Capital Machine Co. Inc. v. Dept. of Local Government Finance

ATTORNEY FOR PETITIONER: DAVID L. PIPPEN ATTORNEY AT LAW Indianapolis, IN ATTORNEYS FOR RESPONDENTS: STEVE CARTER ATTORNEY GENERAL OF INDIANA Indianapolis, IN LAUREANNE NORDSTROM DEPUTY ATTORNEY GENERAL Indianapolis, IN _____________________________________________________________________ IN THE INDIANA TAX COURT _____________________________________________________________________ CAPITAL MACHINE CO., INC., ) ) Petitioner, ) ) v. ) Cause No. 49T10-0004-TA-46 ) DEPARTMENT OF LOCAL ) GOVERNMENT FINANCE,[1] ) ) Respondent. ) ON APPEAL FROM A FINAL DETERMINATION OF THE STATE BOARD OF TAX COMMISSIONERS _____ NOT FOR PUBLICATION July 30, 2003 FISHER, J. Capital Machine Co., Inc. (Capital) appeals the final determination of the State Board of Tax Commissioners (State Board) valuing its improvement for the 1995 tax year. The issue for the Court to decide is whether the State Board erred when it refused to award Capital’s improvement additional obsolescence depreciation.[2] For the following reasons, the Court AFFIRMS the State Board’s final determination. FACTS AND PROCEDURAL HISTORY Capital owns a commercial improvement in Marion County, Indiana. For the 1995 assessment year, Capital’s improvement was awarded 20% functional obsolescence depreciation. Capital appealed its assessment to the Marion County Board of Review (BOR), arguing that additional obsolescence was warranted. The BOR denied Capital’s appeal. On May 4, 1998, Capital appealed the BOR’s decision to the State Board, arguing that its improvement was entitled to 86.6% functional obsolescence depreciation. The State Board held a hearing and, on March 10, 2000, it issued a final determination denying Capital’s request. On April 26, 2000, Capital initiated an original tax appeal. The parties stipulated to the record and, on April 26, 2001, presented oral arguments. Additional facts will be supplied as needed. ANALYSIS AND OPINION Standard of Review This Court gives great deference to the final determinations of the State Board when it acts within the scope of its authority. Thousand Trails, Inc. v. State Bd. of Tax Comm’rs, 757 N.E.2d 1072, 1075 (Ind. Tax Ct. 2001). This Court will reverse a final determination of the State Board only when its findings are unsupported by substantial evidence, arbitrary, capricious, constitute an abuse of discretion, or exceed statutory authority. Id. Furthermore, a taxpayer who appeals to this Court from a State Board final determination bears the burden of showing that the final determination was invalid. Id. The taxpayer must present a prima facie case by submitting probative evidence, i.e., evidence sufficient to establish a given fact that, if not contradicted, will remain sufficient. Id. Once the taxpayer presents a prima facie case, the burden shifts to the State Board to rebut the taxpayer’s evidence and support its findings with substantial evidence. Id. Discussion The sole issue is whether the State Board erred when it refused to award additional obsolescence depreciation to Capital’s improvement. Obsolescence is the functional or economic loss of property value; it is expressed as a percentage reduction in the remaining value of the subject improvement. Clark v. Dep’t of Local Gov’t Fin., 779 N.E.2d 1277, 1283 (Ind. Tax Ct. 2002) (Clark II); Clark v. State Board of Tax Comm’rs, 742 N.E.2d 46, 51 (Ind. Tax Ct. 2001) (Clark I) (citing Ind. Admin. Code tit. 50, r. 2.1-5-1 (1992)). "Functional obsolescence is caused by factors internal to the property and is evidenced by conditions within the property." Clark II, 779 N.E.2d at 1283 (internal quotation marks omitted). "Economic obsolescence is caused by factors external to the property." Id. (internal quotation marks omitted). “Determination of obsolescence involves (1) identification of causes of obsolescence and (2) quantification of the amount of obsolescence to be applied.” Clark I, 742 N.E.2d at 51. The question in this case is whether Capital submitted probative evidence quantifying its request for obsolescence.[3] At the administrative hearing, Capital presented a document entitled “Assessment Review and Analysis” (Analysis), which was prepared by its tax representative, M. Drew Miller of Landmark Appraisals, Inc. (Stip. R. at 25–30.) In the Analysis, Miller submitted a cursory mathematical calculation to quantify Capital’s request, explaining that “[a]fter deducting the physical depreciation that is already applied by the County from the total accrued depreciation that is calculated using the Economic Life Method, 86.6% is the amount attributable to obsolescence depreciation.”[4] (Stip. R. at 27.) Attached to Miller’s calculation is a table from the Marshall Swift Valuation Service showing ranges of typical life expectancies for “garages, industrials and warehouses.” (Stip. R. at 28–29.) To quantify functional obsolescence, Capital must carefully, methodically, and in detail explain the logical relationship between the existence of obsolescence and the quantification of the effects of obsolescence. See Clark II, 779 N.E.2d at 1282 n.4. Instead, Capital merely submitted some conclusory math juxtaposed against a page of life expectancy tables from the Marshall Swift Valuation Service. Indeed, it never showed the relationship between a cause of obsolescence and the need for an additional 66.6% obsolescence.[5] In short, the difference between probative evidence and Capital’s evidence is the difference between lightning and a lightning bug. Capital’s evidence does not “illuminate” the reason behind its request for additional obsolescence; the State Board was entitled to reject it. CONCLUSION For the aforementioned reasons, the Court AFFIRMS the State Board’s final determination. ----------------------- [1] The State Board of Tax Commissioners (State Board) was originally the Respondent in this appeal. However, the Legislature abolished the State Board as of December 31, 2001. 2001 Ind. Acts 198 § 119(b)(2). Effective January 1, 2002, the Legislature created the Department of Local Government Finance (DLGF), and the Indiana Board of Tax Review (Indiana Board). Ind. Code §§ 6-1.1-30-1.1; 6-1.5-1-3 (West Supp. 2001); 2001 Ind. Acts 198 §§ 66, 95. Pursuant to Indiana Code § 6-1.5-5-8, the DLGF is substituted for the State Board in appeals from final determinations of the State Board that were issued before January 1, 2002. Ind. Code § 6-1.5-5-8 (West Supp. 2001) (eff. 2002); 2001 Ind. Acts 198 § 95. Nevertheless, the law in effect prior to January 1, 2002 applies to these appeals. I.C. § 6-1.5-5- 8. See also 2001 Ind. Acts 198 § 117. Although the DLGF has been substituted as the Respondent, this Court will still reference the State Board throughout this opinion. [2] In addition, Capital raises various state and federal constitutional claims that this Court has declined to reach in previous cases. See, e.g., Barth, Inc. v. State Bd. of Tax Comm’rs, 756 N.E.2d 1124, 1127 n.1 (Ind. Tax Ct. 2001). Because Capital’s claims and supporting arguments are identical to those previously rejected by the Court, the Court will not address them. [3] The State Board’s allowance of a 20% obsolescence depreciation indicates that obsolescence exists, therefore, the first prong of Clark I is not at issue here. [4] Miller valued Capital’s property with the “economic life method,” also referred to as the “age-life method.” The age-life method depreciates the value of an improvement based on the ratio between its effective age, i.e., the age of the improvement indicated by its condition and utility according to market perceptions, and its economic life expectancy. Appraisal Inst., The Appraisal of Real Estate 385, 392 (12th ed. 2001). Here, Miller assumed that the improvement’s effective age was fifty-two years and divided that value by a putative total economic life of fifty- five years to arrive at a quotient of 96%, which he says equals the improvement’s total accrued depreciation, both physical and obsolescence. (See Stip. R. at 27.) [5] Although Miller states he derived his age calculations from the Marshall Swift Valuation Service, he did not explain why he chose these particular tables as opposed to any other. (See Stip. R. at 27.) Moreover, an appraiser who uses the age-life method must, at the very least, “[c]onduct research to identify the anticipated total economic life of similar structures in the market area[.]” Appraisal Inst., supra note 3 at 392. No such research was presented in Miller’s Analysis.