ATTORNEYS FOR PETITONER:
ATTORNEYS FOR RESPONDENT:
TIMOTHY D. HERNLY
JOHN C. SMARRELLA
ATTORNEY GENERAL OF INDIANA
BARNES & THORNBERG
South Bend, Indiana
Deputy Attorney General
INDIANA TAX COURT
JUAN C. and MARCIA N.GARCIA, )
v. ) Cause No. 71T10-9809-TA-104
STATE BOARD OF TAX )
ON APPEAL FROM A FINAL DETERMINATION OF THE STATE BOARD OF TAX COMMISSIONERS
February 14, 2001
The petitioners, Juan and Marcia Garcia (Garcias), appeal the final determination of the
State Board of Tax Commissioners (State Board) for the 1993 tax year.
In their original tax appeal, the Garcias raise several issues, which the Court
condenses and restates as:
Whether the grade of A+6 given to the Garcias residence was arbitrary and
2. Whether the State Board acted arbitrarily and capriciously when it failed
assess the Garcias swimming pool enclosure (Enclosure).
For the reasons explained below, the Court finds for the Garcias on both
FACTS AND PROCEDURAL HISTORY
The present case returns to this Court following a remand ordered by the
Court on April 24, 1998. Garcia v. State Bd. of Tax Commrs,
694 N.E.2d 794, 800 (Ind. Tax Ct. 1998) (Garcia I). The facts
in this case have been stated once before in Garcia I, so the
Court will not repeat them in their entirety here. Id. at 795.
Rather, the Court will relate the events subsequent to Garcia I.
Following the Courts decision, the State Board held a remand hearing on June
22, 1998, after which it issued its final determination on July 22, 1998.
(Joint Ex. 50.) In its final determination, the State Board increased
the grade of the Garcias residence from an A+4 to an A+6, but
did not issue a determination concerning the Garcias Enclosure.
The Garcias subsequently
filed their original tax appeal on September 1, 1998, and the Court held
a trial in this matter on May 3, 1999. Additional facts will
be supplied where necessary.
ANALYSIS AND OPINION
Standard of Review
The State Board is given great deference when it acts within the scope
of its authority. Barth, Inc. v. State Bd. of Tax Commrs, 699
N.E.2d 800, 801 (Ind. Tax Ct. 1998), rehg denied. Accordingly, this Court
reverses State Board final determinations only when those determinations are unsupported by substantial
evidence, are arbitrary or capricious, constitute an abuse of discretion, or exceed statutory
authority. Id. at 801. To prevail, a taxpayer can demonstrate the
inaccuracy of the State Boards assessment. Clark v. State Bd. of Tax
Commrs, 694 N.E.2d 1230, 1233-34 (Ind. Tax Ct. 1998).
The Garcias first argue that the grade of A+6 given to their residence
following their remand hearing was arbitrary and capricious, while the State Board contends
that the grade was justified. When contesting the grade assigned an improvement,
a taxpayer must offer probative evidence proving the inaccuracy of the State Boards
assessment. Kemp v. State Bd. of Tax Commrs, 726 N.E.2d 395, 400
(Ind. Tax Ct. 2000). In the alternative, a taxpayer may also offer
a competing view, along with evidence to support that view, of what an
assessment should be. Rinker Boat Co. v. State Bd. of Tax Commrs,
722 N.E.2d 919, 924 (Ind. Tax Ct. 1999). In Indiana, administrative decisions
must be in accord with previously stated, ascertainable standards. Mechanics Laundry v.
Department of State Revenue, 650 N.E.2d 1223, 1233 (Ind. Tax Ct. 1995).
The purpose of the "ascertainable standards" rule "[i]s to make certain that administrative
decisions are fair, orderly and consistent, rather than irrational and arbitrary." Id.
(internal quotations omitted). The ascertainable standards rule is satisfied, at least
in part, when standards are written with sufficient precision to give fair warning
as to what factors an agency will consider in making an administrative decision.
Id. The standards should [also] be readily available to those having
potential contact with the administrative body. Id.
Each grade above an A represents a 20% increase in an improvements value
above the grade below it. Ind. Code Ann. r. 2.1-4-3(f) (1992)
(codified in present form as id., r. 2.2-7-6(g)(4). Therefore, a grade of
A +1 represents a factor of 120%, while a grade of A +10
represents a factor of 360%. Id. "A" grade dwellings have an
"outstanding architectural style and design and . . . are constructed with the
finest quality materials and workmanship throughout." Ind. Admin. Code tit. 50, r.
2.1-3-2 (1992) (codified in present form at id., r. 2.2-7-6 (1996)); Garcia I,
694 N.E.2d at 796.
The State Board based its decision on a series of calculations,
State Board started with the actual construction cost of the Garcias home, which
(Joint Ex. 50 at 7); (Trial Tr. at 8.) From
that figure, the State Board then subtracted items that were separately assessed, such
as a tool shed and tennis pavilion. (Joint Ex. 50 at 8.)
The resulting figure equaled $918,677. (Joint Ex. 50 at 8); (Trial
Tr. at 8.) The State Board then determined that the tax year
in question was governed by the 1989 regulations concerning grade, which were based
on 1985 reproduction costs. (Joint Ex. 50 at 8); (Trial Tr. at
9.) Therefore, the State Board decided that it needed to equate the
1991 construction costs with the 1985 data that the 1989 regulations relied upon.
(Joint Ex. 50 at 8); (Trial Tr. at 9.) To do
so, the State Board discounted the 1991 construction costs by a consumer price
to arrive at a 1985 cost of $741,005
for the Garcias
home. (Joint Ex. 50 at 8); (Trial Tr. at 9.); see also
Town of St. John v. State Board of Tax Commrs, 665 N.E.2d 965,
967 n.5 (Ind. Tax Ct. 1996) (subsequent history omitted) (stating that the cost
schedules for 1989 were based on 1985 reproduction costs deflated by 15%).
The State Board then multiplied $741,005 by the inverse of 15% or 85%
to reach the figure of $629,854. (Joint Ex. 50 at 8.)
To the State Board, this figure represented the adjusted construction cost of the
Garcias home. (Trial Tr. at 9.)
Finally, the State Board determined that under the 1989 regulations, a grade of
C on the Garcias home would equal $217,900. (Trial Tr. at 9.)
To achieve the final grade of A+6, the State Board divided $629,854
by $217,900, which equaled approximately 289%, which was then rounded down to 280%
or A+6 for the 1993 tax year. (Joint Ex. 50 at 8);
(Trial Tr. at 9-10); Ind. Admin. Code tit. 50, r. 2.1-4-3.
Despite the State Boards best efforts, no support exists in the regulations for
the above calculation. The State Board admits in its final determination that
its calculation cannot be supported. (Joint Ex. 50 at 8) (The State
Board grants that the Manual does not explicitly identify the mathematical calculation detailed
above.) At trial, the State Board again stated that it could not
support its calculations. (Trial Tr. at 29-30) (Well, what they did .
. . is they backed into the grade.) Further, the State Board,
when questioned by the Court, could not point to any foundation outside the
regulations with which to support its calculations. (Trial Tr. at 35-36.)
In addition, the Court is surprised by the State Boards use of actual
construction cost in determining its calculations. This Court has stated on several
occasions, usually at the State Boards behest, that in Indiana actual construction costs
generally may not be used when assessing property.
See Dawkins v. State
Bd. of Tax Commrs, 659 N.E.2d 706, 709 (Ind. Tax Ct. 1995) (Under
the assessment law . . . the term reproduction cost . . .
does not refer to the actual cost of constructing an improvement. It
means the cost of the property as calculated through application of the State
Boards rules, regulations and cost schedules.); Barker v. State Bd. of Tax Commrs,
712 N.E.2d 563, 572 (Ind. Tax Ct. 1999); Sterling Mgmt.-Orchard Ridge Apartments v.
State Bd. of Tax Commrs, 730 N.E.2d 828, 835 n.4 (Ind. Tax Ct.
2000). In Indiana, a propertys assessment is based on its true tax
value, which is calculated by taking the reproduction cost of property and subtracting
depreciation, as provided for in the State Boards regulations. Ind. Admin. Code
tit. 50, r. 2.1-3-4 (1992)(codified in present form at id., r. 2.2-7-10 (e)
(1996)); GTE North Inc. v. State Bd. of Tax Commrs, 634 N.E.2d 882,
886 (Ind. Tax Ct. 1994).
Also, in Garcia I, this Court stated that the regulations offered no guidance
as to any grade above an A. See Garcia, 694 N.E.2d at
798 (Although the State Boards regulations offer some guidance regarding characteristics of the
basic grades . . . there are absolutely no definitions or guidelines that
allow . . . this Court . . . to differentiate between an
A+10 or an A grade dwelling.). Without such guidance, the State Board
abused its discretion when it assessed the Garcias home as an A+6.
Therefore, this issue must once again be remanded. Since neither the regulations
nor generally accepted appraisal standards provide for setting a grade above an A,
the State Board is directed to enter a grade of A on the
Garcias home for the 1993 tax year.
II. Swimming Pool Enclosure
The Garcias next argue that the State Board acted arbitrarily and capriciously when
it failed to assess their Enclosure on remand. In Garcia I, the
Court noted that the State Board originally had given the Enclosure a grade
of A+4. Garcia, 694 N.E.2d at 798.
In remanding this issue,
the Court noted that:
In this case, some of the cost schedules . . . expressly require
the use of grade factors . . . However, the schedule for pool
enclosures contains no such instruction . . . . The regulations do not
expressly provide that a grade factor is to be applied when using the
cost schedule for pool enclosures . . . . This leads to the
conclusion that the regulations were drafted with the intent to specifically delineate which
cost schedules required the application of a grade factor.
Id. at 799-800 (emphasis in original).
In Garcia I, the Court instructed the State Board on remand that, rather
than assigning a grade to the Enclosure, the State Board should instead extrapolate
the value of the Enclosure from Schedule G.1 and then reassess it based
on that extrapolation. Garcia, 694 N.E.2d at 799. Instead, the State
Board did nothing. At trial, the State Board asked this Court for
a remand on this issue. (Trial Tr. at 24, 44.) (As far
as the swimming pool is concerned . . . [the State Board] would
take a remand on the swimming pool.) This request will be granted.
The Court finds that the State Board acted contrary to law when it
graded the Garcias home as an A+6 for the 1993 tax year.
The State Board is directed to enter a grade of A on the
Garcias home for the 1993 tax year. Further, the Enclosure issue is
remanded to the State Board with instructions to follow the Courts original instructions
in Garcia I. Accordingly, the Court now REVERSES the State Boards final
determinations and REMANDS this case to the State Board for further proceedings consistent
with this opinion.
In Garcia I, the Court found that the State Boards
determination of an A+4 grade for the Enclosure was an abuse of discretion
and remanded that issue for further consideration. Garcia, 694 N.E.2d at
The State Board does not dispute these calculations and resulting
The Garcias home was built in 1991. (Trial Tr.
Blacks Law Dictionary 312 (7th ed. 1999) defines consumer price
index as an index that is published monthly by the U.S. Bureau of
Labor Statistics that tracks the price of goods and services purchased by the
average consumer. In this case, the State Board used a deflator factor
of .8066. (Joint Ex. 50 at 9.)
Some of the State Boards calculations erroneously list this figure
as $714,005. (Joint Ex. 50 at 8.) This error did not
compromise the final determination, however, since the correct figure of $741,005 is used
in the final set of calculations. (Joint Ex. 50 at 8.)
The 1991 cost schedules found in the regulations are
the 1985 cost schedules reduced by 15%. In order to achieve
the proper comparison for its grade calculation, the State Board took the above-deflated
construction costs and deflated them an additional 15%, for a multiplication factor of
85% or .85, which was then used to compute the adjusted 1991 costs.
(Joint Ex. 50 at 9.)
The Court acknowledges that the State Boards method of calculating
grade in this case does make some sense. However, if the State
Board wishes to use such a method when dealing with future appeals (assuming
such a method is actually relevant to grade), it must be included in
the regulations. Cf. Inland Steel Co. v. State Bd. of Tax Commrs,
729 N.E.2d 201, 230 (Ind. Tax Ct. 2000) (Court did not allow for
the use of engineering costs in determining grade because no support existed in
the regulations for their use.) transfer pending.
The Court has permitted the introduction of generally accepted appraisal
techniques in cases where the regulations are silent. See Clark v. State
Bd. of Tax Commrs, 694 N.E.2d 1234, 1244 n.18 (Ind. Tax Ct. 1994)
(Using generally accepted appraisal techniques is acceptable for quantifying obsolescence in the absence
of specific regulatory guidance); see also Canal Square Ltd. Partnership v. State Bd.
of Tax Commrs, 694 N.E.2d 801, 810 n.8. (Ind. Tax Ct.
1994) (A market value estimate is appropriate in the context of obsolescence.)
Upon a proper showing, such might be appropriate in establishing grade. Also,
in any mass appraisal system, invariably, certain properties are over-assessed and some are
under-assessed. King Indus. Corp. v. State Bd. of Tax Commrs, 699 N.E.2d
398, 403 n.4 (Ind. Tax Ct. 1998). In most states, these inevitable
flaws in the mass appraisal techniques are corrected through the presentation of evidence
of actual value during the appeal process. Id. However, in Indiana,
such is not the case. See State Bd. of Tax Commrs v.
Town of St. John, 704 N.E.2d 1034, 1040 (Ind. 1998) (noting that [b]ecause
the existing system precludes evidence of any value which is not found in
the cost schedules . . . assessors are prevented from considering other relevant
evidence of property wealth.) Despite this, a taxpayer is entitled to a
fair application of the regulations.
The Court notes, as it did in Garcia I, 694
N.E.2d at 798, that the correct schedule for valuing swimming pool enclosures is
Schedule G.1, which appears at Ind. Admin. Code tit. 50, r. 2.1-3-5 (1992)
(codified in present form at id., r. 2.2-9-6 (1996)).