Utah Ass'n of Counties v. Tax Com'n of State of Utah ex rel. MCI Telecommunications Corp.

• Decision Date: 19 April 1995
• Docket Number: Nos. 920452,930438 and 930530,s. 920452
• Citation: 895 P.2d 825
• Parties: UTAH ASSOCIATION OF COUNTIES, a Utah nonprofit corporation, and Box Elder, Morgan, Salt Lake, Utah, and Weber Counties, political subdivisions of the State of Utah, Petitioners, v. TAX COMMISSION OF the STATE OF UTAH, ex rel. MCI TELECOMMUNICATIONS CORPORATION, Respondents.
• Court: Utah Supreme Court

Page 825

895 P.2d 825

UTAH ASSOCIATION OF COUNTIES, a Utah nonprofit corporation and Box Elder, Morgan, Salt Lake, Utah, and Weber Counties, political subdivisions of the State of Utah, Petitioners, v. TAX COMMISSION OF the STATE OF UTAH, ex rel. MCI TELECOMMUNICATIONS CORPORATION, Respondents.

Nos. 920452, 930438 and 930530.

Supreme Court of Utah.

April 19, 1995.

Bill Thomas Peters, Salt Lake City, for petitioners.

Jan Graham, Atty. Gen., Brian L. Tarbet, Asst. Atty. Gen., Salt Lake City, for Tax Com'n.

Maxwell A. Miller, William J. Evans, K.C. Jensen, Salt Lake City, and Douglas A. Richards, Washington, DC, for MCI.

HOWE, Justice:

The Utah Association of Counties (UAC) and Box Elder, Morgan, Salt Lake, Utah, and Weber Counties (collectively "the Counties") seek review of a decision of the Utah State Tax Commission assessing the fair market value of the operating property of MCI Telecommunications (MCIT) for ad valorem tax purposes at $5,506,900,000 as of the lien date of January 1, 1990. The Commission determined that .45% of that amount, $24,781,050, was allocable to Utah.

BACKGROUND

MCIT is a wholly owned subsidiary of MCI Communications Corporation (MCI). The stock of MCI is publicly traded on the In early 1990, the property tax division of the Commission determined that as of the lien date, the total value of MCIT's operating system was $7,900,000,000. Later, the division amended its assessment, reducing it to $7,850,000,000, with .45%, or $35,325,000, allocable to Utah. MCIT timely protested the division's valuation and submitted an independent appraisal report prepared by John E. Green and Associates which fixed the value at $3,700,000,000, with .45%, or $16,650,000, allocable to Utah. Following a formal hearing, the Commission rejected the value asserted by both MCIT and the division and fixed the total value of MCIT's property at $5,506,900,000, with $24,781,050 allocable to Utah. The Commission denied a joint petition for reconsideration filed by the division, the Counties, and UAC. The Counties and UAC now seek review of the Commission's decision and order.

NASDAQ exchange. MCIT accounts for approximately 90% of MCI's total assets and is the second largest telecommunications network in the world. The Federal Communications Commission (FCC) has authority to regulate MCIT's rates but has not done so--competition is allowed to dictate its rates. MCI has experienced significant growth since its incorporation in 1968 and now holds 12 to 15% of the total long distance market.

ANALYSIS

A. UAC's Standing

At the outset, the Commission and MCIT challenge UAC's and the Counties' standing to petition for review. They contend that UAC and the Counties failed to properly intervene in the proceedings before the Commission. They rely upon Utah Code Ann. § 59-2-1007(1), which provides that any county "with a showing of reasonable cause" may timely object to an assessment and "upon a showing of reasonable cause" shall be allowed to intervene in any hearing before the Commission. Here, UAC and the Counties did not protest the assessment of MCIT, nor did they show reasonable cause for intervention. MCIT and the Commission further rely on section 63-46b-9(1), which provides, "Any person not a party may file a signed, written petition to intervene in a formal adjudicative proceeding with the agency...." Commission rule 861-1-5A(J) likewise provides for intervention upon the petition of a party.

A similar challenge to UAC's standing was made in the recent case of Utah Association of Counties v. Tax Commission of the State of Utah ex rel. American Telephone & Telegraph Co., 895 P.2d 819 (Utah 1995). There, UAC did not submit a formal motion to intervene. However, counsel for UAC actively participated throughout the entire hearing, including examination of witnesses with the permission of the Commission. Neither the Commission nor the taxpayer objected to UAC's participation. We held that the Commission had waived its right to challenge UAC's participation in the review before this court and that UAC had adequately intervened on a de facto basis. Id. at 820-21.

The same result follows in this case. Counsel for UAC and the Counties conducted a cross-examination of John E. Green, one of MCIT's witnesses, and a portion of the direct examination of Michael A. Goodwin, one of the division's witnesses. Neither the Commission nor MCIT objected to this participation at the hearing. While we commend to the Commission the observance of the statutes and its own rules regarding intervention, we conclude again that there has been a waiver of any objection to UAC's and the Counties' participation and that they adequately intervened on a de facto basis. Hereafter, UAC and the Counties shall be referred to collectively as UAC.

B. Stock and Debt Method

UAC first assails the Commission's conclusion that the stock and debt method of appraisal was unreliable and caused the Commission to disregard the appraisal of both parties which used that method. ¹ Instead the Commission relied primarily on the income approach to value. ² UAC argues that the purchase of stock is in essence the purchase of a portion of a company's assets. Thus, UAC urges, "[T]he price investors are willing to pay for a portion of the company's assets is representative of the fair market value of the equity portion of a company's value, within the context of determining value for ad valorem tax purposes."

Evidence adduced at the hearing before the Commission clearly supports the Commission's decision to disregard the stock and debt method. Mr. Green, who made an appraisal for MCIT, testified that in MCIT's situation, the stock and debt approach was unreliable. Although he used that approach in his appraisal so as to thoroughly consider all approaches to value, he ultimately gave it no weight in his final determination. He gave two reasons for not relying upon it. First, he testified that the stock purchaser is generally not a "knowledgeable buyer" as required by the statutory definition of "fair market value" found at Utah Code Ann. § 59-2-102(7). He explained:

Anyone [who] is familiar with the [stock] market knows that it's quite a herd instinct, that buyers of common stock if they see a stock moving rapidly on the upside, they'll say to themselves, "someone knows something so I better buy some of it, and it goes up...." So the problem then becomes how do you get a realistic value of the total common stock that's owned by a corporation. Same thing is true for a long-term debt and the preferred stock except it's not quite as volatile.

Mr. Green's second reason was that a stock purchase cannot be equated with the purchase of part of the underlying assets because stock "includes an ownership claim upon tangible and intangible assets and expectations." He pointed out that buyers of stock are not only buying what presently exists, but they also are buying anticipated growth with a rapidly growing company such as MCI. This creates difficulty in determining what portion of a stock price should be allocated to tangible assets, which are taxable, and what portion should be allocated to intangible assets, which are not taxable. Notably, not only did Mr. Green disregard the stock and debt approach, but Sheldon Draper, who made the appraisal for the division, gave little weight to the approach. Support for the approach came largely from two other experts called to testify by the division. Dr. Steven Hanke and Mr. Goodwin both testified that in their opinions, the stock and debt method was the only objective indicator of value. Neither of these experts actually appraised MCIT's property. In sum, the Commission had before it a diversity of expert opinion as to the merit of the stock and debt approach, and its decision to give that approach little or no weight is fully supported by the evidence. Instead, the Commission opted to place its reliance upon the income approach, which was favored by Mr. Green and Mr. Draper.

C. Construction Work in Progress

UAC next contends that the Commission erred in failing to assign any value to construction work in progress (CWIP). CWIP is defined as improvements and personal property that are not functionally complete and thus are not yet capable of providing an economic benefit to the owner. See Utah Admin.R. 884-24-20P(A)(1). UAC points out that this rule mandates that the value of CWIP be added to the cost and income indicators of value. UAC argues that the value of CWIP must be added to the income indicator which was relied upon by the Commission in this case in order to properly account for all nonexempt property in the assessment process. In a joint petition for reconsideration, the division and UAC urged the Commission to add an additional $448,975,087, which they calculated was the discounted value of CWIP, to the figure announced by the Commission as its determination of value. The Commission denied the petition, stating that CWIP had already been included in the income stream and that adding it again would result in double taxation. UAC asserts that "the Commission apparently believed that...