ATTORNEY FOR PETITIONER:    ATTORNEYS FOR RESPONDENT:
DAVID L. PIPPEN    STEVE CARTER
ATTORNEY AT LAW     ATTORNEY GENERAL OF INDIANA
Indianapolis, IN    Indianapolis, IN
    
    KATHRYN SYMMES KIRK
    DEPUTY ATTORNEY GENERAL
    Indianapolis, IN
______________________________________________________________________
     IN THE INDIANA TAX COURT

DEPUY, INC.,                )
                                 )
    Petitioner,                  )
             
                           v.                       )

            ) Cause No. 49T10-9912-TA-242
DEPARTMENT OF LOCAL         )
GOVERNMENT FINANCE, See footnote         )
                )
    Respondent.            )    
______________________________________________________________________

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

NOT FOR PUBLICATION
September 2, 2004

FISHER, J.

Depuy, Inc. (Depuy) appeals the State Board of Tax Commissioners’ (State Board) final determination valuing its real property for the 1992 tax year. The issues for the Court to decide are: 1) whether the State Board erred when it refused to assign obsolescence depreciation to Depuy’s improvement and, 2) whether the State Board erred when it refused to reduce the grade assigned to Depuy’s improvement. See footnote For the following reasons, the Court AFFIRMS the State Board’s final determination on both issues.

FACTS AND PROCEDURAL HISTORY

    Depuy, a developer and manufacturer of orthopedic devices, owns an improvement in Wayne Township, Kosciusko County, Indiana. The improvement’s core structure was constructed in 1974. Between 1978 and 1990, however, multiple sections were added to the structure. For the 1992 assessment year, local assessing officials assigned zero obsolescence depreciation to Depuy’s improvement and the various sections of the improvement were assigned grades ranging between “D-1” and “B-1.”
Depuy appealed the assessment to the Kosciusko County Board of Review (BOR), claiming that its improvement was entitled to obsolescence depreciation and grade adjustments. The BOR denied Depuy’s claims for relief.See footnote Depuy then appealed the BOR’s determination to the State Board; the State Board also denied Depuy’s requested relief.    
    Depuy subsequently filed an original tax appeal. On July 1, 1999, this Court remanded the case to the State Board for further action.See footnote The State Board conducted a remand hearing on September 2, 1999. On October 29, 1999, the State Board issued a final determination denying Depuy’s request for an obsolescence adjustment and grade reductions. Depuy filed another original tax appeal on December 13, 1999. On September 24, 2001, this Court heard the parties’ oral arguments. 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
1. Obsolescence

Obsolescence is the functional or economic loss of property value. Clark v. State Bd. of Tax Comm’rs, 694 N.E.2d 1230, 1238 (Ind. Tax Ct. 1998). Functional obsolescence is caused by factors internal to the property; economic obsolescence is caused by external factors. See id. See also Ind. Admin. Code tit. 50, r. 2.1-5-1 (1992). Obsolescence is expressed as a percentage reduction in the remaining value of an improvement. See 50 IAC 2.1-5-1.
    When a taxpayer seeks an obsolescence adjustment, it must make a two prong showing: 1) it must identify causes of the alleged obsolescence and 2) it must quantify the amount of obsolescence to be applied to its improvement. Clark, 694 N.E.2d at 1241. Each of these two prongs must be tied to an improvement’s actual loss of value; in the commercial context, that usually means the loss of income generated by the property. Id. at 1238.     
Depuy contends that the State Board erred when it failed to assign obsolescence depreciation to its improvement. Specifically, Depuy claims that its improvement is entitled to a 15% obsolescence adjustment. In support of its claim, at the remand hearing Depuy presented an “Assessment Review and Analysis” (Analysis) prepared by its tax representative, Mr. M. Drew Miller of Landmark Appraisals, Inc.
The Analysis stated that Depuy’s improvement suffered from obsolescence because:
[t]he subject has had no less than 10 additions over the years. The resulting structure is of an irregular shape with varying clear ceiling heights, an excessive amount of interior columns and walls.

Because of these additions there are numerous roof lines, seams and valleys which are prone to more maintenance problems than a building with one roof.
The subject’s manufacturing area contains a substantial amount of outdated fluorescent lighting.

Due to the inefficient city water service the subject is required to supply and maintain two water storage tanks and pumps.

These items negatively impact the functional utility of the subject property which diminishes the desirability and the marketability of the property.

(Cert. Admin. R. at 104.) The Analysis then quantified Depuy’s obsolescence at 11.3% by deducting the physical depreciation applied by the Wayne Township Assessor from the total accrued depreciation as determined by the economic age-life method of measuring property depreciation. (See Cert. Admin. R. at 106.) The Analysis then estimated an additional 4% obsolescence to account for the inefficient city water service, to arrive at a total obsolescence depreciation calculation of 15%. (See Cert. Admin. R. at 106.)
    To meet its burden, Depuy was required to translate its improvement’s loss in value (due to the alleged causes of obsolescence) into a quantifiable amount of obsolescence depreciation. See Clark, 694 N.E.2d at 1238. Here, Depuy presented a calculation bearing no relationship to the alleged causes of obsolescence present in its improvement. Indeed, nothing in the Analysis explained how the improvement’s shape,
ceiling heights, or fluorescent lighting caused it to lose value. See footnote Consequently, Depuy’s evidence failed to demonstrate that it was entitled to obsolescence depreciation. The State Board’s final determination with respect to obsolescence is therefore AFFIRMED.

2. Grade

The grading of improvements is an important part of Indiana’s property assessment system. Under that system, assessors use improvement models and cost schedules to determine the base reproduction cost of a particular improvement. See footnote Whitley Prods., Inc. v. State Bd. of Tax Comm’rs, 704 N.E.2d 1113, 1116 (Ind. Tax Ct. 1998), review denied. Improvements are then assigned various grades based on the quality of the materials used, their design, and the quality of the workmanship. Id. See also Ind. Admin. Code tit. 50, r. 2.1-4-3(f) (1992) (providing that grade is used to adjust the total base reproduction cost in order to account for variations in standards of quality and design). The grades represent multipliers that are applied to the subject improvement’s base reproduction cost. Whitley Prods., 704 N.E.2d at 1116.
    When an improvement deviates from the applicable model or cost schedule used to assess it, the deviation often impacts the improvement’s base reproduction cost. Id. at 1117. As this Court has previously explained, there are two methods by which to account for such deviations:
The preferred method . . . is to use separate schedules that show the costs of certain components and features present in the model. This allows an assessor to adjust the base reproduction cost of the improvement objectively.

The other means of accounting for an improvement’s deviation from the model used to develop the cost schedule is via an adjustment to the grade of the improvement. This type of adjustment requires the assessor’s subjective judgment. Where possible, this type of an adjustment should be avoided.

Id. (internal citations, quotations, and footnotes omitted).
    Depuy claims that it is entitled to grade adjustments because the sections of its improvement lack certain features contained in the models used to assess them. To support its claim, Depuy’s Analysis contained several photographs depicting the interior and exterior photographs of the improvement. (See Cert. Admin. R. at 80-86.) The Analysis also compared the pricing for components claimed to be absent in each section of Depuy’s improvement with the pricing for the components actually present. (See Cert. Admin. R. at 91-102.) The Analysis attributed the differences to its requested grade reductions for each section. See footnote
    Depuy falls short of establishing its prima facie case on grade because its evidence does not support the conclusory statements in the Analysis. More specifically, photographs without explanations detailing what is being depicted are of no probative value. For instance, one photograph appears to show office space with removable partitioning – a claimed deviation for section one of Depuy’s improvement. ( See Cert. Admin. R. at 83.) However, there is no evidence demonstrating that the partitioning occupies only 25% of the office space, or if the photograph is even depicting the section one office space since the same allegation is raised with respect to another office section of Depuy’s improvement as well. Moreover, statements that a section of the improvement “has this” and “does not have that,” without supporting evidence, are nothing more than conclusions. See Miller Structures, Inc. v. State Bd. of Tax Comm’rs, 748 N.E.2d 943, 953 (Ind. Tax Ct. 2001) (stating, “[a] taxpayer’s conclusory statements do not constitute probative evidence concerning the grading of the subject improvement”) (internal quotation and citation omitted). Thus, Depuy’s mathematical calculations contain no evidentiary support. Without first proving what components were or were not present in the various sections of its improvement, the results of Depuy’s calculations are meaningless. Accordingly, Depuy has failed to demonstrate that it is entitled to the grade reductions it requests and the State Board’s final determination is AFFIRMED.



CONCLUSION


    Depuy failed to demonstrate that it was entitled to the obsolescence and grade adjustments it requested. See footnote Consequently, 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) (amended 2004); 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) (amended 2004); 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) (amended 2004); 2001 Ind. Acts 198 § 95. Nevertheless, the law in effect prior to January 1, 2002 applies to those 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: Depuy also raises various state and federal constitutional claims in its briefs submitted to this Court. “[T]he general rule is that the Court is bound by the issues and evidence raised at the administrative level.” Miller Structures, Inc. v. State Bd. of Tax Comm’rs, 748 N.E.2d 943, 948 (Ind. Tax Ct. 2001). Accordingly, because the issues were not raised at the administrative level, the issues are waived and may not now be considered by the Court. See id.

Footnote: The BOR did make other adjustments to Depuy’s assessment; those adjustments, however, are not at issue in this appeal.

Footnote: The remand order included, in addition to obsolescence and grade, the issues of land classification, base pricing of land, deviations from the model, and yard improvement pricing. ( See Cert. Admin. R. at 24-25.) Depuy did not address the other issues in its oral argument or briefs submitted to this Court. Therefore, the Court considers those issues waived for review on this appeal.

Footnote: For example, Depuy claims that the numerous roof lines of its improvement can be “prone to more maintenance problems.” ( See Cert. Admin. R. at 104.) While Depuy submitted photographs depicting the multiple roof lines of its improvement, it failed to introduce evidence demonstrating that it had incurred higher maintenance or repair costs associated with the roof’s design. (See Cert. Admin. R. at 80, 84-85.)

Footnote: To help identify and define various classes of buildings, Indiana’s assessment regulations have categorized improvements into numerous models based upon their physical characteristics. See Ind. Admin. Code tit. 50, r. 2.1-4-7 (1992). The cost schedules associated with the improvement models replicate the reproduction costs of a given structure by assuming the presence of certain construction elements. See Ind. Admin. Code tit. 50, rr. 2.1-4-3, -5 (1992).

Footnote: For instance, section one of the improvement is priced from the General Commercial Industrial Office model. See Ind. Admin. Code tit. 50, r. 2.1-4-7(b) (1992). The Analysis states that for section one, “[t]he areas of deviation from the model includes 25% of the area has only removable partitions . . . no terrazzo or equal flooring.” (Cert. Admin. R. at 91.) To account for these deviations, Depuy multiplied the value of partitions, listed in the regulations at $9.10 per square foot, by 25% (to account for the partitioning present) to arrive at a value of $2.27 per square foot. See Ind. Admin. Code tit. 50, r. 2.1-4-5 (Schedule C) (1992). (See also Pet’r Br. at 4.) Depuy next divided the $2.27 by a base rate of $35.9 per square foot to arrive at a 6% reduction in value. (See Pet’r Br. at 4.) Depuy then took the difference in value between carpeting and terrazzo flooring ($1.65 per square foot and $3.90 per square foot) and multiplied it by 15% (the amount of terrazzo presumed in the model) to arrive at another 1% percent reduction in value. (See Pet’r Br. at 4.)

Footnote: The Court notes that Depuy’s evidence does appear to show that some features of its improvement may deviate from the models used to assess each section. However, it was not the State Board’s duty, nor is it this Court’s, to make Depuy’s case for it. “The administration of this state’s property taxation system is best served by having taxpayers make detailed factual presentations to the State Board[.] . . . [T]o allow taxpayers who present no probative evidence at the administrative level to obtain reversal of a State Board final determination would result in a tremendous waste of time and scarce judicial resources.” Whitley Prods., Inc. v. State Bd. of Tax Comm’rs, 704 N.E.2d 1113, 1120 (Ind. Tax Ct. 1998) (internal quotations and citation omitted), review denied.