ATTORNEY FOR PETITIONER: ATTORNEYS FOR RESPONDENT:
DAVID L. PIPPEN STEVE CARTER
ATTORNEY AT LAW ATTORNEY GENERAL OF INDIANA
Indianapolis, IN Indianapolis, IN
DEPUTY ATTORNEY GENERAL
INDIANA TAX COURT
ARLINGTON PROFESSIONAL BUILDING, )
) Cause No. 49T10-0101-TA-18
DEPARTMENT OF LOCAL )
See footnote )
ON APPEAL FROM A FINAL DETERMINATION OF
THE STATE BOARD OF TAX COMMISSIONERS
NOT FOR PUBLICATION
February 7, 2005
Arlington Professional Building (Arlington) appeals the State Board of Tax Commissioners (State Board)
final determination valuing its real property for the 1999 tax year. The
sole issue for the Court to decide is whether Arlingtons improvement is entitled
to an obsolescence depreciation adjustment.
FACTS AND PROCEDURAL HISTORY
Arlington filed a Petition for Review of Assessment (Form 131) with the State
Board challenging the 1999 assessment on its office building located in Warren Township,
Marion County, Indiana. In its Form 131, Arlington claimed, among other things,
that its improvement was entitled to obsolescence.See footnote After conducting an administrative hearing
on August 11, 2000, the State Board subsequently denied Arlingtons claim.
On January 29, 2001, Arlington initiated an original tax appeal. In lieu
of a trial, the parties agreed to argue the case based on the
administrative record as well as on their written briefs filed with the Court.
The Court did, however, hear the parties oral arguments on April 1,
2002. Additional facts will be supplied as necessary.
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. Hamstra Builders, Inc.
v. Dept of Local Govt Fin., 783 N.E.2d 387, 390 (Ind. Tax Ct.
2003). Thus, 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.
A taxpayer who appeals to this Court from a State Board final determination
bears the burden of showing that the final determination is invalid. Clark
v. Dept of Local Govt Fin., 779 N.E.2d 1277, 1281 (Ind. Tax Ct.
2002). The taxpayer must present a prima facie case through the use
of probative evidence (i.e., evidence sufficient to establish a given fact that, if
not contradicted, will remain sufficient). Id. Only after the taxpayer has
made a prima facie case does the burden shift to the State Board
to rebut the taxpayers evidence and to justify its decision with substantial evidence.
Id. (citation omitted).
Obsolescence, which is a form of depreciation, is defined as a loss of
value and classified as either functional or economic. Freudenberg-NOK Gen. Pship v.
State Bd. of Tax Commrs, 715 N.E.2d 1026, 1029 (Ind. Tax Ct. 1999),
review denied. See also Ind. Admin Code tit. 50, r. 2.2-10-7(e) (1996).
Functional obsolescence is caused by factors internal to the property and is
evidenced by conditions within the property itself. See 50 IAC 2.2-10-7(e).
Economic obsolescence is caused by factors external to the property. Id.
This Court has previously explained that when a taxpayer seeks an obsolescence adjustment,
it must make a two-pronged showing: 1) it must identify the causes
of the alleged obsolescence and 2) it must quantify the amount of obsolescence
to be applied to its improvement(s). See Clark v. State Bd. of
Tax Commrs, 694 N.E.2d 1230, 1241 (Ind. Tax Ct. 1998). It is
important to recognize, however, that each of these prongs requires a connection to
an actual loss in property value. For example, when identifying factors that
cause obsolescence, a taxpayer must show through the use of probative evidence that
those causes of obsolescence are causing an actual loss of value to its
See Miller Structures, Inc. v. State Bd. of Tax Commrs, 748
N.E.2d 943, 954 (Ind. Tax Ct. 2001). Then, when the taxpayer quantifies
the amount of obsolescence to which it believes it is entitled, it is
required to convert that actual loss of value (shown in the first prong)
into a percentage reduction and apply it against the improvements overall value.
See Clark, 694 N.E.2d at 1238.
While the local assessing officials did not assign Arlingtons improvement any obsolescence depreciation,
Arlington claims that it should have received an adjustment of 82.4%. To
support that claim, Arlington presented an Assessment Review and Analysis (Analysis) at the
State Board hearing. (Stip. R. at 43-102.) The Analysis was prepared
by Arlingtons property tax consultant, M. Drew Miller (Miller) of Landmark Appraisals, Inc.
In the Analysis, Arlington provided a mathematical calculation in which it quantified its
obsolescence by first trending the 1999 purchase value of its improvement to a
1991 value. Arlington then took this figure and subtracted it from the
improvements reproduction cost (less physical depreciation). Arlington took that difference and divided
it by the reproduction cost figure to arrive at the 82.4% depreciation allowance.
(See Stip. R. at 50.) Arlington contends that this method of
quantifying obsolescence has been explicitly approved by the State Board in its newsletter,
The Communicator. (See Stip. R. at 58, 137.) Accordingly, Arlingtons Analysis
also contained, among other things: 1) a sell/purchase memorandum indicating that it
purchased the property in 1999 for approximately $500,000; 2) the annualized expenses of
the improvement as of March 1, 1999; 3) the improvements rent roll; 4)
photocopied excerpts from The Appraisal of Real Estate (11th edition); and 5) a
photocopied excerpt from The Communicator.
The State Board, in its final determination, held that the method Arlington used
to quantify the obsolescence to which it believed it was entitled was flawed
for several reasons. Indeed, it explained that Arlington used a hodge podge
of formulas and inappropriately mixe[d] the concept of market with the concept
of costs. (Stip. R. at 39.) In addition, the State Board
asserted that the sell/purchase memorandum contains glaring error[s] and does not indicate whether
the sale was made in an arms-length transaction.
See footnote (
See Stip. R. at
39-40 (footnote added).) As a result, the State Board held that Arlingtons
calculations were unreliable and, in turn, that Arlington failed to prove that it
was entitled to obsolescence. (See Stip. R. at 40.)
While the Court agrees with the State Boards final determination in result, it
does not agree with how the State Board arrived at that result.
Indeed, while the State Board criticized the method by which Arlington quantified its
obsolescence, it completely ignored a more fundamental, underlying flaw that existed in Arlingtons
Obsolescence must be tied to an actual loss in property value. Miller
Structures, Inc., 748 N.E.2d at 953. In this case, Arlington presented no
evidence whatsoever indicating an actual loss i.e., how the various causes of
obsolescence present in its property are causing it to lose money. See
id. In fact, the stipulated record is completely bereft as to what
Arlington alleges the causes of its obsolescence to be. Indeed, the Analysis
merely states [t]he subject property suffers a loss in value due to the
diminished utility and the effects on the subjects desirability and marketability.
See footnote (Stip.
R. at 49 (footnote added).) Consequently, Arlingtons failure to provide this evidence
is fatal to its quantification of obsolescence.
See Lake County Trust Co.
v. State Bd. of Tax Commrs, 694 N.E.2d 1253, 1257 (Ind. Tax Ct.
1998), review denied (stating that [w]here there is no cause of obsolescence, there
is no obsolescence to quantify). See also Heart City Chrysler v. State
Bd. of Tax Commrs, 714 N.E.2d 329, 334 (Ind. Tax Ct. 1999) (stating
that attempts to quantify obsolescence must correlate to the causes of obsolescence).
Arlington presented a mathematical calculation quantifying obsolescence which bore no relationship to the
causes of obsolescence alleged to exist or to any evidence of an actual
loss in property value. Without more, Arlington did not establish a prima
facie case that it was entitled to any additional obsolescence depreciation. See
Whitley Prods., Inc. v. State Bd. of Tax Commrs, 704 N.E.2d 1113, 1119
(Ind. Tax Ct. 1998), review denied.
For the foregoing reasons, Arlington has not proven that it is entitled to
an obsolescence depreciation adjustment. Thus, the Court AFFIRMS the final determination of
the State Board.
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),
Indiana Code § 6-1.1-30-1.1 (West Supp. 2004-2005)(eff. 1-1-02); 2001 Ind. Acts 198 §
66, and the Indiana Board of Tax Review (Indiana Board). Ind. Code
Ann. § 6-1.5-2-1 (West Supp. 2004-2005)(eff. 1-1-02); 2001 Ind. Acts 198 § 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 Ann. § 6-1.5-5-8 (West Supp.
2004-2005)(eff. 1-1-02); 2001 Ind. Acts 198 § 95. Nevertheless, the law in
effect prior to January 1, 2002 applies to these appeals. A.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.
Arlington also raised 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 Commrs, 756 N.E.2d 1124, 1127 n.1 (Ind. Tax
Ct. 2001). Because Arlingtons claims and supporting arguments are identical to those
previously rejected by the Court, the Court will not address them.
Arlington also claimed that the grade assigned to its improvement was
excessive. Because Arlington never addressed this issue in its written briefs filed
with this Court, nor in its oral argument, the Court deems the issue
Footnote: In the commercial context, this loss of value usually means a
decrease in the propertys income generating ability.
See Miller Structures, Inc. v.
State Bd. of Tax Commrs, 748 N.E.2d 943, 953 (Ind. Tax Ct. 2001).
This memorandum is fraught with some apparent errors. For instance,
it states that the building was purchased for $500,000.00 cash less the loan
balance of $425,000,000.00 owed by the Seller to the Buyer. (Stip. R.
at 109.) Nevertheless, the Court will give Arlington the benefit of the
doubt and accept Millers statement that the purchase was for $500,000 less $425,000.
See Stip. R. at 143.)
In turn, Arlington alleges that its obsolescence is evidenced by the
30% vacancy, the cash flow and also by the seemingly depressed purchase price.
(Stip. R. at 49.)