BCD Investments v. Dept. of Local Government Finance

ATTORNEY FOR PETITIONER:    ATTORNEYS FOR RESPONDENT:
DAVID L. PIPPEN    STEVE CARTER    
ATTORNEY AT LAW     ATTORNEY GENERAL OF INDIANA
Indianapolis, IN    Indianapolis, IN
    
     JOEL SCHIFF
    DEPUTY ATTORNEY GENERAL
    Indianapolis, IN
    

_____________________________________________________________________

    IN THE INDIANA TAX COURT _____________________________________________________________________

BCD INVESTMENTS, ) ) Petitioner, ) ) v. ) Cause No. 49T10-9701-TA-82 ) DEPARTMENT OF LOCAL ) GOVERNMENT FINANCE, See footnote         )
                )
    Respondent.            )    
_____________________________________________________________________
 
ON APPEAL FROM FOUR FINAL DETERMINATIONS OF
THE STATE BOARD OF TAX COMMISSIONERS
 
NOT FOR PUBLICATION
April 28, 2003
FISHER, J.
 
    BCD Investments (BCD) appeals the four final determinations of the State Board of Tax Commissioners (State Board) that valued its real property for the March 1, 1989 - 1992 assessments.
ISSUES
I.     Whether the State Board erred in determining the base rate for BCD's improvement for the 1989, 1990, and 1991 assessments; and

II. Whether, for the 1992 assessment, the State Board erred in:

A. calculating the perimeter-to-area ratio (PAR) of BCD's improvement;

    B. grading BCD's improvement; and

C. determining the amount of obsolescence to which BCD's improvement was entitled? See footnote
 

 
FACTS AND PROCEDURAL HISTORY
    BCD owns a small manufacturing plant in Fremont, Indiana. The building's core, approximately 19,200 square feet, was built in 1974 and is used for manufacturing. Since 1974, BCD has made numerous additions to its building's core. In 1984, it added a 2,380 square foot office and a 6,400 square foot warehouse. In 1989, it added another 31,600 square feet of warehouse space. Finally, in 1991, it added an additional 21,600 square feet of warehouse space. See footnote
    In December 1992, BCD filed three Petitions for Correction of an Error (Forms 133) with the Steuben County Auditor challenging its 1989, 1990, and 1991 property assessments. The Forms 133 stated "[i]ncorrect base rate used due to error in reg[ulation] 17 for failure to provide reproduction costs for metal buildings." (Cert. Admin. R. at 5, 8, 12.)
    In March 1993, BCD filed a Petition for Review of Assessment (Form 131) with the State Board challenging its 1992 property assessment. In its Form 131, BCD raised the following issues: "(1) Improper calculation of the PAR. Should be 1[;] (2) Improper grade factor applied to building[] [sections] 2, 3 & 4[; and] (3) Improper amount of obsolescence depreciation applied." (Cert. Admin. R. at 16.)
    The State Board conducted one hearing on all four of BCD's petitions on December 6, 1995. On November 22, 1996, the State Board issued a final determination on BCD's Form 131, recalculating the improvement's PAR and grade, as well as allowing a 5% obsolescence depreciation adjustment. On the same day, however, the State Board denied relief to BCD on its Forms 133.
    On January 6, 1997, BCD initiated an original tax appeal. On September 8, 1998, at the request of the State Board, this Court remanded the case to the State Board for further consideration.
    Two years later, and after conducting another administrative hearing, the State Board issued new final determinations on each of BCD's four petitions. While the State Board again refused relief to BCD on its Forms 133, it again changed the PAR on a portion of BCD's improvement as requested on the Form 131.
    BCD filed an amended original tax appeal on February 3, 1999. Because both parties requested to have the matter resolved based on the evidence stipulated into the record as well as on their briefs, the Court did not conduct a trial. The Court did, however, hear oral argument on July 17, 1999. Additional facts will be supplied as necessary.
STANDARD OF REVIEW
    This Court accords great deference to the State Board when it acts within the scope of its authority. Wetzel Enters., Inc. v. State Bd. of Tax Comm'rs, 694 N.E.2d 1259, 1261 (Ind. Tax Ct. 1998). Accordingly, the Court will reverse a State Board final determination only if it is unsupported by substantial evidence, constitutes an abuse of discretion, exceeds statutory authority, or is arbitrary and capricious. Id.
    A taxpayer who challenges the propriety of a State Board final determination bears the burden of demonstrating its invalidity. Clark v. State Bd. of Tax Comm'rs, 694 N.E.2d 1230, 1233 (Ind. Tax Ct. 1998). To do so, the taxpayer must present a prima facie case, i.e., a case in which the evidence is "sufficient to establish a given fact and which if not contradicted will remain sufficient." GTE North, Inc. v. State Bd. of Tax Comm'rs, 634 N.E.2d 882, 887 (Ind. Tax Ct. 1994) (citations and internal quotation marks omitted). To establish a prima facie case, the taxpayer must offer probative evidence concerning the alleged assessment error. Miller Structures, Inc. v. State Bd. of Tax Comm'rs, 748 N.E.2d 943, 947 (Ind. Tax Ct. 2001). Where the taxpayer has failed to provide the State Board with probative evidence supporting its position on the alleged assessment error, the State Board's duty to support its final determination with substantial evidence is not triggered. Whitley Prods., Inc. v. State Bd. of Tax Comm'rs, 704 N.E.2d 1113, 1119-20 (Ind. Tax Ct. 1998), review denied.
DISCUSSION
I. BCD's 1989, 1990, and 1991 Assessments
    For each of its 1989, 1990, and 1991 assessments, BCD filed a Form 133 in which it asserted that "[i]ncorrect base rate used due to error in reg[ulation] 17 for failure to provide reproduction costs for metal buildings." (Cert. Admin. R. at 5, 8, 12.) During the administrative hearing, however, BCD's tax representative, Drew Miller of Landmark Appraisals, testified that the base rate was incorrect because the calculation of the building's perimeter was incorrect. When the State Board issued its final determinations on BCD's Forms 133, it denied relief to BCD on the basis that it presented no probative evidence to support its contention that the building was metal and that a different base rate should have applied. (See Amended Cert. Admin. R. at 33.) BCD now contends the State Board erred in deciding its Forms 133 because it interpreted BCD's issue too narrowly it claims that the gist of its argument was that the base rate was incorrect and, thus, the reason why is not necessarily relevant. (See Oral Argument Tr. at 17-20.)
     "The fundamental purpose of pleadings in the administrative process is to inform each party of the other's position so that each can properly prepare." Yunker v. Porter County Sheriff's Merit Bd., 382 N.E.2d 977, 981 (Ind. Ct. App. 1978). To that end, this Court has encouraged taxpayers to complete their appeal forms (i.e., administrative pleadings) with specificity, and to include mathematical calculations if applicable. See Wareco Enters., Inc. v. State Bd. of Tax Comm'rs, 689 N.E.2d 1299, 1302 n. 3 (Ind. Tax Ct. 1997). Admittedly, on the basis of its administrative pleadings, it is difficult to discern what BCD is attempting to argue.
    Nevertheless, when an issue (or the theory behind it) is not raised in the administrative pleading but is actually litigated at the hearing, the failure to object at the hearing to the introduction of that issue has the same effect as amending the pleading to include that issue. See Yunker, 382 N.E.2d at 981. Here, it appears from the administrative record that the State Board initially believed BCD sought a kit building adjustment to account for the fact that the improvement was a light, pre-engineered building. During the administrative hearing, however, Miller argued that the base rate was incorrect because the building's perimeter was improperly calculated. See footnote The State Board hearing officer subsequently asked Miller if he was substituting the argument for the issue stated on the Forms 133, to which Miller responded: "it will adjust for part of it." (Audiotape of Admin. Hearing.)
    Because Miller argued the perimeter issue at the administrative hearing without objection from the State Board, he effectively amended BCD's pleading to include that issue. See Yunker, 382 N.E.2d at 981. Consequently, the State Board erroneously disregarded BCD's argument that the perimeter of its building was improperly calculated. Accordingly, the Court REMANDS the issue to the Indiana Board See footnote to recalculate the building's perimeter and base rate for the tax years 1989, 1990, and 1991, consistent with this opinion. See footnote
II. BCD's 1992 Assessment
    BCD also filed a Form 131 with the State Board challenging its 1992 assessment. In that Form 131, BCD challenged its improvement's PAR calculation, its grade, and its entitlement to obsolescence depreciation. The Court will address each of those challenges in turn.
A. PAR Calculation
    BCD contends that the State Board acted arbitrarily and capriciously when it assessed its improvement with five separate PARs for the 1992 assessment. See footnote (See Oral Argument Tr. at 11.) BCD argues that pursuant to the State Board's rules, its improvement should have been assessed with a single PAR. The State Board alleges, on the other hand, that BCD failed to make a prima facie case that the State Board miscalculated the PAR. The State Board is incorrect.
    Under Indiana's property tax assessment scheme, PAR is an element used to calculate the reproduction cost of a commercial improvement. PAR is defined as:
the total linear feet in the perimeter of a building divided by the corresponding square foot area and multiplied by 100 to convert to a whole number. The effective perimeter of the building is defined as the total linear feet of exterior walls that are part of[,] and therefore to be priced with a particular building or building section. The area is defined as the total square foot surface of a building.

Ind. Admin. Code tit. 50, r. 2.1-4-1 (1992) (emphasis added). See footnote The regulation further states that when pricing a building with mixed use, framing, or wall heights, the computation of PAR for the entire building should be performed; thereafter, adjustments to the pricing schedule should be made to reflect those variations. See id. Thus, although use costs, framing costs, or wall height costs will differ within the improvement, the PAR will be the same.
    In this case, BCD's building is but one improvement with multi-uses. Nevertheless, the State Board assessed each addition to the building as a separate improvement. In so doing, the State Board assessed the improvement with five separate PARs: the building's core was assessed with a PAR of six, the office with a PAR of two, the 6,400 square foot warehouse section with a PAR of four, the 31,600 warehouse space with a PAR of two, and the final warehouse section with a PAR of two. Had a single PAR been calculated for the entire improvement, it would have been a PAR of two. See footnote Because the per-square foot base cost of an improvement increases as its PAR increases, both the building's core and the 6,400 square foot warehouse section were priced well above what they would have been priced with a PAR of two.
    The State Board must follow its own rules for assessing real property. See Ind. Code § 6-1.1-15-14 (1998); Castello v. State Bd. of Tax Comm'rs, 638 N.E.2d 1362, 1364 (Ind. Tax Ct. 1994). The State Board's rules provide for one course of action: one improvement, despite its multi-uses, receives a single PAR. Damico v. Dep't of Local Gov't Fin., 769 N.E.2d 715, 723 (Ind. Tax Ct. 2002). See footnote Accordingly, the Court REVERSES the State Board's final determination on this issue, and REMANDS the issue to the Indiana Board with instructions to use a single PAR of two for BCD's 1992 assessment.
B. Grade
    BCD also alleges that the State Board erred in grading the 19,200 square foot manufacturing portion of its building, the 6,400 square foot warehouse portion of its building, as well as the 21,600 square feet of warehouse space. The State Board graded these sections C-1, D+1, and D+1 respectively. BCD contends that the State Board should have graded these sections D-1. BCD is incorrect.
    The grading of improvements is an important part of Indiana's property assessment system. Under that system, assessors use improvement models and cost schedules to determine the base reproduction cost of a particular improvement. See Whitley Prods., 704 N.E.2d at 1116. Improvements are then assigned various grades based on their materials, design, and workmanship. Id. See also Ind. Admin. Code tit. 50, r. 2.1-4-3(f) (1992) (Grade is "used to adjust the total base reproduction cost determined [by using the improvement models and cost schedules] to account for variations in the quality of materials, workmanship, and design[]"). The grades represent multipliers that are applied to the subject improvement's base reproduction cost. Whitley Prods., 704 N.E.2d at 1116.
    There are times, however, when an improvement deviates from the applicable improvement model or cost schedule. Such a deviation impacts the improvement's base reproduction cost. Id. at 1117. As this Court has previously explained, there are two methods by which to account for such deviations:
The preferred method . . . is to use separate schedules that show the costs of certain components and features present in the model. This allows an assessor to adjust the base reproduction cost of the improvement objectively.

The other means of accounting for an improvement's deviation from the model used to develop the cost schedule is via an adjustment to the grade of the improvement. This type of adjustment requires the assessor's subjective judgment. Where possible, this type of an adjustment should be avoided. However, because the component (base rate adjustment) schedules are not comprehensive, this type of adjustment may be necessary.

Id. (internal citations, quotations, and footnotes omitted.)
    BCD alleges that sections 2, 3, and 4 of its improvement lack certain features presumed in the applicable model, and therefore their respective grades must be adjusted downward. As evidence, BCD (by way of Miller) prepared and presented an "Assessment Review and Analysis" which contains the following statement:
The subject property lacks the quality of materials and workmanship that is described for a C Grade structure. Some of these items include:

    -- Gas forced air heating system[.]
-- 8" solid concrete block partitioning with a density of 60 SF of floor/LF.
    -- 25% vented steel sash glass windows.
    -- Concrete block exterior walls.
To account for these differences, a Grade no higher than a D-1 is recommended.

(Pet'r Ex. 1 at 3.) Miller's testimony at the administrative hearing did nothing to elaborate on the statement he essentially read the statement into the record.
BCD bears the burden of proof on this issue and must offer probative evidence concerning the alleged grading error. Clark, 694 N.E.2d at 1233; Miller Structures, 748 N.E.2d at 947. BCD's review and Miller's testimony are nothing more than conclusions that "the grade is this" and "it should be that." "A taxpayer's conclusory statements do not constitute probative evidence concerning the grading of the subject improvement." Sterling Mgmt.-Orchard Ridge Apartments v. State Bd. of Tax Comm'rs, 730 N.E.2d 828, 838 (Ind.Tax Ct. 2000).
    Instead, BCD should have explained how it calculated the suggested grade of D-1. Indeed, BCD should have compared the features in the applicable improvement model(s) with the features (or lack thereof) in its own improvement. See footnote BCD should have then attempted to calculate the value of the features in the model and translate that lack of value into a grade adjustment. A taxpayer cannot simply point to alleged deficiencies in a building and expect to make a prima facie case as to grade or any other issue. See Miller Structures, 748 N.E.2d at 953. BCD made no comparisons, made no calculations, and, consequently, made no case. The State Board's final determination on this issue is therefore AFFIRMED. See footnote
C. Obsolescence
    The final issue is whether the State Board erred in denying BCD's improvement an obsolescence adjustment greater than 5%. BCD argues that it has shown that it is entitled to an obsolescence adjustment of 20%. BCD is, again, incorrect.
The State Board's regulations define obsolescence as a functional and economic loss of value. 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 itself. Id. Economic obsolescence is caused by factors external to the property. Id. The State Board's regulations cite a number of examples of causes of obsolescence, such as limited use or excessive material and product handling costs caused by an irregular or inefficient floor plan (functional) and location of the building is inappropriate for the neighborhood (economic). Id. It is important to keep in mind, however, that the obsolescence of a given improvement must be tied to a loss of value. In the commercial context, that loss of value usually means the loss of income generated by the property. Miller Structures, 748 N.E.2d at 953.
    In its presentation to the State Board, BCD (via Miller) argued that its building suffered from obsolescence because of its add-on nature. However, BCD did not present any evidence whatsoever demonstrating that this factor actually caused the improvement to experience a loss in value. See footnote See Loveless Constr. Co. v. State Bd. of Tax Comm'rs, 695 N.E.2d 1045, 1047 (Ind. Tax Ct. 1998) (stating that under the State Board's regulations, obsolescence causes a loss in value), review denied. Therefore, BCD's obsolescence claim is fatally deficient. See White Swan Realty v. State Bd. of Tax Comm'rs, 712 N.E.2d 555, 560 (Ind. Tax Ct. 1999) review denied. Accordingly, the Court AFFIRMS the State Board's final determination with respect to obsolescence.

CONCLUSION
For the aforementioned reasons, the State Board's final determination is AFFIRMED in part and REVERSED in part. Specifically, the Court REVERSES and REMANDS the State Board's final determination with respect to issues I and IIA to the Indiana Board for proceedings consistent with this opinion. The Court AFFIRMS the State Board's final determination with respect to issues IIB and IIC.

Footnote: 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. 198 Ind. Acts 2001 § 119(b)(2). Effective January 1, 2002, the legislature created the Department of Local Government Finance ("DLGF"), see Indiana Code § 6-1.1-30-1.1 (West Supp. 2001)(eff. 1-1-02); 198 Ind. Acts 2001 § 66, and the Indiana Board of Tax Review ("Indiana Board"). Ind. Code § 6-1.5-1-3 (West Supp. 2001)(eff. 1-1-02); 198 Ind. Acts 2001 § 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. 1-1-02); 198 Ind. Acts 2001, § 95. Nevertheless, the law in effect prior to January 1, 2002 applies to these appeals. Id. See also 198 Ind. Acts 2001 § 117. Although the DLGF has been substituted as the Respondent, this Court will still reference the State Board throughout this opinion.
Footnote: BCD also makes a number of arguments concerning the constitutionality of Indiana's property tax system. The thrust of these arguments is that because the system has been declared unconstitutional, see State Board of Tax Commissioners v. Town of St. John, 702 N.E.2d 1034, 1043 (Ind. 1998), any assessment of property thereunder (including its own) is void and should be reversed. (See Pet'r Br. and Findings of Fact and Conclusions of Law at 9-12.) However, the mere fact that the system is flawed does not entitle the taxpayer to a reversal of an assessment. See Town of St. John, 702 N.E.2d at 1043. Indeed, this Court has stated that "[r]eal property must still be assessed, and, until the new regulations are in place, must be assessed under the present system." Whitley Prods., Inc. v. State Bd. of Tax Comm'rs, 704 N.E.2d 1113, 1121 (Ind. Tax Ct. 1998) review denied; see also Town of St. John v. State Bd. of Tax Comm'rs, 729 N.E.2d 242, 246 & 251 (Ind. Tax Ct. 2000) (ordering real property in Indiana to be reassessed under constitutional regulations as of March 1, 2002 and providing that until then, "real property tax assessments shall be made in accordance with the current system"). Thus, the Court need not analyze BCD's constitutional claims in this opinion.
Footnote: These additions are typically three-sided: the fourth wall is actually one of the walls of the pre-existing structure.
Footnote: Miller even stated at the administrative hearing that while BCD's building is a light pre-engineered building, it is not a kit building. (Cert. Admin. R. at 30.)
Footnote: All cases that would have previously been remanded to the State Board are now remanded to the Indiana Board of Tax Review (Indiana Board). See Ind. Code § 6-1.1-15-8 (Supp. 2002). Final determinations made by the Indiana Board are subject to review by this Court pursuant to Indiana Code § 6-1.1-15. Ind. Code §§ 6-1.5-5-7; 33-3-5-2 (Supp. 2002).
 
Footnote: Recalculating the improvement's perimeter will necessarily affect its perimeter-to-area ratio (PAR) as well.
 
Footnote: The State Board assigned a PAR to the building's core, as well as to each of the four separate additions. BCD a rgues that when the State Board did this, it erroneously "double-counted" certain interior (i.e., shared) walls to arrive at the improvement's total linear feet.
Footnote: Thus, PAR is a means of converting a per lineal foot price into easily measured square foot units. See Ind. Admin. Code tit. 50, r. 2.1-4-1 (1992). PAR essentially measures how efficiently the building space is used; indeed, "[a] rectangular building requires a larger amount of perimeter walls than a square building to encompass the same amount of floor area[.]" Id. The PAR calculation translates this reality to a measurable, and taxable, ratio.

Footnote: In 1992, BCD's improvement had a perimeter of 1,298 linear feet (28' + 85' + 28' + 35' + 160' + 120' + 20' + 40' + 120' + 180' + 120' + 200' + 120' + 42') and an area of 81,180 square feet. The quotient of 1,298 divided by 81,180 is 0.0159. The product of 0.0159 multiplied by 100 is 1.59 which, when rounded to the nearest whole number, is 2. See 50 IAC 2.1-4-1.
    
Footnote: Some assessors, however, choose to calculate PAR by using the "section method," which is aimed at simplifying the calculations for the entire building. Use of this method requires an assessor to use percentages to avoid double taxation of interior or partition walls. Wareco Enters., Inc. v. State Bd. of Tax Comm'rs, 689 N.E.2d 1299, 1301 (Ind. Tax Ct. 1997). Regardless of which methodology is used, the calculation of PAR should the same total lineal feet of exterior walls divided by total square foot area of the building.
 
Footnote: It is unclear from the record what models were in fact used to assess sections 2, 3, and 4 of BCD's improvement. Essentially, BCD's claim is that the sections deviate from the model, but it doesn't even tell the Court which models were used. This Court will not make a taxpayer's case for it. See Davidson Indus. v. State Bd. of Tax Comm'rs, 744 N.E.2d 1067, 1071 (Ind. Tax Ct. 2001).
Footnote:
In any event, the State Board did find that BCD's improvement lacked vented sash windows. The final determination provides the State Board's own analysis as to the value of those windows, and then a grade assignment to BCD's improvement to account for that lack of value. (Cert. Admin. R. at 21-22.) If there are any issues with the State Board's calculation, they do not mandate reversal. Indeed, because BCD has failed to provide the State Board with probative evidence supporting its position on the alleged grading error in the first place, the State Board's duty to support its final determination with substantial evidence is not triggered. See Whitley Prods.,704 N.E.2d at 1119-20.
Footnote: When the State Board hearing officer offered Miller an opportunity to produce some kind of profit/loss statement or income statement to substantiate BCD's loss of income- generating ability, he refused, stating "I disagree with your philosophy." (Audiotape of Admin. Hearing.) Later, Miller stated "I'm not saying [the improvement] is obsolete at all. I'm saying it suffers a loss in value due to the symptoms [sic] of obsolescence." (Audiotape of Admin. Hearing.) Signs of obsolescence are irrelevant, however, if a taxpayer cannot show actual loss in value. See Clark v. State Bd. of Tax Comm'rs, 694 N.E.2d 1230, 1239 (Ind. Tax Ct. 1998); Miller Structures, Inc. v. State Bd. of Tax Comm'rs, 748 N.E.2d 943, 954 (Ind. Tax Ct. 2001).