ATTORNEY FOR PETITIONER:    ATTORNEYS FOR RESPONDENT:
DAVID L. PIPPEN    STEVE CARTER
ATTORNEY AT LAW     ATTORNEY GENERAL OF INDIANA
Indianapolis, IN    Indianapolis, IN
    
    LINDA I. VILLEGAS
    DEPUTY ATTORNEY GENERAL
    Indianapolis, IN
______________________________________________________________________________
     IN THE INDIANA TAX COURT

LOGAN CENTER HOLDING CORP.,         )
                                     )
    Petitioner,                      )
    v.                               )

       
            ) Cause No. 49T10-0011-TA-117
DEPARTMENT OF LOCAL         )
GOVERNMENT FINANCE, See footnote         )
                )
    Respondent.            )    
______________________________________________________________________

ON APPEAL FROM A FINAL DETERMINATION OF
THE STATE BOARD OF TAX COMMISSIONERS

NOT FOR PUBLICATION
July 26, 2004

FISHER, J.
Logan Center Holding Corp. (Logan) appeals the State Board of Tax Commissioners’ (State Board) final determination valuing its real property for the 1995 tax year. The issue to be decided by this Court is whether Logan’s improvements are entitled to additional obsolescence depreciation. See footnote
FACTS AND PROCEDURAL HISTORY

Logan owns commercial land and improvements in Logansport, Indiana. For the 1995 assessment, the Cass County Board of Review (BOR) awarded between 10% and 40% obsolescence depreciation to Logan’s improvements. Logan then timely filed Petitions for Review of Assessment (Forms 131) with the State Board alleging, among other things, that its improvements were entitled to additional obsolescence. See footnote The State Board upheld the BOR’s assessment, and Logan subsequently appealed to this Court on May 22, 2000. Upon a joint motion filed by the parties, the Court remanded the case to the State Board for review of Logan’s obsolescence.
The State Board held another administrative hearing on July 20, 2000, and subsequently issued a second final determination, again sustaining the BOR’s assessment. Logan initiated another original tax appeal on November 2, 2000. This Court heard the parties’ oral arguments on November 7, 2001. Additional facts will be supplied as necessary.
ANALYSIS AND OPINION
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

    “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.
To receive an adjustment for obsolescence, a taxpayer must 1) identify the causes of obsolescence present in its improvement and 2) quantify the amount of obsolescence to which it believes it is entitled. 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 in 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.
While the BOR awarded Logan’s improvements between 10% and 40% obsolescence depreciation, Logan claims that they are entitled to 84%. In support of its claim, Logan presented an “Assessment Review and Analysis” (Analysis) at the State Board remand hearing. (Stip. R. at 67-85.) The Analysis contained, among other items, the following: a calculation of how the 84% figure was attained, copies of the property’s record cards, a settlement statement of sale indicating that Logan sold the property in 1996 for $2,400,000, and a photocopied page from the State Board’s newsletter, “The Communicator.” (See Stip. R. at 67-85.)
Logan quantified its obsolescence by first deducting the market value of its improvements (as indicated in the settlement statement) from their reproduction cost new. Logan then took that difference, divided it by the reproduction cost new figure, to arrive at its 84% figure. (See Stip. R. at 75.) Logan claimed this method of quantifying obsolescence was recognized by the State Board in “The Communicator,” and is applicable to real estate in general. (See Stip. R. at 449.)
In its final determination, the State Board explained that the method Logan used to calculate obsolescence could not legitimately be the same method illustrated in “The Communicator.” (See Stip. R. at 62-63.) The State Board further explained that assuming arguendo that Logan’s calculation had any ties to a recognized method of determining obsolescence, there was no probative evidence that the 1996 sale of the property was at arm’s-length, let alone on the open market at all. (Stip. R. at 63.) Consequently, the State Board determined that Logan failed to prove its additional obsolescence claim. (See Stip. R. at 65.)
The State Board was correct in its final determination to deny additional obsolescence. The Court believes, however, that the State Board should not have focused on whether the sale was at arm’s-length. The State Board overlooked the more obvious defect in Logan’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. See Miller Structures, Inc., 748 N.E.2d at 953-54. Logan offered no evidence of an actual loss in value to its property. Instead, Logan, through its tax representative Drew Miller, merely testified at the State Board hearing what factors it believed were causing obsolescence to its improvements:
Basically it’s functional along with economic problems that the property’s been suffering from. I mean the idea as it was originally constructed back in the 1960’s just hasn’t panned out.

*****

[ ] I mean the demand for the space has diminished.
Q: And then this [other building] the main reason for obsolescence?
A: Is reflected in the vacancy as well as the lease rates.

(Stip. R. at 464.) A taxpayer may not merely name random factors causing property to be entitled to an obsolescence adjustment; it must explain how the purported causes of obsolescence cause the property’s improvements to suffer a loss in value. See Champlin Realty Co. v. State Bd. of Tax Comm’rs, 745 N.E.2d 928, 936 (Ind. Tax Ct. 2001), review denied. In other words, Logan needed to show how the property’s design had caused a loss in value. In failing to provide such evidence, Logan is unable to quantify additional obsolescence.
In the alternative, Logan argues that because obsolescence was originally applied by the BOR, the State Board must support the 10% and 40% obsolescence figures with substantial evidence, regardless of whether or not Logan’s claim for additional obsolescence has been supported. See footnote (See Pet’r Br. at 4 (footnote added).) Logan is incorrect. Here, the State Board denied Logan’s request for additional obsolescence rather than affirmatively determining whether Logan was entitled to the amount of obsolescence initially awarded by the BOR. Since Logan did not meet its burden of proof, the burden of going forward did not pass to the State Board.

CONCLUSION

Because Logan has failed to link the factors causing the obsolescence with an actual loss in its property’s value, it failed to make a prima facie case quantifying the amount of additional obsolescence to which it believed it was entitled. Thus, the Court AFFIRMS the final determination of the State Board.






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 Annotated § 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: Logan 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 Logan’s claims and supporting arguments are identical to those previously rejected by the Court, the Court will not address them.

Footnote: Logan also alleged that the BOR failed to apply an influence factor to its land. Logan, however, waived the issue at oral argument. ( See Oral Argument Tr. at 3-4.)

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:      By upholding the initial obsolescence adjustments of 10% and 40%, the State Board agreed that obsolescence was present in Logan’s improvement. Therefore, the 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. Nevertheless, while this case centers on the second prong of Clark, it is important to recognize that both prongs require a connection to an actual loss in property value. See Clark v. State Bd. of Tax Comm’rs, 694 N.E.2d 1230, 1238 (Ind. Tax Ct. 1998). Thus, the quantification of obsolescence is intrinsically tied to the actual loss of value suffered by the improvement from the alleged causes of obsolescence. See Miller Structures, Inc. v. State Bd. of Tax Comm’rs, 748 N.E.2d 943, 954 (Ind. Tax Ct. 2001). 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 record lacks any evidence or explanation on the subject of Logan’s actual loss of value.