's findings will not be set aside unless clearly erroneous. Whittemore v. Amator, 148 Ariz. 173, 713 P.2d 1231 (1986).

CLASSIFICATION OF REAL PROPERTY

Under the Arizona property tax statutes, county assessors are required to determine as of January 1 of each year the full cash value of all properties within their respective jurisdictions. A.R.S. § 42-221. Assessed valuation, against which the tax rate is applied to determine the amount of taxes owed, is a percentage of full cash value, and that percentage is determined by the property's classification. A.R.S. § 42-227. In this case, all parties agree that the property should be given a class four designation, with a resulting assessed valuation of 16 percent of full cash value. The designation of the property within that class as either agricultural or non-agricultural determines the method by which full cash value is calculated, and thus drastically affects the amount of taxes to be paid.

A.R.S. § 42-141(A)(5) ¹ requires the Department of Revenue (hereinafter "Department") to:

"[a]dopt standard appraisal methods and techniques for use by the department and county assessors in determining the valuation of property, and prepare and maintain manuals and other necessary guidelines reflecting such methods and techniques in order to perpetuate a current inventory of all property subject to taxation and the valuation of such property. In the standard appraisal methods and techniques adopted, current usage shall be included in the formula for reaching a determination of full cash value. When the methods and techniques adopted prescribe the use of market data as an indication of market value, the price paid for future anticipated property value increments ... shall be excluded. Land used for agricultural purposes shall be valued using solely the income approach to value without any allowance for urban or market influences. The income of the property shall be determined using the capitalized average annual net cash rental for such property. For the purpose of this paragraph, the average annual net cash rental for such property means the average of the annual net cash rental, excluding real estate and sales taxes, determined through an analysis of typical arm's length rental agreements collected for a five year period prior to the year for which the valuation is being determined, for comparable agricultural land used for agricultural purposes and located in the vicinity, if practicable, of the property being valued. For the purpose of this paragraph, the average annual net cash rental shall be capitalized at a rate one and one-half percentage points higher than the average long-term annual effective interest rate for all new federal land bank loans for the five year period prior to the year for which the valuation is being determined."

The italicized portion of the statute was added by the legislature in 1980. Laws 1980, 2d S.S., Ch. 8, § 39.

DEPARTMENTAL GUIDELINES

Pursuant to § 42-141(A)(5), the Department has prepared guidelines for use by county assessors in determining whether land should be classified as agricultural. Division of Property and Special Taxes, Arizona Department of Revenue, Agricultural Manual No. 1532 (September 1983) (hereinafter "Manual"). The Manual, which was admitted into evidence, provides in pertinent part:

"Agricultural property is that real and personal property used for the purpose of agronomy, horticulture or animal husbandry:

1. In which the primary function is to produce an agricultural crop or commodity.

2. In which the improvements are primarily oriented to agricultural functions or agricultural support functions; ...

3. In which the total operation consists of at least the minimum number of acres or animal units specified in pages 205 through 208 ...

4. Which is used with a reasonable expectation of profit solely from its agricultural use." Manual at 101.

The Manual then defines non-qualifying rural property:

"Applying the preceding criteria for defining agricultural property, certain properties which have an appearance of agricultural use are considered non-qualifying farms or ranches for ad valorem property tax purposes. Two common non-qualifying types of property are:

1. Property used primarily for residential, pleasure, development speculative or recreational purposes. This type of property is classified and valued according to its primary use.

2. Property changing from agricultural use to non-agricultural use. Signs of such change include the appearance of survey stakes in conjunction with non-agricultural development, recording of a plat or plats, earthwork in connection with urban development, appearance of roads, installation of utilities, failure to plant crops despite the availability of adequate water, etc." (citations omitted). Manual at 102-103.

In order for property to qualify within this classification as ranch property, the guidelines provide that "its primary use must be livestock grazing on large uncultivated acreages utilizing natural forage crops." Manual at 203. Further, where privately owned undeveloped land is leased to a livestock rancher, the lease "must be critically analyzed to determine the valid qualifications of the land for classification as grazing ... land." Manual. The Manual requires that the analysis consider the following questions:

"1. Does the leased acreage add significant value to the farming or grazing capability of the farm or ranch?

2. Is there an operating well or water tank on the leased land?

3. Does the leased land create access between two parcels necessary for the operation of the farm or ranch?

4. Does the lessee's operation qualify as a farming or ranching operation?

5. Has the leased land consistently been leased for farming or grazing purposes?

6. Is the lease typical of other private farming or grazing leases in the state?

a. Is there sufficient evidence to prove that the lease is valid?

b. Are the terms and conditions of the lease reasonable?

c. Is the rental return in line with typical leases in the farming or ranching field?

7. If the leased acreage has been purchased recently, does the rental rate indicate a reasonable return on invested capital to the owner?" (citations omitted). Manual at 203-204.

FACTUAL BACKGROUND

The property which is the subject of this appeal consists of approximately 636 acres of land, comprising all of Section 35, T15S, R14E, G & SRM, Pima County, Arizona. The trial court found, with ample support in the record, that this property, in conjunction with other leased and fee-owned lands, has been part of a continuous ranching operation since the turn of the century. For the past 18 years, it has been leased for grazing as part of the Franco Ranch, which consists of some 50 sections of leased land and is operated by Frank Rees. Prior to appellee Nationwide Resources Corporation's purchase of Section 35, the land had been leased to Rees by appellee's predecessor in interest, Pima Service Corporation, for a term expiring October 31, 1985. Although the lease was assigned to Nationwide as part of the purchase agreement, the latter entered into its own lease with Rees sometime in early 1985 for a term to expire on November 9, 1987.

Prior to 1983, none of the land within the Franco Ranch owned by Nationwide's predecessors in interest was classified as agricultural. At that time, the current owner appealed the assessor's classification and, after lengthy proceedings, a settlement was reached which provided that portions of the ranch would retain their non-agricultural status and other portions, including this section, would be classified as agricultural. Section 35 retained this classification for 1984.

In August of 1984, Nationwide purchased Section 35 from Pima Service Corporation for approximately $4,500,000. Harold Freedman, vice president of Nationwide, testified candidly that the property was purchased for investment. The property was...