ATTORNEYS FOR PETITIONER: ATTORNEYS FOR RESPONDENT:
CURTIS J. DICKINSON STEPHEN R. CARTER
DICKINSON & ABEL ATTORNEY GENERAL OF INDIANA
Indianapolis, IN Indianapolis, IN
DAVID L. PIPPEN KATHRYN SYMMES KIRK
Attorney at Law DEPUTY ATTORNEY GENERAL
Indianapolis, IN Indianapolis, IN
INDIANA TAX COURT
RONALD D. CLARK, )
v. ) Cause No. 49T10-9701-TA-53
STATE BOARD OF TAX COMMISSIONERS, )
ON APPEAL FROM A FINAL DETERMINATION OF THE
STATE BOARD OF TAX COMMISSIONERS
January 8, 2001
Petitioner Ronald D. Clark appeals the final determination of the State Board of
Tax Commissioners (State Board) establishing the assessed value for Clarks property as of
March 1, 1993. Clark presents various issues for review. These are
I. Whether the State Board improperly adjusted the grade assigned Clarks apartment
units from C to C-1 in order to account for items included as
part of the GCR Apartment model but not found in the subject units;
II. Whether the State Board erroneously refused to recognize causes of economic
obsolescence in the subject units;
FACTS AND PROCEDURAL HISTORY
Clark owns a partnership interest in apartment units in Tippecanoe County, Indiana.
The apartments are leased primarily to students attending Purdue University. On December
9, 1993, Clark filed a Form 131 petition for review with the State
Board, contending that an improper amount of obsolescence depreciation [had been] applied.
(State Bd. Tr. of Proceedings, Ex. A.) An administrative hearing was conducted
on February 20, 1996. At the hearing, Clark claimed that the grade
of the subject property is more accurately described as a D+1, in addition
to requesting a fifteen to twenty percent adjustment for economic obsolescence. (Joint
Ex. 2.) The subject property was inspected on February 21, 1996.
The State Board issued a final determination on November 22, 1996, lowering the
subject units grade from a C to a C-1 but declining to apply
an obsolescence adjustment to the units. (State Bd. Tr. of Proceedings, Ex.
C.) Clark filed this original tax appeal on January 6, 1997.
The Court held a trial on June 18, 1998. The parties
presented oral arguments to the Court on January 25, 1999. Additional facts
will be supplied where necessary.
ANALYSIS AND OPINION
Standard of Review
This Court gives the final determinations of the State Board great deference when
the State Board acts within the scope of its authority. Wetzel Enters.,
Inc. v. State Bd. of Tax Commrs, 694 N.E.2d 1259, 1261 (Ind. Tax
Ct. 1998). Accordingly, this Court reverses final determinations of the State Board
only when those decisions are unsupported by substantial evidence, are arbitrary or capricious,
constitute an abuse of discretion, or exceed statutory authority. Id. The
taxpayer bears the burden of demonstrating the invalidity of the State Boards final
determination. Clark v. State Bd. of Tax Commrs, 694 N.E.2d 1230, 1233
(Ind. Tax Ct. 1998).
I. Grade Adjustment
Clark argues that the C-1 grade assigned by the State Board was improper
because the State Board provided no basis for its determination.
See footnote Clarks position
is based upon the lack of specificity in the State Boards final determination,
which supported the change in grade with this single sentence explanation: Upon
inspection of the property, it is determined [that] the property is indicative of
a C-1 grade. (State Bd. Tr. of Proceedings, Ex. C.) His
basic argument is that the State Boards reasons for assigning the C-1 grade
can only be considered
post hoc rationalizations. (Petr Br. at 5.)
As testified to by the State Boards hearing officer Ellen Yuhan, the State
Boards grade adjustment accounted for items missing from the units that are included
as part of the GCR Apartment model. (Trial Tr. at 28-29.)
Specifically, the adjustment accounted for the subject units eight-foot walls (instead of the
nine-foot wall height provided by the model), lack of concrete block back-up walls
and lack of sliding glass doors.
Id.; Ind. Admin. Code tit. 50,
r. 2.1-4-7 (1992) (codified in present form at id., r. 2.2-11-3) (1996)).
Using the regulations unit-in-place tables, see Ind. Admin. Code tit. 50, r. 2.1-4-10
(1992) (codified in present form at id., r. 2.2-15-1 (1996)), Yuhan calculated the
value of these missing items. (Trial Tr. at 29-30.) She determined
their value to equal approximately five percent of the assessment. (Trial Tr.
at 28-29.) Therefore, she assigned the subject units a grade of C-1,
effectively lowering their assessed value by five percent. Ind. Admin. Code tit.
50, r. 2.1-4-5 (1992) (Schedule F) (codified in present form at id., r.
Nowhere in its final determination does the State Board explain its rationale for
adjusting the subject units grade. It is well-settled that the State Board,
in general, may not support a final determination by referring to reasons that
were not previously ruled upon, but that are offered as post hoc rationalizations.
Word of His Grace Fellowship, Inc. v. State Bd. of Tax Commrs,
711 N.E.2d 875, 878 (Ind. Tax Ct. 1999). Here, Yuhans trial testimony
provides the first explanation as to her methodology for determining a grade adjustment.
The State Board may not provide its explanation for the first time
on appeal. Id. at 878-79 (explaining reasons for this rule). Therefore,
the Court REVERSES and REMANDS the State Boards grade determination.
The State Boards adjustment was not made to account for variations in its
quality of materials, workmanship and design per Ind. Admin. Code tit. 50, r.
2.1-4-3(f) (1992) (codified in present form at id., r. 2.2-10-3 (1996)). Rather,
as noted supra, Yuhan made the adjustment to account for deviations of the
subject units from the specifications of the GCR Apartment model. An improvements
deviation from the model used to assess it may be accounted for in
two ways. The preferred method of accounting for this deviation is to
use separate schedules that show the costs of certain components and features present
in the model. Whitley Prods., 704 N.E.2d at 1117 (citations omitted). This
method allows an assessing official to make an objective adjustment to the improvements
base rate. Id. Another method to account for an improvements deviation
is application of a grade adjustment. Id. Where possible, this type
of an adjustment should be avoided because it requires an assessing officials subjective
judgment. Id. However, because the component (base rate adjustment) schedules are
not comprehensive, this type of adjustment may be necessary. Id.
Yuhan testified that she used the unit-in-place tables to calculate the value of
the missing items. (Trial Tr. at 29-30.) Thus, she could have
objectively accounted for the deviations using the unit-in-place tables. Use of objective
adjustments is preferable and must be done where the base rate adjustment and/or
unit-in-place tables permit the deviations values to be reasonably calculated.
Prods., 704 N.E.2d at 1117; see also Inland Steel Co. v. State Bd.
of Tax Commrs, 739 N.E.2d 201, 231-32 (Ind. Tax Ct. 2000) (noting that
the preferred method for calculating deviations from the models is to use separate
schedules showing the costs of components and concluding that taxpayers use of unit-in-place
tables to calculate a corresponding grade increase to account for items not included
in model did not establish prima facie case as to grade), pet. for
review filed Dec. 22, 2000.
Upon remand, Clark must submit probative evidence sufficient to establish a prima facie
case as to grade. See Whitley Prods., 725 N.E.2d at 1119; CDI,
Inc. v. State Bd. of Tax Commrs, 725 N.E.2d 1015, 1019 (Ind. Tax
Ct. 2000); see also King Indus. Corp. v. State Bd. of Tax Commrs,
699 N.E.2d 338, 343 (Ind. Tax Ct. 1999). The State Board must
consider any probative evidence in a meaningful manner. Clark, 694 N.E.2d at
1235. If the State Board deems the grade to be other than
that as shown by Clarks evidence, the State Board must support its final
determination with substantial evidence.
See footnote The State Board is instructed to use the unit-in-place
tables to calculate the value of those items included in the GCR Apartment
model but not found in the subject units, where the State Board can
reasonably identify and apply values for the missing items from the unit-in-place tables.See footnote
Accordingly, if the unit-in-place tables are used, the missing items cannot be
the basis for the lowering of the subject units grade in this case.See footnote
II. Economic Obsolescence
Clark argues that a reduction for economic obsolescence should have been applied to
the subject units. (Petr Br. at 9-10.) Clark contends that he
presented the State Board with considerable evidence of causes of [economic] obsolescence.
(Reply Br. at 5.) Specifically, he alleges that the high tenant turnover
rate, excessive maintenance costs, lack of adequate parking and poor land-to-building ratio are
all causes of economic obsolescence. (Petr Br. at 9.)
Clark had to present probative evidence sufficient to establish a prima facie case
that the subject units suffered from causes economic obsolescence.
See Western Select
Properties v. State Bd. of Tax Commrs, 639 N.E.2d 1068, 1075 (Ind. Tax
Ct. 1994); see also Loveless Constr. Co. v. State Bd. of Tax Commrs,
695 N.E.2d 1045, 1049-50 (Ind. Tax Ct. 1998) (concluding that taxpayers evidence constituted
prima facie case of economic obsolescence), review denied. Obsolescence depreciation is composed
of functional and economic loss of value. . . . Economic obsolescence
is caused by factors external to the property. Ind. Admin. Code tit.
50, r. 2.1-5-1 (1992) (codified in present form at id., 2.2-10-7(e) (1996)).
Obsolescence is expressed as a percentage reduction in the remaining value of the
subject improvement. Id. (codified in present form at id., r. 2.2-10-7(f) (1996)).
Determination of obsolescence involves (1) identification of causes of obsolescence and (2)
quantification of the amount of obsolescence to be applied.
Clark, 694 N.E.2d
at 1238. The regulations list various causes of economic obsolescence. Ind.
Admin. Code tit. 50, r. 2.1-5-1 (1992) (codified in present form at id.,
r. 2.2-10-7(e) (1996)). This list does not reference the impact of college students
on leased apartment units or the effect of a high turnover ratio for
leases; however, the list is illustrative, not exhaustive. Lake County Trust v.
State Bd. of Tax Commrs, 694 N.E.2d 1253, 1257 (Ind. Tax Ct. 1998),
Clarks evidence consisted of Millers review and trial testimony. (Reply Br. at
5.) Millers review discusses causes of economic obsolescence over several paragraphs.
In his review, Miller states that students tend to sign shorter lease terms
and subject apartments to a higher degree of wear and tear than do
non-student tenants. (Joint Ex. 2 at 2.) He asserts that this translates
[in]to higher than normal administration costs as well as higher maintenance costs [for
repairs and painting]. (Joint Ex. 2 at 2.) These higher costs
result in decreased cash flow resulting in a diminished value for the subject
units. (Joint Ex. 2 at 2.) Miller states that the annual
turnover rate for the subject units is seventy percent. (Joint Ex. 2
at 2.) He claims that the units suffer from limited parking due
to a poor land-to-building ratio. (Joint Ex. 2 at 2.) This,
he maintains, contributes to lawn wear and to damage to the units from
scrapes and dents when trying to get in and out of tight or
improper parking spaces. (Joint Ex. 2 at 2.) This greater degree
of wear and tear, Miller contends, leads to a shortened economic life expectancy
for the units. (Joint Ex. 2 at 3.) Millers review recommends
application of a fifteen to twenty percent obsolescence factor to the units.
(Joint Ex. 2 at 3.) The review cited no authority, although Miller
did attach a one-page income statement dated December 31, 1993. (Joint Ex.
2 at 4.) The income statement shows the year-to-date rental income and
security deposit income for the units, in addition to units year-to-date expenses.
(Joint Ex. 2 at 4.)
Miller testified at trial that the subject units suffered economic obsolescence because they
were rented to students. (Trial Tr. at 34.) However, he admitted
that Clark was not necessarily losing money in renting the units. (Trial
Tr. at 34-35.) Miller opined that the high turnover rate detracted from
cash flow. (Trial Tr. at 35.) He stated that there are
income analysis methods that determine the degree of impact but that no analyses
had be done in this case. (Trial Tr. at 35-36.)
Clark has not submitted probative evidence as to causes of economic obsolescence.
First, the Court notes that Millers review and his trial testimony are
conclusory observations; they are unsupported statements that do not qualify as probative evidence.
CDI, 725 N.E.2d at 1020-21. See also Herb v. State Bd.
of Tax Commrs, 656 N.E.2d 890, 893 (Ind. Tax Ct. 1995) (Allegations, unsupported
by factual evidence, remain mere allegations.) Assuming that the subject units do
have a seventy percent annual turnover rate (an unsubstantiated figure), Clark does not
submit evidence showing that this alleged fact causes overly burdensome administrative costs.
Clarks financial statement was not probative as to obsolescence because it did not
compare the subject units rental income, security deposit income and maintenance expenses with
those of other properties with non-student populations. But see Clark, 694 N.E.2d
at 1239 n.13 (noting that under some circumstances financial statements, standing alone, may
be probative as to obsolescence). Also, the alleged inadequacy of parking and
poor land-to-building ratio could potentially reduce rental income to Clark. Clark, 694
N.E.2d at 1238-39. However, Clark in the present case submitted no evidence
demonstrating what the ratio of parking spots per apartment or the land-to-building ratio
actually is; the Court cannot and will not speculate as to the impact
of these alleged deficiencies.
Clark has provided the Court with no probative evidence showing that the subject
units suffer from causes of economic obsolescence. Therefore, the State Boards final
determination on this issue is AFFIRMED.
For the aforementioned reasons, the State Boards final determination is REVERSED and REMANDED
with respect to Issue I for further proceedings consistent with this opinion and
is AFFIRMED with respect to Issue II.
Clark raises one additional issue not considered by the Court: whether
the State Boards assessment regulations violate both the United States Constitution and the
Indiana Constitution. The fact that the subject property was assessed under an
unconstitutional regulation does not mean the assessment will be invalidated on that basis.
Whitley Prods., Inc. v. State Bd. of Tax Commrs, 704 N.E.2d 1113,
1121 (Ind. Tax Ct. 1998) (citations omitted), review denied. Real property must
still be assessed, and, until the new regulations are in place, must be
assessed under the present system. Id. See also Town of St.
John v. State Bd. of Tax Commrs, 729 N.E.2d 242, 246 & 251
(Ind. Tax Ct. 2000) (ordering that all real property in Indiana shall be
reassessed under new, constitutional rules as of March 1, 2002, and, until then,
real property tax assessments shall be made in accordance with the current system).
The Court notes that because Clark did not raise the grade issue
in its Form 131 petition for review, the State Board was not required
to but, instead, choose to consider it as part of its administrative review.
Whitley Prods., 704 N.E.2d at 1119 ([T]he State may limit its inquiry
to only those errors raised by the taxpayer.) See also Ind. Code
Ann. § 6-1.1-15-4 (1989) (stating that State Board may assess the property in
question, correcting any errors which may have been made in reviewing taxpayers appeal)
(amended 1993, 1995 & 1997).
According to Yuhan, the subject units had walls that were approximately nineteen
percent brick and eighty-one percent frame. (Trial Tr. at 12.) For
the GCR Apartment model, improvements with Type 2 walls have Face brick on
concrete block back-up for a 9 [foot] wall.
Ind. Admin. Code tit.
50, r. 2.1-4-7 (1992). The subject units had no concrete block back-up
walls. (Trial Tr. at 12.) Thus, Yuhans grade adjustment in part
accounted for missing concrete block back-up walls for approximately nineteen percent of the
subject units walls.
The 1992 regulations define unit-in-place method as a method of computing the
replacment or reproduction cost of an improvement by applying established unit-in-place rates, developed
to include cost of materials, equipment, labor, overhead and profit, to the various
Ind. Code Ann. tit. 50, r. 2.1-6-1 (1992). The
current regulations explain that Normally, [the unit-in-place cost] schedules are only used when
an item cannot be priced from cost schedules included in this article.
Ind. Code Ann. tit. 50, r. 2.2-15-1 (1996). Thus, the unit-in-place tables
must be used to account for deviations of the subject improvement from the
model when the other base rate adjustment schedules do not provide ascertainable prices
for the items at issue.
If the State Board deems Clarks evidence non-probative or concludes that Clark
has not presented a prima facie case as to grade, it should indicate
this in its final determination. Then, the State Board may merely state
in its final determination that Clark takes nothing by his petition. In
that event, the countys grade assignment stands. The Court observes, too, that
if Clark fails to establish a prima facie case with probative evidence and
the State Board again chooses to change the subject units assigned grade, the
State Board then must support its final determination with substantial evidence if Clark
is prejudiced by the State Boards action.
See Whitley Prods., 704 N.E.2d
at 1120 (concluding that, despite flaws in State Boards grading of subject property,
lowering of grade by State Board did not prejudice taxpayer and therefore State
Boards grade would not be reversed).
Any party advocating for adjustments to an improvements valuenot just the State
Boardshould use the unit-in-place tables, where values for items can be reasonably identified
and applied using the unit-in-place tables (and where adjustments for items are not
otherwise provided for by the regulations cost schedules).
Footnote: Clark claims that the regulations governing grade lack ascertainable standards and are
therefore invalid. (Petr Br. at 6-7.) However, a taxpayer may not
simply point out the inadequacies of the present assessment system and expect to
secure a reversal.
White Swan Realty v. State Bd. of Tax Commrs,
712 N.E.2d 555, 559 (Ind. Tax Ct. 1999), review denied. Instead, the
taxpayer must offer probative evidence relating to the grade issue. Id.
Clarks evidence, i.e., the written review and trial testimony of M. Drew Miller,
is not probative evidence because it is conclusory in nature. See CDI,
Inc. v. State Bd. of Tax Commrs, 725 N.E.2d 1015, 1020-21 (Ind. Tax
Ct. 2000). Thus, this argument also fails.
This case concerns only the first step, i.e., identifying causes of economic
Footnote: Issues as to parking spots and land-to-building ratios involve questions of functional
obsolescence, i.e., obsolescence caused by conditions internal to the property.
N.E.2d at 1238 (citing Ind. Admin. Code tit. 50, r. 2.1-5-1 (1992)).
However, for ease of reference in this opinion, the Court considers these two
points within the framework of Clarks economic obsolescence arguments.