ATTORNEYS FOR PETITIONER: ATTORNEYS FOR RESPONDENT:
CURTIS J. DICKINSON JEFFREY A. MODISETT
DAVID L. PIPPEN Attorney General of Indiana
DICKINSON & ABEL
Indianapolis, Indiana TED J. HOLADAY
Deputy Attorney General
LOVELESS CONSTRUCTION CO., ) ) Petitioner, ) ) v. ) Cause No. 49T10-9701-TA-00065 ) STATE BOARD OF TAX COMMISSIONERS, ) ) Respondent. ) __________________________________________________________________________________________________________________________________________
ON APPEAL FROM A FINAL DETERMINATION OF THE STATE BOARD OF TAX COMMISSIONERS
taxpayer demonstrates that it is unsupported by substantial evidence, constitutes an
abuse of discretion, exceeds the State Board's legal authority, or is arbitrary or
capricious. See Zakutansky v. State Bd. of Tax Comm'rs, 691 N.E.2d 1365, 1367 (Ind.
Tax Ct. 1998).
The regulations state that an "accurate determination of Obsolescence
Depreciation will require the Assessor to recognize the symptoms of obsolescence and
exercise sound judgement in equating his observation of the property to the correct
deduction in value from Reproduction Cost New." Ind. Admin. Code tit. 50, r. 2.1-5-1.
An assessor's determination of obsolescence is a two-step inquiry. See Clark, No.
49T10-9607-TA-00083, slip op. at 14. "The assessor must identify the causes of
obsolescence and then quantify the amount of obsolescence to be applied." Id.
However, the regulations contain no specific guidance on how obsolescence is to be
quantified. See id. at 17.
Loveless bears the burden of demonstrating that the State Board erred in determining the subject property's obsolescence. First, Loveless argues that an examination of the testimony of the State Board hearing officer and the State Board's final determination shows that the 5% figure is unsupported by substantial evidence. Loveless' second challenge to the final determination is that the State Board erroneously disregarded the taxpayer's evidence concerning the obsolescence of the property. The State Board counters by arguing that Loveless failed to make a prima facie case demonstrating that additional obsolescence was justified. Therefore, Loveless cannot satisfy its burden of demonstrating that the State Board's final determination was erroneous.
In its final determination, the State Board found that "[n]o evidence was submitted to support the application of functional or economic obsolescence. It is determined that no additional obsolescence [beyond that awarded by the BOR] be
applied." (Joint Ex. C at 11). This explains what the State Board thought of Loveless'
evidence. However, it does nothing to explain why the State Board found that the
subject property had 5% obsolescence, as opposed to any other figure. Cf. id. at 18
n.15. At trial, the State Board hearing officer could not point to any facts that would
support the decision to quantify the obsolescence at 5%, other than the possibility that
the BOR was "doing a little equalization." (Trial Tr. at 34).
Under this Court's previous decisions, this falls well short of the substantial evidence needed to support a State Board final determination. See id. at 18-19. There is not a scintilla of evidence in the record to support the quantification of the property's obsolescence at 5%. Perhaps realizing this problem, the State Board advances a different argument. The State Board points out that it merely maintained the 5% figure determined by the BOR and argues that to "preserve the status quo," in the absence of the taxpayer offering probative evidence showing that the 5% figure as determined by the BOR was incorrect, was proper.
The flaw in the State Board's argument is that it focuses on the 5% figure itself, rather than how that figure was determined. See Scheid v. State Bd. of Tax Comm'rs, 560 N.E.2d 1283, 1285 (Ind. Tax Ct. 1990) (Court concerned with "integrity of process by which the facts were found, rather than the facts themselves."). As this Court recently explained, "a taxpayer need not always challenge the accuracy of an assessment in order to challenge the basis of an assessment." Clark, No. 49T10-9607- TA-00083, slip op. at 6. This means that Loveless does not have to show that the 5% figure is inaccurate in order to prevail. Instead, Loveless must demonstrate that the 5%
figure lacks evidentiary support. See id. at 19 n.16. Loveless has done so,
notwithstanding the fact that the State Board maintained the BOR's figure.
Loveless' second challenge to the State Board's final determination is that the
State Board erroneously disregarded Loveless' evidence of obsolescence. At the State
Loveless attempted to support its claim of economic obsolescence by
offering financial statements showing the income generated by the property for 1991
through 1993 and by offering evidence that, in order to keep the property fully
occupied, Loveless had to change from net leases to gross leases.See footnote
statements showed a decline of almost 10% in net profits from 1991 to 1993.See footnote
Loveless also offered evidence comparing the True Tax Value of the property to the
value of the property as determined by capitalizing the income generated by the
property. See Appraisal Institute, The Appraisal of Real Estate 467 (10th ed.
1992). Additionally, Loveless offered newspaper articles purporting to show that there
was a regional office space glut and a general decrease in the value of real estate. At
the State Board hearing, Loveless argued that this evidence demonstrated that the 5%
obsolescence factor awarded by the BOR was far too low.
As this Court recently pointed out, "[t]he State Board may not simply refuse to consider the taxpayer's evidence." Clark, No 49T10-9607-TA-00083, slip op. at 6. Rather, the State Board is required to deal with the taxpayer's evidence in a meaningful
manner. The prima facie case formulation is tailored to allow the Court to determine
what probative evidence the taxpayer presented to the State Board and whether the
State Board complied with the requirement of dealing with that evidence meaningfully.
The establishment of a prima facie case, however, is not a sine qua non to a taxpayer
carrying its burden of demonstrating that a State Board final determination is improper.See footnote
Id. at 19 n.16. Therefore, a complaint that the taxpayer has not established a prima
facie case, even if true, does not necessarily spell doom for the taxpayer's appeal.
"In order to establish a prima facie case, a taxpayer must introduce evidence sufficient to establish a given fact and which if not contradicted will remain sufficient." Clark, No. 49T10-9607-TA-00083, slip op. at 3 (quoting GTE N., 634 N.E.2d at 887) (internal quotation marks omitted). Once the taxpayer carries this burden, the burden then shifts to the State Board to rebut the taxpayer's evidence and justify its decision. See Western Select, 639 N.E.2d at 1072. In order to carry its burden, the State Board must do more than merely assert that it assessed the property correctly. See Canal Square v. State Bd. of Tax Comm'rs, No. 49T10-9608-TA-00095, slip op. at 16 (Ind. Tax Ct. Apr. 24, 1998) (mere recitation of expertise insufficient to rebut prima facie case). Instead, the State Board must offer an authoritative explanation of its decision
to discount the taxpayer's prima facie showing.See footnote
See id. at 7.
The State Board regulation concerning obsolescence provides that one cause of economic obsolescence is a decrease in the "[m]arket acceptability of the product or devices for which the property was constructed or is currently used." Ind. Admin. Code tit. 50, r. 2.1-5-1. The subject property is used as an office building. The "product" is the leased office space. Cf. Lake County Trust Co. No. 1163 v. State Bd. of Tax Comm'rs, No. 71T10-9609-TA-00104, slip op. at 8 (Ind. Tax Ct. May 21, 1998). The change of the leases from gross leases to net leases made the leases less costly to the tenants. This means that the market considered the leases less valuable than previously. Consequently, the market acceptability of the leases decreased. Loveless corroborated the decrease in the market acceptability of the leases by introducing financial statements documenting a decrease in net income from 1991 to 1993.See footnote 6
This constitutes a prima facie case of obsolescence.See footnote 7 The only evidence offered in rebuttal of this prima facie case was the fact that the subject property was fully
This, however, does not rebut Loveless' prima facie case of obsolescence.See footnote
"A high occupancy rate is not necessarily determinative of whether obsolescence exists
because a taxpayer may have had to reduce the rent to maintain the high occupancy
rate." Clark, No. 49T10-9607-TA-00083, slip op. at 16. Loveless presented evidence
that this was the case. It was incumbent upon the State Board to rebut this showing.
However, the State Board did not. Therefore, the State Board's final determination was
Loveless has demonstrated that the State Board's final determination is deficient in two respects. First, the quantification of obsolescence at 5% is not supported by substantial evidence, and second, the State Board failed to rebut Loveless' prima facie case of obsolescence. Therefore, the final determination of the State Board is REVERSED and REMANDED.
Canal Square, No. 49T10-9608-TA-00095, slip op. at 10-11. At the State Board
hearing, Loveless attempted to quantify the obsolescence of its property by comparing
the True Tax Value of the property (as calculated by the BOR) to the value of the
property as determined by capitalizing the income generated by the property during
one year. See The Appraisal of Real Estate, supra, at 467, 477 (discussing direct
capitalization method). By doing this, Loveless attempted to show that there was a
marked disparity between the True Tax Value of the property (as calculated by the
BOR) and the value of the property as calculated by capitalizing the income generated
by the property. At the State Board hearing, Loveless argued that this disparity
demonstrated 25% obsolescence. (Joint Ex. A). At trial, Loveless argued that the
comparison demonstrated that the 5% obsolescence figure was "wholly inadequate."
(Trial Tr. at 11).
Loveless' attempt to quantify the obsolescence of the property in this manner is flawed. The obsolescence of a particular improvement is tied to the loss of the improvement's income generating ability. The income generated by an improvement is measured in real dollars, not True Tax Value dollars. Therefore, a comparison of an improvement's True Tax Value to its value as calculated by capitalizing the income of the property is essentially meaningless.
On remand, the entire issue of obsolescence is open for reconsideration. To that end, Loveless is entitled to offer any evidence probative of obsolescence regardless of whether that evidence was presented at the original State Board hearing. In addition, the State Board may conduct any additional lawful investigation it deems
necessary and may use any evidence uncovered in that investigation to determine the
obsolescence of the property. If the State Board chooses to do so, Loveless will have
to be given the opportunity to respond to any new evidence discovered by the State
Board. See Castello v. State Bd. of Tax Comm'rs, 638 N.E.2d 1362, 1365 (Ind. Tax Ct.
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