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

CHAMPLIN REALTY,                                                          )
                                                                               )
    Petitioner,                                                                )
                                                                               )
    v.                                                                         )   Cause No. 49T10-0010-TA-106
                                                                               )
DEPARTMENT OF LOCAL                                                            )
GOVERNMENT FINANCE,
                                                           
                                                 
                                                                      
See footnote         )
                )
    Respondent.            )    
_____________________________________________________________________

ON APPEAL FROM TWO FINAL DETERMINATIONS OF
THE STATE BOARD OF TAX COMMISSIONERS

NOT FOR PUBLICATION
July 7, 2004


FISHER, J.

    Champlin Realty (Champlin) appeals from two final determinations of the State Board of Tax Commissioners (State Board) valuing its real property for the March 1, 1995 assessment date. The sole issue for the Court to decide is whether Champlin’s improvements are entitled to additional obsolescence depreciation. See footnote
FACTS AND PROCEDURAL HISTORY

Champlin owns two parcels of real property in Elkhart, Indiana. For the 1995 assessment, the local assessing officials assigned the first parcel (Parcel No. 01-05-13-251-0020) an assessed value of $533,970 and the second parcel (Parcel No. 01-05-13-277-013) an assessed value of $40,900. In arriving at these values, Champlin’s improvements were awarded obsolescence depreciation adjustments: the improvements on the first parcel received 15% obsolescence adjustments (except for a warehouse that received 80%); the improvements on the second parcel received 25% obsolescence adjustments.
On December 14, 1995, Champlin filed a Petition for Review of Assessment (Form 131) on each parcel with the State Board. In each of the Forms 131, Champlin claimed that its improvements were entitled to additional obsolescence. The State Board conducted one administrative hearing on both challenges. On August 16, 2000, the State Board issued two final determinations (one for each parcel) denying Champlin’s claims.
    On October 6, 2000, Champlin 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 heard the parties’ oral arguments on August 20, 2001. Additional facts will be supplied as necessary.
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. When appealing to this Court from a State Board final determination, the taxpayer bears the burden of showing that the final determination is invalid. Id.
DISCUSSION & ANALYSIS

    “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). In turn, 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.
1. Parcel No. 01-05-13-251-0020

    While the local assessing officials assigned the improvements on this parcel obsolescence depreciation adjustments between 15% and 80%, Champlin claims that it should have received an overall adjustment of 43%. To support that claim, Champlin presented an “Assessment Review and Analysis” (Analysis) at the State Board hearing. (Stip. R. at 71-91.) The Analysis was prepared by Champlin’s property tax consultant, M. Drew Miller (Miller) of Landmark Appraisals, Inc.
    In the Analysis, Champlin provided a mathematical calculation in which it quantified its obsolescence by first deducting the market value of its improvements from their reproduction cost new. Champlin then took that difference, divided it by the reproduction cost new figure, to arrive at the 43% depreciation allowance. (See Stip. R. at 75.) Champlin contends that this method of quantifying obsolescence has been explicitly approved by the State Board in its newsletter, “The Communicator.” (See Stip. R. at 74, 135.) Accordingly, Champlin’s Analysis also contained, among other things: 1) a “settlement statement” indicating that it sold the property in 1997 for approximately $1,500,000 (Stip. R. at 77-78); 2) photocopies of “Comparative Cost Multipliers” from the Marshall Swift Valuation Service manual which Champlin used to convert a 1991 reproduction cost value of the property to a 1997 reproduction cost value (see Stip. R. at 79-80); and 3) the property’s record cards (Stip. R. at 81-91.)
    In its final determination, the State Board explained that although Champlin used an acceptable method to calculate “accrued depreciation,” there were several flaws with the numbers it used. More specifically, it asserted that the settlement statement Champlin presented did not indicate whether it sold the property in an arms-length transaction. As a result, the State Board held that “[i]t is [] impossible . . . to examine the terms of the contract to determine whether it is a ‘market sale.’” (Stip. R. at 44.) In addition, the State Board asserted that because the “remainder value” Champlin used did not match any of the numbers used by the local assessing officials, it would give the calculation no weight. (Stip. R. at 44-45.) Accordingly, the State Board ruled that Champlin failed to prove that it was entitled to additional obsolescence. (Stip. R. at 45.)
    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 “nitpicked” Champlin’s calculations, it completely ignored a more fundamental, underlying flaw that existed in Champlin’s Analysis.
Obsolescence must be tied to an actual loss in property value; in the commercial context, this loss of value usually means a decrease in the property’s income generating ability. Miller Structures, Inc., 748 N.E.2d at 953. In this case, Champlin 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 footnote See id. Champlin’s failure to provide this evidence is fatal to its quantification of additional obsolescence.
Nevertheless, Champlin argues that because the local assessing officials applied obsolescence in the first instance, everyone is in agreement as to what the causes of obsolescence are. (See Oral Argument Tr. at 24-27.) As a result, it asserts that all it had to do in order to make a prima facie case was to provide a calculation as to the proper amount of obsolescence to be applied to its improvements, not what the causes of the obsolescence were. See footnote Champlin misses the point.
    Admittedly, this case does center on the second prong (the quantification prong) of the Clark test. Champlin forgets, however, that both prongs require a connection to an actual loss in property value. See Clark, 694 N.E.2d at 1238. Thus, the quantification of obsolescence is intrinsically tied to the actual loss of value suffered by the improvements from the alleged causes of obsolescence. See Miller Structures, Inc., 748 N.E.2d at 954. 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). The stipulated record lacks any evidence or explanation on the subject of Champlin’s actual loss of value. Consequently, it is impossible for Champlin to convert that loss of value into an obsolescence quantification. See footnote
Because Champlin failed to link the factors causing obsolescence with an actual loss in its property’s value, it could not make a prima facie case quantifying the amount of obsolescence to which it was entitled. Thus, the Court AFFIRMS the final determination of the State Board valuing this parcel for the 1995 tax year.
2. Parcel No. 01-05-13-277-013

    For the 1995 reassessment, the local assessing officials awarded Champlin’s improvements on this parcel 25% obsolescence depreciation adjustments. Champlin asserts, however, that the improvements are entitled to 65% obsolescence adjustments.
Because the assessing officials obviously agreed that causes of obsolescence existed within Champlin’s improvements See footnote , Champlin again bore the burden of presenting evidence at the State Board hearing quantifying the amount of obsolescence to be applied to its improvements. Consequently, Champlin presented another “Assessment Review and Analysis” (Analysis #2) in which it argued that its property suffered from both functional and economic obsolescence because the building lacked thermal pane windows and insulation, its layout was inefficient, and it did not facilitate a network of computer and phone lines. (Stip. R. at 123.) As a result, Champlin claims the property “is at an economic disadvantage in the marketplace, incurring higher utility, maintenance, material handling costs and labor costs.” (Stip. R. at 123.) Analysis #2 also contains: 1) a mathematical calculation showing how it arrived at 65%; 2) several photocopied pages from the Marshall Swift Valuation Services manual; 3) a photocopied page from the eighth edition of “The Appraisal of Real Estate;” and 4) the property’s record cards. (See Stip. R. at 124-133.)
All Champlin has done with respect to this parcel is provide the State Board with a laundry list of factors that may cause obsolescence to its improvement and then say “as a result, we’re entitled to a 65% obsolescence adjustment.” However, Champlin needed to link one with the other by showing an actual loss of value. See Miller Structures, 748 N.E.2d at 954. Again, the administrative record is completely devoid of any evidence indicating and explaining an actual loss of value. See footnote Because Champlin has not shown how or why its improvements’ value has been negatively impacted by the factors that it alleges are causing obsolescence, it has not satisfied its burden. Thus, the State Board’s final determination valuing this parcel for the 1995 assessment is AFFIRMED.
CONCLUSION

Because Champlin failed to link the factors causing obsolescence with an actual loss in its properties’ value, it failed to make a prima facie case quantifying the amount of obsolescence to which it was entitled. The Court therefore AFFIRMS the two final determinations of the State Board valuing Champlin’s properties for the 1995 assessment.





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 Annotated § 6-1.1-30-1.1 (West Supp. 2003)(eff. 1-1-02); 2001 Ind. Acts 198 § 66, and the Indiana Board of Tax Review (Indiana Board). Ind. Code Ann. § 6-1.5-1-3 (West Supp. 2003)(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. 2003)(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: Champlin 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 Champlin’s claims and supporting arguments are identical to those previously rejected by the Court, the Court will not address them.

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: In fact, the administrative record is completely bereft as to what Champlin alleges the causes of its obsolescence to be. The Township Assessor could not provide any insight either: at the administrative hearing, she explained that Elkhart County hired an outside firm to conduct its 1995 general reassessment. ( See Stip. R. at 136.) She admitted that while that firm (and hence, her office) had assigned the 15% and 80% obsolescence factors to Champlin’s improvements, she really had no idea why. (See Stip. R. at 137 (“I assume it is [because] the building is cut up some . . . [and because] they don’t have current heating and air conditioning systems”).)


Footnote: By awarding the initial obsolescence adjustments, the local assessing officials agreed that obsolescence was present in Champlin’s improvements. Therefore, quantification of obsolescence, not the identification of causes thereof, is the issue here. See Phelps Dodge v. State Bd. of Tax Comm'rs, 705 N.E.2d 1099, 1102 (Ind. Tax Ct.1999), review denied.

Footnote: Stated differently: although the only issue in this case was the quantification of obsolescence, Champlin was, nonetheless, necessarily required to explain the alleged causes of obsolescence in order to translate its improvements’ loss in value (due to those causes) into a quantifiable amount of obsolescence depreciation. See Clark, 694 N.E.2d at 1238. Instead, Champlin presented a mathematical calculation bearing no relationship to the causes of obsolescence alleged to exist or to evidence of an actual loss in property value. Without more, Champlin 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.


Footnote: See footnote 5, supra.

Footnote: For example, Champlin needed to support its allegation that its irregular and inefficient floor plan has caused increased production and material handling costs with calculations indicating the amount of those increased costs. Likewise, Champlin needed to support its claim that it has incurred higher utility costs due to a lack of insulation and thermal pane windows with evidence indicating the amount of those higher utility costs.