Tennessee Gas Pipeline Co. v. Board of Assessors of Agawam

• Decision Date: 19 October 1998
• Citation: 428 Mass. 261,700 N.E.2d 818
• Parties: TENNESSEE GAS PIPELINE COMPANY v. BOARD OF ASSESSORS OF AGAWAM.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 818

700 N.E.2d 818

428 Mass. 261

TENNESSEE GAS PIPELINE COMPANY v. BOARD OF ASSESSORS OF AGAWAM.

Supreme Judicial Court of Massachusetts,

Suffolk.

Argued Sept. 3, 1998.

Decided Oct. 19, 1998.

Philip Burling, Boston (Barbara A. Fiacco with him) for the plaintiff.

Thomas S. Locke, Town Counsel, for the defendant.

Before WILKINS, C.J., and ABRAMS, LYNCH, GREANEY, FRIED, MARSHALL and IRELAND, JJ.

ABRAMS, Justice.

The plaintiff, Tennessee Gas Pipeline Company (taxpayer), appealed from a decision of the Appellate Tax Board (board) denying its applications for abatement of the real estate taxes assessed by the Agawam board of assessors (assessors) on property owned by the taxpayer for the years 1992 and 1993. See G.L. c. 58A, § 13. We conclude that the board erred by disregarding relevant evidence of fair cash value without a legally supportable justification. We therefore remand this matter to the board for a redetermination of the fair cash value of the taxpayer's property.

The undisputed facts are as follows. The taxpayer, a part of the Tenneco, Inc., conglomerate, owns and operates a pipeline which transports gas from Louisiana and Texas to New England. The pipeline runs through a 51.9 acre parcel of land in Agawam. This parcel contains a compressor station which compresses the gas as it travels through the pipeline. The land also contains several other improvements, including pipelines, offices, and warehouses. For fiscal years 1992 and 1993, the assessors valued the Agawam property at $1,968,600. The taxpayer paid the 1992 tax bill and then applied to the assessors for an abatement of the fiscal year 1992 tax. The application was denied. The taxpayer did not appeal timely to the board. The board allowed a late appeal. See G.L. c. 59, § 65C. On November 2, 1992, the taxpayer unsuccessfully applied for abatement for the fiscal year 1993 and timely appealed.

"[I]t is well established that decisions of the board must be supported by substantial evidence" in the record. New Boston Garden Corp. v. Assessors of Boston, 383 Mass. 456, 465, 420 N.E.2d 298 (1981), and cases cited. This standard, although hard to define, requires "such evidence as a reasonable mind might accept as adequate to support a conclusion." Id. at 466, 420 N.E.2d 298, quoting Boston Edison Co. v. Selectmen of Concord, 355 Mass. 79, 92, 242 N.E.2d 868 (1968). "A finding of the board must be set aside if 'the evidence points to no felt or appreciable probability of the conclusion or points to an overwhelming probability of the contrary.' " New Boston Garden Corp., supra, quoting L.L. Jaffe, Judicial Control of Administrative Action 598 (1965). Looking at the record as a whole, "[t]he substantiality of evidence [required to support a finding] must take into account whatever in the record fairly detracts from its weight." New Boston Garden Corp., supra, quoting Cohen v. Board of Registration in Pharmacy, 350 Mass. 246, 253, 214 N.E.2d 63 (1966).

Assessors must assess the taxpayer's property at its "fair cash value." G.L. c. 59, § 38. See Boston Edison Co. v. Assessors of Watertown, 387 Mass. 298, 301, 439 N.E.2d 763 (1982). The fair cash value is defined as "the price that an owner willing but not compelled to sell ought to receive from one willing but not compelled to buy." Assessors of Quincy v. Boston Consol. Gas Co., 309 Mass. 60, 63, 34 N.E.2d 623 (1941). The taxpayer has the burden of proving overvaluation. See Montaup Elec. Co. v. Assessors of Whitman, 390 Mass. 847, 855, 460 N.E.2d 583 (1984) (Montaup Elec.); Foxboro Assocs. v. Assessors of Foxborough, 385 Mass. 679, 684, 433 N.E.2d 890 (1982). On appeal, the taxpayer must show an error of law by the board. Montaup Elec., supra at 849, 460 N.E.2d 583.

There are several methods for determining the fair cash value of property, and "the board is not required to adopt any particular method of valuation." Pepsi-Cola Bottling Co. v. Assessors of Boston, 397 Mass. 447, 449, 491 N.E.2d 1071 (1986). Generally we defer to the board's judgment in determining what valuation method to apply. See Assessors of Watertown, supra at 302, 439 N.E.2d 763. In valuing utility property, assessors may, for example: (1) examine the net book value, also known as the rate base value, defined as the original cost of the property at the time it was originally devoted to public use, less accrued depreciation; (2) look to comparable market sales; (3) refer to capitalized net earnings; or (4) look to the current replacement or reproduction cost of the property less depreciation (DRC). See Montaup Elec., supra at 850, 460 N.E.2d 583, and cases cited. Assessors also may use the unit principle to value property of a utility. ¹ The goal of each method is to determine what a willing buyer would pay a willing seller for the property.

When assessing the value of property owned by a utility, the board must consider the impact of government regulations. See Assessors of Watertown, supra at 304, 439 N.E.2d 763. If a utility sells an asset to another regulated utility, that asset ordinarily retains the same basis for ratemaking purposes. In those circumstances, the return on the investment of the purchaser is limited to the net book value. If the taxpayer sold its Agawam property "to another public utility, that other utility would be allowed a return ... based on that property's net book ... value, and not on any higher purchase price it might have paid." See id. at 301, 439 N.E.2d 763. Absent evidence showing that a potential buyer would pay more than the net book value for utility-owned land, when, by investing elsewhere, the buyer could receive a greater return, the net book value is the proper valuation method. See id. at 304-305, 439 N.E.2d 763. See also Montaup Elec., supra at 850, 460 N.E.2d 583 (determining that reproduction or replacement cost of property less depreciation also may be probative of fair cash value).

Assessors may offer evidence of special circumstances demonstrating why a buyer might pay more than the net book value for property owned by a utility. ² See, e.g., Boston Edison Co. v. Assessors of Everett, 20 Mass.App. Tax Bd. Rep. 77, 123-124, 128 (1996) (concluding that net book value is not an accurate reflection of fair cash value where foreseeable changes in regulations might cause a buyer to pay more than net book value). The taxpayer need not show the absence of such special circumstances "until there is some evidence offered by the assessors to show that, because of such circumstances, the relevance of [net book value] is put in question." See Montaup Elec., supra at 855, 460 N.E.2d 583.

Before the board, the taxpayer offered evidence of the fair value of the property. One of the taxpayer's witnesses testified that the Agawam real estate was subject to significant regulations regarding air emissions, hazardous waste, asbestos, water discharge, toxic substances, wetlands, and underground pipes and tanks. These regulations require the taxpayer to obtain government approval to remove improvements or renovate the property. The taxpayer offered evidence that, as of 1992, it would cost more than $6.6 million to remove the facilities located on the property. The taxpayer also submitted evidence concerning the Federal Energy Regulatory Commission's (FERC's) intensive government regulations which affect the value of the land. Because FERC controls the rates that the taxpayer may charge, and because those limits are carried over to any utility purchaser, the value of the property is limited. ³ Finally, another witness for the taxpayer, an expert in utility valuation and appraisals, said that the Agawam property's highest and best use was as a utility, noting that it would be financially impractical to make the property suitable for another use. The Agawam property was part of a network; it could not be valued without looking at the network. Using the unit principle, adopted by the board in Tenneco, Inc. v. Commissioner of Revenue, 9 Mass.App. Tax Bd. Rep. 140, 147 (1988), that expert valued the Agawam property, including the real estate and all of its improvements, at $312,908 for fiscal year 1992 and $780,597 for fiscal year 1993. ⁴

The assessors called two witnesses. Neither witness offered a method for valuing property of a utility nor acknowledged or testified to any special circumstance which might cause a buyer of the utility real estate to pay more than net book value. One witness testified that the Agawam property should be assessed as any other commercial property, ignoring the impact of all the regulations, including FERC's, and other encumbrances on the value of the land. ⁵ The expert also disregarded the cost of removing the pipeline and its supporting facilities in determining that a pipeline or compression facility could not be the property's highest and best use. The second witness said that he originally assessed the value of the property by relying on comparisons to sales of regular commercial property. He did not take into account the presence or possibility of pollution or other hazardous material, nor did he consider the regulatory limits on the use and transfer of the land or...