Thorntown Telephone Co., Inc. v. State Bd. of Tax Com'rs

• Citation: 588 N.E.2d 613
• Decision Date: 13 March 1992
• Docket Number: Nos. 49T05-9007-TA-00032,49T05-9007-TA-00033,TRI-COUNTY,s. 49T05-9007-TA-00032
• Parties: THORNTOWN TELEPHONE COMPANY, INC., Petitioner, v. STATE BOARD OF TAX COMMISSIONERS, Jack L. New, Chairman, Gordon E. McIntyre, Member, Sandra K. Bickel, Member, Respondents.TELEPHONE COMPANY, INC., Petitioner, v. STATE BOARD OF TAX COMMISSIONERS, Jack L. New, Chairman, Gordon E. McIntyre, Member, Sandra K. Bickel, Member, Respondents.
• Court: Indiana Tax Court

Page 613

588 N.E.2d 613

THORNTOWN TELEPHONE COMPANY, INC., Petitioner, v. STATE BOARD OF TAX COMMISSIONERS, Jack L. New, Chairman, Gordon E. McIntyre, Member, Sandra K. Bickel, Member, Respondents.

TRI-COUNTY TELEPHONE COMPANY, INC., Petitioner, v. STATE BOARD OF TAX COMMISSIONERS, Jack L. New, Chairman, Gordon E. McIntyre, Member, Sandra K. Bickel, Member, Respondents.

Nos. 49T05-9007-TA-00032, 49T05-9007-TA-00033.

Indiana Tax Court.

March 13, 1992.

Daniel P. Byron, Jeffrey T. Bennett, McHale, Cook & Welch, P.C., Indianapolis, for petitioners.

Linley E. Pearson, Atty. Gen., Joel Schiff, Marilyn S. Meighen, Deputy Attys. Gen., Indianapolis, for respondents.

FISHER, Judge.

The Petitioners, Thorntown Telephone Company, Inc. (Thorntown) and Tri-County Telephone Company, Inc. (Tri-County), appeal the State Board of Tax Commissioners' (State Board) final assessments of their distributable property for the year 1990. Thorntown and Tri-County ask the court to set aside their respective final assessments and to require the State Board to determine their assessments applying the economic obsolescence adjustment used in the assessment of railroad ¹ property. Thorntown's and Tri-County's appeals are

considered together because they address the same issues.

ISSUES

I. Whether the State Board must apply the economic obsolescence adjustment from the railroad property assessment methodology in the assessment of telephone property?

II. Whether the State Board must consider applying an adjustment for economic obsolescence in assessing Thorntown's and Tri-County's property?

DISCUSSION AND DECISION

I.

The court's standard of review of the State Board's final assessments of public utility company property is set by statute:

When a public utility company initiates an appeal under section 30 of [IC 6-1.1-8], the tax court may set aside the state board of tax commissioners' final assessment and refer the matter to the board with instructions to make another assessment if:

(1) the company shows that the board's final assessment, or the board's apportionment and distribution of the final assessment, is clearly incorrect because the board violated the law or committed fraud; or

(2) the company shows that the board's final assessment is not supported by substantial evidence.

IND.CODE 6-1.1-8-32.

"The property owned or used by a public utility company shall be taxed in the manner prescribed in [IND.CODE 6-1.1-8]." IND.CODE 6-1.1-8-1. IC 6-1.1-8-2 defines a number of different classes of public utility companies. Railroads and telephone companies are designated as different classes of public utility companies. IC 6-1.1-8-2(9) through (12) and (14).

Indiana's statutes governing the assessment of public utility company property involve a centralized assessment scheme ² in which the State Board assesses the operating property (distributable property) used in providing utility services: the State Board "shall assess the distributable property which ... is owned or used by a public utility company." IND.CODE 6-1.1-8-25 (emphasis added). The non-operating property (fixed property) of public utility companies is assessed locally by township assessors. IND.CODE 6-1.1-8-24(a). When calculating the value of distributable property, the State Board first considers the total value (unit value) ³ of a public utility company's property and then subtracts the value of fixed property: "The value of the distributable property of a public utility company ⁴ ... equals the remainder of: (1) the unit value of the company; minus (2) the value of the company's fixed property." ⁵ IC 6-1.1-8-26(a) (emphasis added).

The dispute in this case arises from changes in State Board's method of computing unit value. Before 1988, the State Board computed the unit value for all public utility companies using a two-factor formula, consisting of a property factor and an income factor:

(a) For purposes of this section, 'property factor' means the value of all tangible property of a company determined under 50 IAC 5-4-3....

(b) For purposes of this section, 'income factor' means the average net operating income of a company capitalized at a uniform rate as determined by the tax board, with respect to each utility company within the same classification, taking into account the method of depreciation used by the company.

....

(d) The 1987 total unit value as a going concern of a public utility company shall be determined as follows:

(1) If the 1987 income factor of the company exceeds its 1987 property factor, the 1987 total unit value is the average of those income and property factors minus three-fourths of the amount by which the income factor exceeds that average.

(2) If the 1987 property factor of the company exceeds its 1987 income factor, the 1987 total unit value is the average of those income and property factors plus three-fourths of the amount by which the property factor exceeds that average.

(e) The total unit value as a going concern of a public utility company for 1988 and thereafter is equal to the property factor of the company for the year in question.

50 I.A.C. 5-4-2 (filed Nov. 19, 1985) (emphasis added).

Because the income factor was calculated, in part, by capitalizing average net operating income, it reflected losses in the value of public utility company property with depressed earning capacity. Thus, the loss of the income factor in 1988 potentially resulted in higher assessments for public utility companies.

In 1988, 50 I.A.C. 5-4-2 was amended to reflect the removal of the income factor from the computation of unit value. The amended version of this regulation states in relevant part:

For purposes of this section, 'unit value' means the value of all tangible property of a company determined under 50 IAC 5-4-2.5 and 50 IAC 5-4-3 [sections 2.5 through 3 of this rule ] (including all leased property used by the company).

50 I.A.C. 5-4-2(a) (filed Nov. 3, 1988).

Within the general framework for determining unit value under 50 I.A.C. 5-4-2, the State Board's methods of assessment vary among the different classes of public utility companies. In 1989, the State Board incorporated an economic obsolescence adjustment in its method of assessing railroad property. The economic obsolescence adjustment is calculated using a table referred to as the economic obsolescence schedule (schedule). The schedule is applied based on the ratio of operating expenses (expenses) to operating revenues (revenues). If expenses are greater than 60 percent of revenues, the schedule provides a sliding scale adjustment that reduces the percentage of property that is taxable. ⁶ Because the schedule is based on the ratio of expenses to revenues, its application could reduce the assessments of railroads that have property with depressed earning capacity. During 1990, the year at issue, the State Board exclusively applied the schedule to the assessment of railroad property.

Notwithstanding, when Thorntown and Tri-County provided the State Board with information for their 1990 assessments, they included calculations of expense to revenue ratios. The expense to revenue ratio for Thorntown was 87.56%, and the expense to revenue ratio for Tri-County was 76.70%. Because their expenses exceeded 60 percent of their revenues, Thorntown and Tri-County requested adjustments for economic obsolescence calculated according to the schedule.

On June 1, 1990, the State Board issued tentative assessments of Thorntown's and Tri-County's property, without the requested adjustments for economic obsolescence. Thorntown and Tri-County objected, and the State Board held a hearing on the matter on June 27, 1990. On June 29, 1990, the State Board issued orders making Thorntown's and Tri-County's tentative assessments final.

Thorntown and Tri-County contend their final assessments are clearly incorrect because the State board violated the Indiana Constitution by refusing to apply the economic obsolescence adjustment calculated under the schedule. The State Board contends, however, the Indiana Constitution does not require it to provide uniform methods of assessment for different classes of public utility companies, and, therefore, it is not required to use the economic obsolescence adjustment applied to railroad property when assessing telephone property.

The Indiana Constitution states in relevant part: "The General Assembly shall provide, by law, for a uniform and equal rate of property assessment and taxation and shall prescribe regulations to secure just valuation for taxation of all property...." IND. CONST., art. X, Sec. 1(a). "The Constitution of Indiana does not require a uniform method of valuation, but rather such regulations as shall secure a just valuation for taxation of all property." Indiana State Bd. of Tax Comm'rs v. Lyon and Greenleaf Co. (1977), 172 Ind.App. 272, 277, 359 N.E.2d 931, 934 (citing The Louisville and N.A.R.R. Co. v. State ex rel. McCarty (1865), 25 Ind. 177). Indeed, "our Supreme Court recognizes the necessity perceived by the Legislature to adopt different methods for assessment of different classes of property in order to achieve a just and uniform valuation." Id. (citing Clark v. Vandalia R. Co. (1909), 172 Ind. 409, 86 N.E. 851).

Although the State Board is not required to provide uniform methods of assessment for different classes of public utility companies, Thorntown and Tri-County contend the different methods used to assess railroad property and telephone property during the year at issue result in valuations which are not uniform or just. Thorntown and Tri-County assert that prior to 1988, the methods for assessing all public utility companies contained the income factor, which served as the functional equivalent of the economic obsolescence adjustment because it reflected losses in value from the depressed earning capacity of property.

The State Board's methods for assessing railroad property and telephone property during the year at issue...