ATTORNEYS FOR PETITIONER: ATTORNEYS FOR RESPONDENT:
DAVID L. PIPPEN KAREN M. FREEMAN-WILSON
Attorney at Law ATTORNEY GENERAL OF INDIANA
Indianapolis, IN Indianapolis, IN
JEFFREY S. McQUARY
DEPUTY ATTORNEY GENERAL
INDIANA TAX COURT
ARTHUR & CAROL KEMP, )
v. ) Cause No. 49T10-9804-TA-32
STATE BOARD OF TAX )
ON APPEAL FROM A FINAL DETERMINATION OF THE
STATE BOARD OF TAX COMMISSIONERS
March 14, 2000
Petitioners Arthur and Carol Kemp (Kemps) appeal the final determination of the State
Board of Tax Commissioners (State Board) denying their request to lower the assessed
value of their residence for the 1995 assessment year. In this original
tax appeal, the Kemps present the following three issues for the Courts review:
I. Whether the State Board exceeded its legislative authority in conducting a hearing
in this matter without having issued a letter of appointment to its hearing
II. Whether the State Board improperly assigned the Kemps residence a B grade;
III. Whether the Departments regulations, as applied to the assessment of the Kemps property,
produced an inequitable and unjust assessment in violation of the Indiana Constitution, art.
X, § 1.
FACTS AND PROCEDURAL HISTORY
The Kemps own residential real estateparcel number 04-06-33-301-027 (Parcel 27)in LaPorte, Indiana.
They filed a Form 130 petition for review of assessment with the LaPorte
County Board of Review (BOR), which conducted a hearing on the petition on
April 4, 1996. The BOR, on April 10, 1996, lowered the grade
assigned Parcel 27 from a B plus 1 to a B. This
decreased the assessed value of Parcel 27 to $45,100.
On June 6, 1996, the Kemps filed a Form 131 petition for review
of assessment with the State Board, alleging improper grade and neighborhood rating.
The State Board conducted a hearing on the petition on December 16, 1996.
On February 18, 1998, the State Board issued its final determination.
The State Board made one adjustment to the Kemps assessment, changing the condition
assigned to their home from good to average. However, this resulted in
no change in the assessed value of Parcel 27.
The Kemps filed an original tax appeal with this Court on April 6,
1998. The Court conducted a trial in this matter on December 7,
1998. Oral argument was held on June 3, 1999. Additional facts
will be supplied as needed.
ANALYSIS AND OPINION
Standard of Review
The Court gives great deference to the State Boards final determinations when the
State Board acts within the scope of its authority. See 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. See id.
The taxpayer bears the burden of demonstrating the invalidity of the State Boards
final determination. See Clark v. State Bd. of Tax Commrs, 694 N.E.2d
1230, 1233 (Ind. Tax Ct. 1998).
The Court will consider each of the Kemps issues in turn.
I. Hearing Officers Appointment
The Kemps assert that the State Board issued no written order appointing its
hearing officer in this matter, Ms. Ellen Yuhan (Yuhan). To support its
position, the Kemps point to Yuhans testimony at trial, where she admitted to
not having received any specific written instructions from the State Board regarding her
duties as a hearing officer in the Kemps appeal. (Trial Tr. at
9.) Therefore, the Kemps contend that the State Boards actions exceeded its
legislative authority. However, there is no evidence in the record that the
Kemps objected to Yuhans authority at the administrative level, either at the hearing
or during the physical inspection of the subject property, to hear the Kemps
appeal on behalf of the State Board. Therefore, the Court finds that
the Kemps silence at the administrative level on the issue of Yuhans authority
to conduct the hearing constituted consent to the hearing. The Kemps thus
waived the issue and may not now raise the issue for the first
time in their original tax appeal. See Hoogenboom-Nofziger v. State Bd. of
Tax Commrs, 715 N.E.2d 1018, 1021-22 (Ind. Tax Ct. 1999).
The Kemps challenge the B grade assigned their home by the BOR and
affirmed by the State Board. To support their claim, the Kemps make
the following claim: The components of the subject property do not meet
the B grade used to price the subject property. Nothing in the
presentation of the State Board establishes [that] the admitted deviations equate to a
B grade. It is error for the State Board to ignore the
established errors before them. (Petr Post-Hrg. Br. at 8.) In essence,
the Kemps maintain that the State Boards final determination is not supported by
substantial evidence. In response, the State Board contends that the Kemps did
not make a prima facie case that the assigned grade was improper.
Under Indianas true tax value system, improvements are assigned various grades based on
their materials, design and workmanship; the grades represent multipliers that are applied to
the base reproduction cost of an improvement. See Ind. Admin. Code tit.
50, r. 2.2-10-3 (1996); Whitley Prods. Inc. v. State Bd. of Tax Commrs,
704 N.E.2d 1113, 1116 (Ind. Tax Ct. 1998). When contesting the grade
assigned an improvement, a taxpayer must offer probative evidence concerning the alleged assessment
error. See Herb v. State Bd. of Tax Commrs, 656 N.E.2d 890,
894 (Ind. Tax Ct. 1995); Whitley Prods., 704 N.E.2d at 1119. A
taxpayers conclusory statements do not constitute probative evidence concerning the grading of the
subject improvement. See Whitley Prods., 704 N.E.2d at 1119. Mere references
to photographs or regulations, without explanation, do not qualify as probative evidence.
See Heart City Chrysler v. State Bd. of Tax Commrs, 714 N.E.2d 329,
333 (Ind. Tax Ct. 1999). Furthermore, State Board hearing officers are not
obligated to make a case for the taxpayer. See Whitley Prods., 704
N.E.2d at 1118. Where the taxpayer fails to provide the State
Board with probative evidence supporting its position on the grade issue, the State
Boards duty to support its final determination with substantial evidence is not triggered.
See id. at 1119-20.
The Court has examined the evidence presented to the State Board at the
Kemps administrative hearing and the subsequent inspection of Parcel 27. The Kemps
submitted one sheet of paper with black and white copies of four photographs
of the subject property, along with two actual color photographs of the property.
(Joint Ex. 1.) In addition, they submitted a copy of the original
property record card for Parcel 27, as well as a sample property record
card for the property.
(Joint Ex. 2.) The Kemps also provided
a copy of the grade specification table from Rule 7, page 12 of
the 1992 Indiana Real Property Assessment Manual (Regulation 17). (Joint Ex. 2.)
The grade specification table, which lists basic features associated with the designs
and structures of the different grades found in the regulations, contained checks by
descriptions in the B grade and C grade columns of the table.
(Joint Ex. 2.) Two audiotapes were also provided to the Court; they
were recordings of the Kemps administrative hearing, along with recordings of other hearings
held by the State Board on the same day. (Joint Ex. 3.)
A copy of the State Boards transcript of proceedings was also admitted
Yuhan conducted a physical inspection of Parcel 27. (Trial Tr. at 11.)
Neither the Kemps nor their representatives attended this inspection. (Trial Tr.
at 19, 33.) In assessing the subject property, Yuhan reviewed the grade
specification table. (Trial Tr. at 11.) She also referenced the representative grade pictures
of Regulation 17. See Ind. Admin. Code tit. 50, r. 2.2-7-10 (1996).
(Trial Tr. at 11.)
Mr. Stephen M. Hay (Hay) also testified at trial. Hay worked as
a consultant for Landmark Appraisals, Inc., the company representing the Kemps before the
State Board. (Trial Tr. at 25.) Hay testified that, in his
opinion, the Kemps home was a straight C grade. (Trial Tr. at
26.) He used this C grade in filling out a sample
property record card for Parcel 27. (Trial Tr. at 26; Joint Ex.
According to Yuhan, Hays testimony at the administrative hearing probably wasnt more than
(Trial Tr. at 42.) With respect to grade, Hay
gave Yuhan no evidence other than the photographs from Joint Exhibit one and
the grade specification table from Joint Exhibit two. (Trial Tr. at 41.)
At trial, Counsel for the State Board had the following exchange with
Q. Did [Hay] explain when he handed you the pictures what it was about
the pictures that made him believe or led him to the conclusion that
this house should be graded as a C?
A. No, he didnt say anything.
Q. When he handed you the Grade Specification Table, did he go through that
table with you line by line and interpret either his checkmarks or anything
else on the table that led him to the conclusion that this house
should not be rated a B?
(Trial Tr. at 41.)III. Uniformity of Assessments
The Kemps failed to submit probative evidence on the issue of grade to
the State Board. Hays opinion that the Kemps home deserves a C
grade is a conclusory statement. He provided no foundation for applying the
C grade to his sample property record card. Furthermore, Hays checkmarks on
the grade specification table, without further explanation, are also conclusory.
supra, conclusory statements do not qualify as probative evidence. Yuhan had no
duty to make the Kemps case for them. It was the taxpayers
obligation to substantiate their claims with probative evidence before the State Board.
Because they failed to do so, they did not meet their burden of
production. Therefore, the State Boards duty to substantiate its final determination on
the issue of grade was never triggered.
Finally, the Kemps allege that the State Board ignored evidence demonstrating a lack
of uniformity in the assessments of residential properties in LaPorte. They claim that
a sales ratio study (Study) conducted by Hay reveals that newer homes in
LaPorte are assessed on average 57.5% higher than older homes. The Kemps
essentially contend that the State Boards regulations, as applied, violate Article X, Section
1 of the Indiana Constitution, which provides in part: The General Assembly
shall provide, by law, for a uniform and equal rate of property assessment
and taxation and shall prescribe regulations to secure a just valuation for taxation
of all property, both real and personal.
To rectify this alleged discrepancy in assessments, the Study asserted that the assessments
of the six [newer] homes which have been appealed require a downward adjustment
of 36.5%. (Joint Ex. 2.) At the administrative hearing, Hay requested
that the State Board award the Kemps home a twenty percent obsolescence depreciation
adjustment. (Joint Ex. 3.) The State Board refused to grant
the Kemps an adjustment for obsolescence depreciation. In its final determination, the
State Board reached the following conclusion:
After reviewing 50 IAC 2.2-7-9, it is determined [that] obsolescence depreciation is seldom
applied to residential dwellings. There must be an extremely abnormal circumstance involved
with a residential dwelling before obsolescence depreciation applies. The State of Indiana
uses the Cost Approach method for assessing improvements rather than the Market Approach[,]
so a ratio based on the Market Approach can not be addressed.
No change in assessment is made.
(Tr. of Proceedings at 19.) A. Obsolescence Adjustment
While the Court will not entertain facial challenges to the State Boards regulations,
it does hear as applied challenges. See Dana Corp. v. State Bd.
of Tax Commrs, 694 N.E.2d 1244, 1247 (Ind. Tax Ct. 1998). In
order for such a challenge to succeed, a taxpayer must present specific evidence
that an assessment is unconstitutional as applied to him. See id.
Application of regulations in an unconstitutional manner constitutes an abuse of discretion by
the State Board. See Bielski v. Zorn, 627 N.E.2d 880, 886 n.14
(Ind. Tax Ct. 1994).
The Kemps requested a twenty percent obsolescence adjustment for their home. Obsolescence is
the diminishing of a propertys desirability and usefulness brought about by either functional
inadequacies or overadequacies inherent in the property itself, or adverse economic factors external
to the property. Ind. Admin. Code tit. 50, r. 2.2-1-40 (1996).
The regulations recognize two forms of obsolescence: functional and economic. See
id., r. 2.2-10-7(e); Freudenberg-NOK Gen. Partnership v. State Bd. of Tax Commrs, 715
N.E.2d 1026, 1029 (Ind. Tax Ct. 1999), review denied. Functional obsolescence is
caused by internal factors. Economic obsolescence is caused by external factors.
Ind. Admin. Code tit. 50, r. 2.2-10-7(e) (1996). The determination of obsolescence
is a two-step process whereby an assessor must first identify causes of obsolescence
and then quantify the amount of obsolescence to be applied. See Freudenberg-NOK,
715 N.E.2d at 1029 (citations omitted). However, as the regulations make clear,
Obsolescence depreciation is seldom applied to residential dwellings. There must be an
extremely abnormal circumstance involved with a residential dwelling before obsolescence depreciation applies.
Ind. Admin. Code tit. 50, r. 2.2-7-9(d) (1996); see also Simmons v. State
Bd. of Tax Commrs, 642 N.E.2d 559, 562 (Ind. Tax Ct. 1994) (noting
that residential improvements do not receive obsolescence adjustments, like commercial improvements do).
To obtain an obsolescence adjustment, the Kemps had a burden to produce evidence
showing that their home suffered from an extremely abnormal circumstance.
The Kemps, through Hay, introduced no evidence whatsoever at the administrative hearing showing
that an extremely abnormal circumstance was present in their home that justified application
of an obsolescence adjustment. In fact, the Kemps identified no causes of
Therefore, the State Board correctly denied the Kemps an obsolescence adjustment
for their home. Cf. White Swan Realty v. State Bd. of Tax
Commrs, 712 N.E.2d 555, 560 (Ind. Tax Ct. 1999) (concluding that obsolescence adjustment
for commercial property was not warranted where taxpayer provided no evidence in the
record showing that the property suffers from any cause of obsolescence), review denied.
B. Sales Ratio Study
That the Kemps home did not qualify for an obsolescence adjustment does not
mean that their constitutional claim fails. The obsolescence adjustment was merely the
proposed remedy to an alleged unconstitutional inequity. Thus, the Court must ascertain
whether the Kemps offered specific evidence showing that the State Boards regulations, as
applied to their assessment, were unconstitutional.
To support the assertion that their home and other newer homes in LaPorte
were on average assessed at a higher value than older homes, the Kemps
offered the Study into evidence as part of Joint Exhibit two. A
sales ratio study (also referred to as an assessment-ratio study) is designed to
compare assessed value to market value property. Institute of Property Taxation, Property
Taxation 154 (Jerrold F. Janata ed., 2d ed. 1993). A sales ratio
study is undertaken principally for evaluating assessment accuracy and achieving tax equalization.
Indiana does not value property based on its market value; rather the assessed
value of property is based on its reproduction cost as determined by the
State Boards regulations. See Lake County Trust Co. No. 1163 v. State
Bd. of Tax Commrs, 694 N.E.2d 1253, 1258 (Ind. Tax Ct. 1998), review
denied; Zakutansky v. State Bd. of Tax Commrs, 696 N.E.2d 494, 496 (Ind.
Tax Ct. 1998) (citing Ind. Code Ann. § 6-1.1-31-6 (West 1989)); Dawkins v.
State Bd. of Tax Commrs, 659 N.E.2d 706, 708-09 (Ind. Tax Ct. 1995);
and GTE North, Inc. v. State Bd. of Tax Commrs, 634 N.E.2d 882,
886 (Ind. Tax Ct. 1994). Cf. Barker v. State Bd. of Tax Commrs,
712 N.E.2d 563, 572 (Ind. Tax Ct. 1999) (However, evidence of actual reproduction
cost may have relevance in certain cases.) (citations omitted). The Study compares
sales figures, i.e. market data, with the assessed values of the listed homes.
Thus, given the approach of Indianas property assessment system, the Kemps were
obligated to show how use of this market data helps demonstrate that the
State Boards regulations, as applied, violated their right to an equal and uniform
assessment under the Indiana Constitution.
The Kemps have not persuaded this Court that a study based on market
values can validly demonstrate the alleged inequity of assessments made under Indianas system.
Without citing to authority, the Kemps assert that a ratio study does
not establish a value, but measures a deviation from a standard; [it] measures
general equality and uniformity. (Petr Reply Br. at 5.) Their argument misses
the point. The deviations measured by the ratios in the Study represent
a comparison of two valuesa propertys market value and its assessed value.
A sales ratio study, prepared using professionally acceptable standards, would measure the uniformity
of assessments under a market based assessment system. However, the Kemps do
not sufficiently explain how the Study demonstrates uniformity of assessments calculated using the
true tax value system.See footnote
The State Board is required to deal with a taxpayers evidence in a
meaningful manner, but only if the evidence has probative value.
694 N.E.2d at 1235. In the present case, the Kemps did
not demonstrate that the Study was relevant in determining the correctness of their
assessment. Therefore, the State Board did not abuse its discretion in refusing
to consider the Study.
The Study was the only evidence provided by the Kemps supporting their constitutional
claim. Without it, they lacked any specific evidence showing that the State
Boards regulations, as applied, violated their rights to a uniform and equal assessment
under the Indiana Constitution. Therefore, this claim too must fail.
For all of the aforementioned reasons, the Court hereby AFFIRMS the State Boards
final determination in this matter.
The Kemps raise two additional issues not considered by the Court:
(1) whether the State Boards property assessment system, on its face, violates the
Indiana Constitution; and (2) whether the State Boards final determination was supported by
sufficient findings of fact. As to the issue of constitutionality, the fact
that the subject improvement was assigned a grade under an unconstitutional regulation does
not mean that the assessment will be invalidated on that basis. See
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. Furthermore, because of the Courts resolutions of
the remaining issues, the Court need not consider whether the State Board supported
its final determination with sufficient findings.
The Kemps assessment was based upon an assigned neighborhood rating of very
good. (Tr. of Proceedings at 8.) See also Ind. Admin. Code
tit. 50, r. 2.2-7-7.1(f)(7) (1996) (stating that very good indicates an extremely attractive
and desirable area). The State Board, in its final determination, concluded that
the Kemps home was located in an extremely desirable and attractive area.
(Tr. of Proceedings at 18.) In their original tax appeal, the Kemps
do not challenge this decision by the State Board.
Both cards reflect a sub-total base rate of $93,000 for the subject
property. (Joint Ex. 2.) However, the original property record card applies
a grade of B plus 1 to the base rate, resulting in a
total reproduction cost of $121,940 for the property. (Joint Ex. 2.) See
also Ind. Admin. Code tit. 50, r. 2.2-11-6 (1996) (Schedule F) (assigning a
130% multiplier to B plus 1 grade). The original property record card
also applies a five percent adjustment for physical depreciation; this results in a
true tax value of $115,800. As discussed infra, the sample property record
card applies a C grade to the property, in addition to applying a
five percent adjustment for physical depreciation and a twenty percent adjustment for obsolescence
depreciation. (Joint Ex. 2.) See also Ind. Admin. Code tit. 50,
r. 2.2-11-6 (1996) (Schedule F) (assigning a 100% multiplier to C grade).
The sample property record card, using these adjustments, calculates the propertys true tax
value to be $71,290. (Joint Ex. 2.)
At trial, the transcript of proceedings was admitted into evidence as Joint
Exhibit four. (Trial Tr. at 5.) However, the parties did not
submit a copy of this exhibit to the Court at the time or
trial. (Trial Tr. at 4.) While the Court does not have
an official Exhibit four to review, the Court has reviewed and will refer
to the transcript of proceedings formally filed by the State Board on June
4, 1998, pursuant to Ind. Code Ann. § 6-1.1-15-6 (West 1989).
Ms. Yuhan was generous. The Courts review of the audiotape of
the administrative hearing of the Kemps appeal indicates that the entire hearing lasted
approximately two minutes and twenty seconds. (Joint Ex. 3.) The Court
does note, though, that Yuhan did hear testimony regarding the same sales ratio
study introduced by the Kemps in the present case and discussed infra in
a hearing involving another of Hays clients on the same day as the
Kemps hearing. (Trial Tr. at 4, 39-40.)
Hay was being paid on a contingency fee basis. (Trial Tr.
at 33.) The Court views Hays statements in light of his contingency
fee arrangement. See Wirth v. State Bd. of Tax Commrs, 613 N.E.2d
874, 877 (Ind. Tax Ct. 1993).
Functional obsolescence has numerous possible causes, including: (1) inefficient floor plans;
(2) unnecessary or superadequate construction; (3) inadequate parking; and (4) mechanical inadequacy.
See Pedcor Invs.-1990-XIII, L.P. v. State Bd. of Tax Commrs, 715 N.E.2d 432,
435 (Ind. Tax Ct. 1999) (citations omitted). Possible causes of economic obsolescence include:
(1) inoperative or inadequate zoning ordinances; (2) deed restrictions; and (3) market
acceptability of the product or devices for which the property was constructed or
is currently used. See id.
The sample property record card submitted by Hay calculated the assessed value
of the Kemps home using a twenty percent adjustment for obsolescence. (Joint
Ex. 2.) This calculation, absent any explanation, is conclusory and in no
way reflects whether the Kemps home suffered from causes of obsolescence. Cf.
Clark, 694 N.E.2d at 1241 n.17 (noting that witness conclusory statement as to
applicable level of obsolescence would not, on remand, satisfy taxpayers burden of quantifying
obsolescence because percentage presented was baseless and because witness was contingently paid).
At trial, Hay testified that market data must be used to establish
a reliable baseline against which deviations could be measured for purposes of determining
whether the regulations have been applied accurately in an assessment. (Trial Tr.
at 36-37.) However, Hay admitted that to his knowledge the State Boards
regulations do not specifically spell out the use of [baselines] for the measurement
[of deviations]. (Trial Tr. at 38.)
As observed in Institute of Property Taxation, Property Taxation 159-61 (Jerrold F.
Janata ed., 2d ed. 1993):
In theory, the propertys fair market value tells little or nothing about whether
the valuation is correct [under Indianas true tax value standard]. . . .
The real problem with the true tax value standard is the lack of
uniformity among taxpayers. If taxpayers are assessed at varying fractions of their
fair market value, those with higher fractional assessments may have legitimate complaints.
Of course, this begs the question whether, as long as assessments are entered
in accordance with the [Indiana Real Property Assessment] Manual, there is any valid
legal objection based on the lack of a uniform assessment ratio compared to
fair market value. . . . [B]ecause of the lack of any
uniform relationship between true tax value and fair market value, no standard percentage
exists by which to equalize assessments to insure uniformity vis-à-vis fair market value.
See generally the line of
Town of St. John cases, which provide additional
insight into Indianas property tax system. 665 N.E.2d 965 (Ind. Tax Ct.
1996), revd, 675 N.E.2d 318 (Ind. 1996), opinion on remand, 690 N.E.2d 370
(Ind. Tax Ct. 1997), affd in part, revd in part, 702 N.E.2d 1034
The Study also has a third page, which is a copy of
page thirteen from the Report of the Indiana Fair Market Value Study.
(Joint Ex. 2.) The report, dated December 10, 1996, in part provides
We find that older homes are systematically under-assessed, at approximately .5% per year.
This indicates that a 50 year old home is approximately 30% underassessed
relative to a market standard than is a new home. (Joint Ex. 2.)
This page, however, was not admissible as proof that the Kemps property was
incorrectly assessed. The fair market study cited on this third page was
authorized by the General Assembly pursuant to Pub. L. No. 63-1993. This
act specifically provided that the report and data collected in the study may
not be used in a . . . review of assessment under .
. . IC 6-1.1-15. Thus, even had the State Board considered the
fair market study in reaching its conclusion, it would have abused its discretion
in so doing.