ATTORNEY FOR PETITIONER:    ATTORNEYS FOR RESPONDENT:
DAVID L. PIPPEN    STEVE CARTER
ATTORNEY AT LAW     ATTORNEY GENERAL OF INDIANA
Indianapolis, IN    Indianapolis, IN
    
    LAUREANNE NORDSTROM
    DEPUTY ATTORNEY GENERAL
    Indianapolis, IN
______________________________________________________________________
     IN THE INDIANA TAX COURT

ARLINGTON PROFESSIONAL BUILDING,    )
                                     )
    Petitioner,                      )
                                     )
    v.                               )

            ) Cause No. 49T10-0101-TA-18
DEPARTMENT OF LOCAL         )
GOVERNMENT FINANCE, See footnote         )
                )
    Respondent.            )    
______________________________________________________________________

ON APPEAL FROM A FINAL DETERMINATION OF
THE STATE BOARD OF TAX COMMISSIONERS

NOT FOR PUBLICATION
February 7, 2005

FISHER, J.
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 Arlington’s improvement is entitled to an obsolescence depreciation adjustment. See footnote
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 Arlington’s 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. Dep’t of Local Gov’t 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. Dep’t of Local Gov’t 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 taxpayer’s evidence and to justify its decision with substantial evidence. Id. (citation omitted).
Discussion

    “Obsolescence, which is a form of depreciation, is defined as a loss of value and classified as either functional or economic.” Freudenberg-NOK Gen. P’ship v. State Bd. of Tax Comm’rs, 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 Comm’rs, 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 property. See footnote See Miller Structures, Inc. v. State Bd. of Tax Comm’rs, 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 improvement’s overall value. See Clark, 694 N.E.2d at 1238.
While the local assessing officials did not assign Arlington’s 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 Arlington’s 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 improvement’s 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, Arlington’s 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 improvement’s 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 Arlington’s 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 Board’s 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 Arlington’s Analysis.
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 subject’s desirability and marketability.” See footnote (Stip. R. at 49 (footnote added).) Consequently, Arlington’s failure to provide this evidence is fatal to its quantification of obsolescence. See Lake County Trust Co. v. State Bd. of Tax Comm’rs, 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 Comm’rs, 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 Comm’rs, 704 N.E.2d 1113, 1119 (Ind. Tax Ct. 1998), review denied.
CONCLUSION

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.





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. 2001 Ind. Acts 198 § 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. 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.

Footnote: 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 Comm’rs, 756 N.E.2d 1124, 1127 n.1 (Ind. Tax Ct. 2001). Because Arlington’s claims and supporting arguments are identical to those previously rejected by the Court, the Court will not address them.

Footnote: 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 waived.

Footnote: In the commercial context, this loss of value usually means a decrease in the property’s income generating ability. See Miller Structures, Inc. v. State Bd. of Tax Comm’rs, 748 N.E.2d 943, 953 (Ind. Tax Ct. 2001).


Footnote: 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 Miller’s statement that the purchase was for $500,000 less $425,000. ( See Stip. R. at 143.)

Footnote: 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.)