Transcontinental Gas Pipe Line Corp. v. Bernards Tp.

• Decision Date: 15 August 1988
• Citation: 111 N.J. 507,545 A.2d 746
• Parties: TRANSCONTINENTAL GAS PIPE LINE CORPORATION, Plaintiff-Appellant, v. BERNARDS TOWNSHIP, Defendant-Respondent, ALGONQUIN GAS TRANSMISSION COMPANY, Plaintiff-Appellant, v. BERNARDS TOWNSHIP, Defendant-Respondent.
• Court: New Jersey Supreme Court

Page 507

111 N.J. 507

545 A.2d 746

TRANSCONTINENTAL GAS PIPE LINE CORPORATION, Plaintiff-Appellant, v. BERNARDS TOWNSHIP, Defendant-Respondent, ALGONQUIN GAS TRANSMISSION COMPANY, Plaintiff-Appellant, v. BERNARDS TOWNSHIP, Defendant-Respondent.

Supreme Court of New Jersey.

Argued March 14, 1988.

Decided Aug. 15, 1988.

Angelo A. Mastrangelo, for appellant Transcontinental Gas Pipe Line Corp. (Fox, Schackner & Mastrangelo, attorneys; Angelo A. Mastrangelo and Stephanie E. Malcolm, Madison, on the brief).

Robert F. Danziger, for appellant, Algonquin Gas Transmission Co. (Large, Scammell & Danziger, Flemington, attorneys).

Louis P. Rago, Morristown, for respondent.

The opinion of the Court was delivered by

HANDLER, J.

This case presents the complex issue of determining the proper method for valuing the property of a regulated industry for purposes of local property taxation.

We are asked to review the municipal tax assessments of segments of pipeline that are used by the taxpayers for the interstate transmission of natural gas, an operation that that is subject to comprehensive federal regulation. We determine that the method of valuation proposed by the taxpayers, which is based essentially on the book value of the property that is used and approved for ratemaking purposes, does not reflect the proper worth or fair market value of their pipelines for property tax purposes, and that such property should be valued according to its depreciated replacement cost. Further, because the methodology used by the municipal assessor to determine value for tax assessment purposes was so patently deficient and the resultant assessment amount so unreliable, the assessment cannot be affirmed. Accordingly, we remand the matter to the Tax Court for an independent determination of the value of the property for tax purposes.

I.

Transcontinental Gas Pipe Line Corporation (Transco) and Algonquin Gas Transmission Company (Algonquin) both operate interstate natural gas pipelines that run through Bernards Township. Prior to the 1983 property tax assessment, the pipelines had been valued according to an interim or provisional method established in Transcontinental Gas Pipeline v. Township of Bernards, 115 N.J. Super. 593, 280 A.2d 689 (App.Div.1970) (Transcontinental I ), aff'd o.b. 58 N.J. 585, 279 A.2d 674 (1971), and Texas Eastern Trans. Corp. v. Borough of Carteret, 116 N.J. Super. 9, 280 A.2d 833 (App.Div.1970), aff'd o.b. 58 N.J. 585, 279 A.2d 674 (1971). Under this method, interstate natural gas pipelines were valued at their original cost less depreciation, without any recognition of any increase in value over time, up to an upper limit of 48% depreciation. Following this methodology, the Transco pipeline's assessed value, including its fifty-foot easement, was $675,000, resulting in a property tax of $32,718.60. The Algonquin pipeline was valued at $569,700, resulting in a property tax of $28,371.06.

For the 1983 tax year, as part of an overall reassessment of the Township's property, Bernards Township abandoned the Transcontinental I methodology and assessed the property at its replacement cost less depreciation. As of the October 1, 1982, assessment date, Transco's pipeline was valued at $1,959,200, resulting in a tax of $34,677.84 and Algonquin's pipeline was valued at $1,678,900, resulting in a tax of $30,068.76. The similarity between the 1982 and 1983 tax figures for the two pipelines is not coincidental; in his deposition, the assessor who performed the original assessment candidly admitted that while he did consult some external sources to determine replacement cost, his primary consideration was to establish a value that would yield substantially the same tax dollars at the Township's new tax rate as had been yielded in the previous year under the old tax rate. Since other property in the Township had been assessed, on average, at approximately three times its 1982 value due to the 1983 revaluation, the assessor essentially tripled the pipelines' 1982 assessment and worked backwards to determine replacement cost and depreciation figures.

The pipeline companies challenged these assessments in the Tax Court, alleging that the assessment methodology was incorrect. In addition, they challenged the 48% cap on depreciation established by the Transcontinental I court's interim methodology, arguing that, as a regulated utility their income was limited by the value of property that is included in their rate base by the Federal Energy Regulatory Commission (FERC). Since the FERC-mandated depreciation of their property had long ago exceeded 48%, the pipeline companies argued that it was unfair to value their property for ad valorem property tax purposes at a value higher than the FERC-determined value at which it earned income as part of the utility's rate base. The two cases were tried together by the Tax Court, with evidence of each proceeding applying to both cases.

At trial, the pipeline companies used the unit-valuation method, determining the value of each pipeline company as a whole, then allocating a percentage of this overall figure to the company's assets within the Township. The rationale for this approach is that a pipeline must operate as an entire unit to produce earnings, and an isolated section of pipeline would have little or no value standing alone. The pipeline company experts presented evidence of comparable sales as well as income and cost figures based on the income, rate of return, and cost figures utilized in FERC ratemaking proceedings. The resulting values were all very close to the book value of the property: Transco's expert testified to a valuation of $216,000, in contrast to a depreciated original cost of $213,376, and Algonquin's expert computed a value of $252,318, compared to a depreciated original cost of $208,392.

The Township, on the other hand, presented evidence that the original assessment, if anything, was too low. In light of the useful lifetime of the property, which the taxpayers' own experts testified was indefinite if properly maintained, and the Township's expert estimated to be at least 100 years, the Township argued that the 45% lump sum depreciation used in the original assessment was too high, and that a 1% annual straight line depreciation for each pipeline would be more appropriate. The Township expert thus opined that the proper replacement cost new less depreciation of the Transco property was $3,428,923, and the proper value of the Algonquin pipeline was $3,440,000. The Township's expert also testified that he found no reason to reduce the value of the property to reflect functional or economic obsolescence.

The Tax Court upheld the original assessment, rejecting both pipeline companies' proposed market sales and capitalized income valuations, and in addition rejecting Algonquin's proffered stock and debt valuation as well as its depreciated replacement cost method, which in essence equated FERC depreciation with economic obsolescence. In Transcontinental Gas Pipeline Corp. v. Bernards Township, ( Transcontinental II ), 7 N.J. Tax 508 (Tax Ct.1985) , aff'd 9 N.J. Tax 636 (App.Div.1987) (per curiam ), the Tax Court rejected Transco's ¹ contention that the pipeline should be valued for property tax purposes in the same manner as it is valued in FERC ratemaking proceedings, and concluded that replacement cost new less depreciation is the proper method of valuing such special purpose property. The Appellate Division consolidated the Transco and Algonquin appeals, and the majority below affirmed the Tax Court decisions in each case. The dissent, however, argued that the Tax Court approach failed to consider the impact of this manner of property taxation on the pipeline as a whole. The case thus comes to us as an appeal as of right pursuant to Rule 2:2-1(a)(2).

II.

Taxpayers, in challenging the municipality's original assessment, bear the burden of rebutting the validity of the quantum of this assessment. Riverview Gardens v. Borough of North Arlington, 9 N.J. 167, 175, 87 A.2d 425 (1952). As we observed in Pantasote Co. v. City of Passaic, 100 N.J. 408, 495 A.2d 1308 (1985), this presumption is not simply an evidentiary mechanism allocating the burden of proof, but "a construct that expresses the view that in tax matters it is to be presumed that governmental authority has been exercised correctly and in accordance with law." Id. at 413, 495 A.2d 1308. In Aetna Life Ins. Co. v. City of Newark, 10 N.J. 99, 89 A.2d 385 (1952), the Court announced what has come to be accepted as the definitive verbal formulation of the burden imposed on a taxpayer challenging an ad valorem property tax assessment: "it is not sufficient for the taxpayer merely to introduce evidence: the presumption stands until sufficient competent evidence is adduced to provide a true valuation different from the assessment. Such evidence must be definite, positive, and certain in quality and quantity to overcome the presumption." Id. at 105, 89 A.2d 385. In Pantasote we interpreted this to mean that the presumption remained in place even if the municipality utilized a flawed valuation methodology, so long as the quantum of the assessment is not so far removed from the true value of the property or the method of assessment itself is so patently defective as to justify removal of the presumption of validity. Pantasote, supra, 100 N.J. at 415, 495 A.2d 1308.

In attempting to meet this burden, taxpayers presented evidence of market value, ² income capitalization, original cost less depreciation, and replacement cost less depreciation including a significant reduction based on FERC regulation as a form of economic obsolescence. We agree with the Appellate Division that the Tax Court was correct in ruling that taxpayers failed to overcome the presumption of correctness that attaches to the municipality's assessment.

The Tax Court correctly rejected taxpayers' market valuation on the grounds that...