Sulphur Springs Valley Elec. Coop., Inc. v. Ariz. Dep't of Revenue, 1 CA-TX 14-0002
| Decision Date | 24 February 2015 |
| Docket Number | No. 1 CA-TX 14-0002,1 CA-TX 14-0002 |
| Parties | SULPHUR SPRINGS VALLEY ELECTRIC COOPERATIVE, INC., an Arizona corporation, Plaintiff/Appellant, v. ARIZONA DEPARTMENT OF REVENUE, an executive administrative agency of the State of Arizona; PIMA COUNTY; COCHISE COUNTY; GRAHAM COUNTY; and SANTA CRUZ COUNTY, all political subdivisions of the State of Arizona, Defendants/Appellees. |
| Court | Arizona Court of Appeals |
NOTICE: NOT FOR OFFICIAL PUBLICATION. UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.
Appeal from the Superior Court in Maricopa County
Nos. TX2010-000398, TX2011-000002, TX2011-000592, TX2012-000446 (Consolidated)
The Honorable Dean M. Fink, Judge
AFFIRMED
Gallagher & Kennedy, P.A., Phoenix
By Michael G. Galloway, Hannah H. Porter
Frazer, Ryan, Goldberg & Arnold, L.L.P., Phoenix
By Douglas S. John, Giselle C. Alexander
Arizona Attorney General's Office, Phoenix
By Kenneth J. Love, Macaen F. Mahoney
Judge Lawrence F. Winthrop delivered the decision of the Court, in which Presiding Judge Kent E. Cattani and Judge Peter B. Swann joined.
¶1 Plaintiff/Appellant, Sulphur Springs Valley Electric Cooperative, Inc. ("Sulphur Springs"), appeals the tax court's grant of summary judgment in favor of Defendants/Appellees, Arizona Department of Revenue ("the Department"), Pima County, Cochise County, Graham County, and Santa Cruz County (collectively, "the Counties").1 For the following reasons, we affirm.
¶2 Sulphur Springs is a nonprofit electric utility cooperative that distributes electric power to approximately 51,000 customers in rural areas of southern Arizona. It has taxable property consisting of overhead lines, transmission lines, power poles, substations, and miscellaneous tools and equipment (collectively, "the Property"). For tax years 2010 through 2013, Sulphur Springs challenged the Department's valuation of the Property for property tax purposes.
¶3 After the State Board of Equalization affirmed the Department's valuation of the Property for tax years 2010 through 2012, Sulphur Springs appealed to the tax court, and for tax year 2013, Sulphur Springs appealed directly to the tax court. Thereafter, the court consolidated the four cases.
¶4 Sulphur Springs filed a motion for summary judgment, asking the tax court to declare the Department's method of valuing the Property invalid. The court denied Sulphur Springs' motion as well asDefendants' cross-motion. Thereafter, Defendants moved for summary judgment on the basis that Sulphur Springs' expert appraiser, Michael E. Green,2 had improperly relied on an income approach to valuation in formulating his opinion of value, that such evidence was incompetent as a matter of law, and therefore, Sulphur Springs was unable to rebut the statutory presumption of correctness established by Arizona Revised Statutes ("A.R.S.") section 42-16212(B) (West 2015).3 The tax court granted Defendants' motion and dismissed Sulphur Springs' appeals for all four years, reasoning that our supreme court's holding in Graham County v. Graham County Electric Cooperative, Inc., 109 Ariz. 468, 512 P.2d 11 (1973), prohibits the use of an income approach in valuing the property of a nonprofit electric distribution cooperative.
¶5 Sulphur Springs timely appealed the tax court's judgment in favor of Defendants, and we have jurisdiction pursuant to A.R.S. § 12-2101(A)(1).
¶6 Arizona law requires the Department to value electric transmission and distribution property owned by for-profit corporations according to a statutory formula, which is based on original plant in service cost, less depreciation, with some exceptions. See A.R.S. § 42-14154(A)-(B). The Arizona Legislature, however, has excluded property owned by member-owned nonprofit electric distribution cooperatives from that statutory valuation formula, see A.R.S. § 42-14154(A)(1), and, for the tax years at issue in this appeal, no statutory formula existed.4 In the absence of a statutory formula, the Department is required to value the property ofa nonprofit electric distribution cooperative by applying "standard appraisal methods and techniques." A.R.S. § 42-11001(6) .
¶7 This appeal involves the question of what constitutes "standard appraisal methods and techniques" as applied to the valuation of a nonprofit electric distribution cooperative.5 Sulphur Springs raises two issues on appeal: (1) Did Sulphur Springs' expert use standard appraisal methods and techniques in forming his opinion of value? (2) Did the Department utilize standard appraisal methods and techniques in valuing the Property and/or was the methodology the Department applied invalid under Arizona's Administrative Procedure Act ("the APA")? See A.R.S. §§ 41-1001 to -1092.12.
¶8 We will affirm a grant of summary judgment if there are no genuine issues as to any material fact and the moving party is entitled to judgment as a matter of law. Ariz. R. Civ. P. 56(a); Orme Sch. v. Reeves, 166 Ariz. 301, 305, 802 P.2d 1000, 1004 (1990). We review de novo a grant of summary judgment, see Wilderness World, Inc. v. Dep't of Revenue, 182 Ariz. 196, 198, 895 P.2d 108, 110 (1995), and view all facts in the light most favorable to the party against whom judgment was entered. Nat'l Bank of Ariz. v. Thruston, 218 Ariz. 112, 116, ¶ 17, 180 P.3d 977, 981 (App. 2008).
¶9 We begin by acknowledging that Arizona law establishes a presumption that the state or county's valuation of property is lawful and correct. A.R.S. § 42-16212(B) (). A taxpayer challenging the valuation of his or her property has the burden of proving, by competent evidence, that the state or county's valuation is excessive. See Pima Cnty. v. Trico Elec. Coop. ("Trico I"), 15 Ariz. App. 517, 519, 489 P.2d 1219, 1221 (1971). In the absence of competent evidence rebutting the statutory presumption, the taxing authority's valuation will stand as lawful and correct. See id. Accordingly, SulphurSprings has the burden of proving the Department's valuation of the Property is excessive.
¶10 As we have noted, Sulphur Springs retained an expert appraiser, Mr. Green, to formulate an opinion of the market value of the Property for each tax year at issue. Sulphur Springs argues Mr. Green's appraisal report utilized standard appraisal methods and techniques, and therefore is competent evidence which rebuts the statutory presumption of correctness under A.R.S. § 42-16212(B). Defendants argue the report does not constitute competent evidence sufficient to overcome the statutory presumption because Mr. Green relied on an income approach in valuing the Property, which Arizona law prohibits.
¶11 There are three generally accepted approaches to valuing real property in Arizona: the market data approach, the cost approach, and the income approach. Dep't of Revenue v. Transamerica Title Ins. Co., 117 Ariz. 26, 29, 570 P.2d 797, 800 (App. 1977). Mr. Green arrived at his opinion of value by using both the income approach and the cost approach.
¶12 In his report, Mr. Green generally described the income approach as follows:
The income approach to value is predicated upon the assumption that the market value of an income producing property is the present worth of future benefits (income) to be derived from owning the property. . . . Typically, this approach involves projecting potential income (e.g. earning capacity) and deducting all operating expenses and capital expenditures to arrive at an estimate of free cash flow.
He further explained his application of the income approach to this specific Property by stating: "The income approach has been utilized in this appraisal due to the fact that the subject is income producing and its earning capacity is the primary basis for value."
¶13 Mr. Green also applied an alternative cost approach in valuing the Property; however, this approach also utilized income databecause he estimated external obsolescence6 by applying an "income shortfall method," which he described as follows:
External obsolescence is estimated by the income shortfall method where projected net utility operating income is compared to target net utility operating income (rate base times the cooperative market rate of return). The income shortfall is capitalized at the market rate of return as a measure of external obsolescence.
Thus, Mr. Green's alternative cost approach relied in part upon "projected net utility operating income."
¶14 Mr. Green reconciled the income and cost opinions of value to arrive at an estimated market value of the Property for each tax year. In calculating his final opinions of value, Mr. Green gave greater weight to the income approach.
¶15 Our supreme court has issued three opinions addressing the valuation of nonprofit electric cooperatives: Graham County; Department of Property Valuation v. Trico Electric Cooperative, Inc. ("Trico II"), 113 Ariz. 68, 546 P.2d 804 (1976); and Arizona Department of Revenue v. Trico Electric Cooperative, Inc. ("Trico III"), 151 Ariz. 544, 729 P.2d 898 (1986).7 In the first of these three opinions, Graham County, the court concluded it is "fundamentally wrong" to rely upon the capitalization-of-income method in valuing the property of a nonprofit corporation:
The utility's expert used the capitalization-of-income method which is an approved appraisal method. He reasoned that the balance of income...
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