ATTORNEYS FOR APPELLANT ATTORNEYS FOR APPELLEES
Steve Carter Timothy D. Hernly
Attorney General of Indiana John C. Smarrella
Barnes & Thornburg
Nandita G. Shepherd South Bend, Indiana
Deputy Attorney General
SUPREME COURT OF INDIANA
STATE BOARD OF TAX COMMISSIONERS, ) ) Appellant (Respondent Below ), ) ) v. ) No. 71S10-0108-TA-366 ) JUAN C. GARCIA and MARIA N. GARCIA, ) ) Appellees (Petitioners Below ).)
April 12, 2002
In a property grading system based upon comparables, what happens when a property is incomparable?
In this case, the Indiana State Board of Tax Commissioners appeals the Indiana
Tax Courts decision that the Boards methodology for assessing Juan and Maria Garcias
home at a grade of A + 6 for the 1993 tax year
was arbitrary and capricious. The State Board argues that the Tax Court
abused its discretion in overturning the grading.
We conclude that the Tax Court did not give adequate deference to the
Boards method of calculation and thus affirm the grade of A + 6
for the Garcias residence.
The Garcias then filed a Form 131 Petition for Review of Assessment with
the State Board in March 1994, and the Board held a hearing on
July 14, 1994. The Board heard evidence regarding the exterior of the
residence, the structural elements of the roof, and the high quality amenities such
as cabinets, light fixtures, plumbing fixtures, and multiple heating systems, features that were
all generally indicative of an A grade dwelling. 50 IAC 2.1-3-2 (1992).
The State Board agreed that the Garcias home deserved an elevated A
grade, but reduced the assessment to A + 4.
The Garcias next filed an original tax appeal petition with the Tax Court,
which held the Boards methodology in grading dwellings above an A grade was
arbitrary and capricious. Garcia I, 694 N.E.2d at 795. The Tax
Court remanded to the Board for further consideration. Id. at 800.
Following the Tax Courts decision, the State Board held a remand hearing on
June 22, 1998. Using a methodology discussed in detail below, the Board
revised the grade of the Garcias dwelling to A + 6.
After this setback, the Garcias filed a second original tax appeal petition to
the Tax Court. The Tax Court again held that neither the regulations
nor generally accepted appraisal standards provide for setting a grade above an A,
and it directed the State Board to enter a grade of A on
the Garcias home for 1993. Garcia II, 743 N.E.2d at 821.
The Board petitioned this Court to review the final judgment of the Tax
Court pursuant to Indiana Appellate Rule 63. We granted review. 761
At the heart of the new regulations is the State Boards endeavor to
define true tax value so as to measure property wealth.
See footnote True tax
value is defined as [t]he market value-in-use of a property for its current
use, as reflected by the utility received by the owner or a similar
user, from the property, less that portion of use value representing subsistence housing
for its owner. State Board of Tax Commissioners, 2002 Real Property Assessment
Manual 2 (2001).
The manual further explains true tax value as the ask price of property
by the owner, because . . . the ask price represents how much
utility must be replaced to induce the owner to abandon the property.
Id. Attempting to measure value-in-use as opposed to value-in-exchange, the manual specifies
three methods for determining the value of real property: (1) cost approach,
(2) sales comparison approach,See footnote and (3) income approach.See footnote
Id. Using one
of these methods, the manual states that assessors will arrive at the true
tax value, reduced by the applicable shelter allowance for owner-occupied housing units.
Id. at 3, 7, 23.
The manual goes on to say:
Appeal of assessments must operate within the rules and utilize data in the same manner as provided in this manual. In general, this requires that challenges to assessments be proven with aggregate data, rather than individual evidence of property wealth. Since assessments are calculated using aggregate data, it is not permissible to use individual data without first establishing its comparability or lack thereof to the aggregate data. By requiring taxpayers to make any internal data readily available assessors are given the opportunity to establish this comparability.
There shall be a presumption that the value determined according to the rules
prescribed in this manual is the true tax value of the subject property.
However, the taxpayer shall be permitted to offer evidence relevant to the
fair market value-in-use of the property to rebut such presumption and to establish
the actual true tax value of the property as long as such information
is consistent with the definition of true tax value provided in this manual
and was readily available to the assessor at the time the assignment was
made. Such evidence may include actual construction costs, sales information regarding the
subject or comparable properties, appraisals that are relevant to the market value-in-use of
the property, and any other information compiled in accordance with generally accepted appraisal
Id. at 5-6.
The States declared goal is to establish a more objectively verifiable result that will satisfy the constitutional requirements of uniform and equal property assessment. See id. at 2-3.
Tax Board and Tax Court practice are likewise changing. Effective January 1, 2002, the State Board of Tax Commissioners was abolished and its duties distributed to two new agencies: the Department of Local Government Finance, which has tax collection authority, See footnote and the Indiana Board of Tax Review, which will review property tax appeals.See footnote
As for the Tax Court, the legislature has abolished the Tax Courts former
practice of re-creating the evidence that had been before the State Board as
a substitute for making a formal administrative record at the time of the
Board proceedings.See footnote Instead, the Board of Tax Review must now prepare a
certified record of the proceedings related to the petition for judicial review that
Copies of all papers submitted to the Indiana board during the course of the action and copies of all papers provided to the parties by the Indiana board. For purposes of this subdivision, the term papers includes, without limitation, all notices, petitions, motions, pleadings, orders, orders on rehearing, briefs, requests, intermediate rulings, photographs, and other written documents.
Evidence received or considered by the Indiana board.
A statement of whether a site inspection was conducted, and, if a site inspection was conducted, either:
(A) a summary report of the site inspection; or
(B) a videotape transcript of the site inspection.
A statement of matters officially noticed.
Proffers of proof and objections and rulings on them.
Copies of proposed findings, requested orders, and exceptions.
a transcription of the audio tape of the hearing; or
a transcript of the hearing prepared by a court reporter.
Ind. Code Ann. § 6-1.1-15-6(b) (West Supp. 2001)(effective Jan. 1, 2002).
A Tax Court appeal will now be heard on that record, subject to
the provisions of the Administrative Orders and Procedures Act in Indiana Code Ann.
chapter 4-21.5-5.See footnote Relief will be granted if the Board of Tax Reviews
actions were arbitrary, capricious, an abuse of discretion, unsupported by substantial evidence, or
otherwise violate one of the standards listed in Ind. Code Ann. § 4-21.5-5-14(d)
In short, Tax Court appeals will now bear strong resemblance to the review
of other agency determinations, like those of the Workers Compensation Board or the
Indiana Utility Regulatory Commission, presently undertaken by the Court of Appeals. Judge
Shields summarized these appeals in language approximating the present basis for tax appeals:
Judicial review of an administrative decision is limited to a determination of whether the agency has jurisdiction over the matter and whether its order is in accordance with proper legal procedure, is based on substantial evidence, and does not violate any constitutional, statutory, or legal principle.
Ind. Civil Rights Commn v. Wellington Village Apartments, 594 N.E.2d 518, 529 (Ind.
Ct. App. 1992)(citations omitted).
From these appeals heard by the Court of Appeals and the Tax Court,
this Court has discretion to grant further review. App. R. 4(A)(2).
C grade dwellings, defined as [m]oderately attractive dwellings constructed with average quality materials,
are considered average and assigned a grade factor of 100 percent of the
replacement cost as determined by the State Board. 50 IAC 2.1-3-2(a), (b)
(1992). The highest major classification grade is A, which is defined as
a dwelling of outstanding architectural style and design that is constructed with the
finest quality materials and workmanship throughout. Id. at 2(b). Further on,
the regulation states that [m]ansion type dwellings fall within the upper limits of
the grade ranging from AA to AAA [grades A + 4 to A
+ 10]. Id.; 50 IAC 2.1-3-4(f) (1992). A grade dwellings have
a grade factor of 160 percent of the base price. 50 IAC
Because dwellings can fall between the major classifications, the Boards regulations provide a
system of pluses and minuses to fine-tune the grades.
See 50 IAC
2.1-3-4(f) (1992). Grades that fall above A are indicated by +1 through
+10, with each increment representing an increase in value over the base grade
of twenty percent. Id. The Garcias grade of A + 6
represents a factor of 280 percent. See id.
Within the State Boards regulations, assessors must use models, which are conceptual tool[s]
used to replicate replacement cost of a given structure using typical construction materials.
50 IAC 2.1-3-2(a) (1992). Included within the regulations are [g]raded photographs
of representative dwellings . . . [to] assist the assessor in selecting the
proper grade. Id.; see also 50 IAC 2.1-3-6 (1992). Photographs of
comparable homes with grades from A to E 1 are shown in
the regulation. See 50 IAC 2.1-3-6 (1992). No home graded above
an A is pictured. See id. Additionally, a Grade Specification Table
describes the general characteristics of dwellings within each major classification.
See footnote 50 IAC
B. Methodology for Garcias Grade. In reaching the A + 6
grade, the State Board started with the actual construction cost of the Garcias
home, $1,634,543. The State Board subtracted items not assessed in Indiana or
assessed as separate line items.
See footnote The net cost equaled $918,677. The
Board then determined that the applicable regulations concerning grade were based upon 1985
Therefore, the State Board equated the Garcias 1991 construction costs with the 1985
data. To do this, it discounted the 1991 construction costs by a
consumer price index deflatorSee footnote to arrive at an adjusted 1985 cost of $741,005
for the Garcias home. Additionally, because the 1985 cost schedules in the
State Boards Manual were further reduced by fifteen percent, the State Board then
reduced the $741,005 by fifteen percent to reach the figure of $629,854.
This figure, the State Board determined, represented the adjusted construction cost of the
Garcias home.See footnote
Finally, the State Board calculated that a grade of C on the Garcias
home would have equaled a reproduction cost of $217,900. To arrive at
an appropriate grade factor, the State Board divided $629,854 by $217,900, which equaled
approximately 289 percent. The State Board rounded that figure to 280 percent
for a final grade of A + 6.
In sum, the Garcias grade of A + 6 was arrived at by deflating their dwellings actual cost of construction to a 1985 cost level, then dividing by the grade C reproduction costs from the State Boards cost schedules, to arrive at a rounded grade multiplier of 280 percent.
C. Review of the Tax Courts Decision. We review Tax Court
decisions under a clearly erroneous standard of review. In doing so, we recognize
that the Indiana Tax Court was established to develop and apply specialized expertise
in the prompt, fair, and uniform resolution of state tax cases. Ind.
Dept of State Revenue v. Caylor-Nickel Clinic, P.C., 587 N.E.2d 1311 (Ind. 1992).
In reviewing the State Boards approach in Garcia II, the Tax Court again
found fault with the State Boards methodology and directed that a grade of
A be entered on the Garcias home. 743 N.E.2d at 821.
Despite acknowledging that the State Boards method of calculating grade in this case
does make some sense, Id. at 820 n.7, the Tax Court held that
no support exists in the regulation for the above calculation. Id. at
820. The court further stated, [I]f the State Board wishes to use
such a method when dealing with future appeals . . . it must
be included in the regulations. Id. at 820 n.7.
Like other courts conducting judicial review of administrative actions, the Tax Court owes
a certain deference to the executive body to which is assigned the principal
responsibility for carrying out the mission. The Tax Court may reverse a
final determination of the State Board only when its decision is unsupported by
substantial evidence, is arbitrary or capricious, constitutes an abuse of discretion, or exceeds
statutory authority. Wetzel Enters., Inc. v. State Bd. of Tax Commrs, 694
N.E.2d 1259 (Ind. Tax 1998). The taxpayer bears the burden of demonstrating
that the State Boards final determination is invalid. Clark v. State Bd.
of Tax Commrs, 694 N.E.2d 1230 (Ind. Tax 1998).
Indiana Code Ann. § 6-1.1-35-1 (West 1998) establishes the following duties of the
(1) interpret the property tax laws of this state;
(2) instruct property tax officials about their taxation and assessment duties and ensure that the county assessors, township assessors, and assessing officials are in compliance with section 1.1 of this chapter;
(3) see that all property assessments are made in the manner provided by law; and
(4) develop and maintain a manual for all assessing officials and county assessors concerning:
(A) assessment duties and responsibilities of the various state and local officials;
(B) assessment procedures and time limits for the completion of assessment duties;
(C) changes in state assessment laws; and
other matters relevant to the assessment duties of assessing officials, county assessors, and other county officials.
Given this clear legislative grant of authority to develop regulations and interpret the
property tax law within Indiana, the Tax Court should have accorded more deference
in this instance to the State Boards actions.
The Tax Courts ruling that any methodology not appearing within the regulations would
be arbitrary and capricious effectively prevents grading of dwellings above A. The
regulation at issue, however, 50 IAC 2.1-3-4(f) (1992), clearly contemplates that dwellings will
fall above grade A. On this point, the regulation states:
Grades that fall above A (which represents a factor of 160%) are indicated by +1 through +10 (each of which represents an increase of the factor by 20%, so that A + 10 equals a factor of 360%). Grade A + 4 may be designated AA, and grade A + 10 may also be designated as AAA.
50 IAC 2.1-3-4(f) (1992).
The Tax Courts conclusion, therefore, flies in the face of the regulations.
First, regulation 2.1-3-4(f) explicitly contemplates ten plus factors above A. Second, the
regulation assigns specific percentage increments to these higher grades. A C house
has a grade factor of 100 percent, an A house has a grade
factor of 160 percent, and an A + 6 house has a grade
factor of 280 percent. And third, while not providing pictorial representations, regulation
2.1-3-2(b) does describe houses at or above A + 4 as mansion type
dwellings. 50 IAC 2.1-3-2(b) (1992).
Under this scheme, graded dwellings can be thought of as falling somewhere on
a bell-shaped curve, with the few houses of the poorest quality construction (grades
E 4 to E 1) on one end of the curve
and the few mansions of the highest quality construction (A + 4 to
A + 10) on the opposite end. The average house (the C
classification) falls somewhere around the mean of the curve.
Because few homes fall within these fringe categories (below E and above A),
the regulations provide specific comparisons to guide assessors only for grades between A
and E - 1. This is understandable. If the State Board
tries to provide assessors with a picture of a dwelling it considers of
the highest quality, what happens when an even more expensive and luxurious home
is built in the future?
Predictably, it is only those few dwellings of especially high quality that will
be heard to complain. No homeowner is likely to challenge a tax
appraisal as too low.
In this rare situation, the Garcias built a home so upscale that the
comparables available to assessors were simply not comparable. There were no general
specifications or graded photographs to guide the local assessors. But the State
Board did have the general description of mansion type dwellings and specific grade
factors over the average C classification from which to work. See 50
IAC 2.1-3-2(b), 4(f) (1992).
As the Tax Court agreed in Garcia II, the State Boards methodology of
using discounted construction costs in comparison to reproduction costs derived from the regulations
for average C dwellings makes sense. 743 N.E.2d at 820 n.7.
It is a reasonable approach that results in an objectively verifiable grading.
Given that the Garcias house was one of the few dwellings falling
within the elevated A category, it was within the State Boards discretion to
identify the rationale for grading the Garcias home at A + 6.
The Garcias argue, in essence, that because the State Board did not contemplate
a home of this caliber it must assess the Garcias home based upon
the best it did contemplate and assign a grade of A. We
disagree. The State Board found an objective, logical method to assess a
literally incomparable property within the existing guidance.
See footnote This was not arbitrary or
We conclude that the State Board acted within its statutory authority and assessed the Garcias residence using a methodology that was neither arbitrary nor capricious.See footnote The Garcias home was properly graded at A + 6.
Dickson, Sullivan, Boehm, and Rucker, JJ., concur.