ATTORNEY FOR PETITIONER:     ATTORNEYS FOR RESPONDENT:
DAVID L. PIPPEN     STEVE CARTER
ATTORNEY AT LAW     ATTORNEY GENERAL OF INDIANA     
Indianapolis, IN     Indianapolis, IN

     ROBERT B. WENTE
     DEPUTY ATTORNEY GENERAL
    Indianapolis, IN


IN THE INDIANA TAX COURT
ZORN INDUSTRIES,            )            
             
                                
                   

            )
    Petitioner,                )
            )    
    v.        ) Cause No. 49T10-0008-TA-90
            )
DEPARTMENT OF LOCAL        )
GOVERNMENT FINANCE, See footnote         )         
            )
    Respondent.            )    


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



NOT FOR PUBLICATION
October 22, 2004


FISHER, J.
    Zorn Industries (Zorn) appeals the final determination of the State Board of Tax Commissioners (State Board) valuing its real property for the 1991 tax year. The issue before this Court is whether Zorn’s improvements are entitled to additional obsolescence depreciation. See footnote
FACTS AND PROCEDURAL HISTORY

    Zorn owns land and improvements in Elkhart County, Indiana. For the 1991 assessment, local assessing officials awarded Zorn’s two light manufacturing buildings (improvements) a 40% obsolescence depreciation adjustment. Zorn appealed the assessment to the Elkhart County Board of Review (BOR) who increased the obsolescence adjustment to 60%. Unsatisfied with this result, Zorn filed a Petition for Review of Assessment (Form 131) with the State Board on August 12, 1992, claiming that additional obsolescence should be granted. The State Board held a hearing on Zorn’s petition on May 30, 1996. On November 22, 1996, the State Board issued its final determination upholding the BOR’s assessment.
Zorn filed an original tax appeal with this Court on January 3, 1997. The Court conducted a trial on November 30, 1998, and issued its decision on February 8, 2000. The Court found that the State Board had failed to support its findings with substantial evidence. Accordingly, the Court reversed the State Board’s final determination and remanded the matter to the State Board for further proceedings. The Court instructed Zorn, on remand, to quantify the amount of obsolescence depreciation it sought.See footnote
    Pursuant to the order of remand, the State Board conducted a hearing on April 27, 2000. Thereafter, on June 13, 2000, the State Board issued its final determination finding that Zorn had failed to satisfy its burden of proof in quantifying its improvements’ obsolescence depreciation. The State Board again affirmed the BOR’s award of 60% obsolescence. Zorn filed a second original tax appeal with this Court on July 31, 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 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). 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. 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. 2.1-5-1 (1992). Functional obsolescence is caused by factors internal to the property and is evidenced by conditions within the property itself. See 50 IAC 2.1-5-1. 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 Miller Structures, Inc. v. State Bd. of Tax Comm’rs, 748 N.E.2d 943, 954 (Ind. Tax Ct. 2001). In the commercial context, this loss of value usually means a decrease in the property’s income generating ability. See id. at 953. 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.
    Zorn contends that its improvements should have been assigned an obsolescence depreciation adjustment of 83% and that the State Board erred when it upheld the 60% adjustment assigned by the local assessing officials. Both Zorn and the Elkhart County assessing officials agreed that causes of obsolescence existed within Zorn’s improvements. Accordingly, Zorn bore the burden of presenting evidence at the remand hearing quantifying the amount of obsolescence depreciation to be applied to its improvements. See Clark v. State Bd. of Tax Comm’rs, 742 N.E.2d 46, 52 (Ind. Tax Ct. 2001), review denied; see also Heart City Chrysler v. State Bd. of Tax Comm’rs, 714 N.E.2d 329, 333-34 (Ind. Tax Ct. 1999) (stating that when parties agree as to the existence of certain causes of obsolescence, the only issue to consider is the quantification of obsolescence).
    To support its claim, Zorn presented an “Assessment Review and Analysis” (Analysis) prepared by its property tax consultant, Mr. M. Drew Miller (Miller) of Landmark Appraisals. In the Analysis, Zorn provided a mathematical calculation in which the reproduction cost of its improvements was factored to equal 1990 cost dollars (the year the subject property was sold). That reproduction cost, less physical depreciation, was then compared with the sale price of the improvements to arrive at the 83% obsolescence depreciation allowance. (See Cert. Admin. R. at 46.) Zorn claims that this method of quantifying obsolescence, commonly known as the sales comparison method, has been approved by the State Board in its newsletter, “The Communicator.” (See Cert. Admin. R. at 56, 82; Pet’r Br. at 5.) Zorn’s Analysis also contained, among other things: 1) a copy of the Winter 1999-2000 issue of “The Communicator” describing the sales comparison method; 2) a photocopy of the first and last pages of a sales contract indicating that the property was sold in 1990 for $500,000; 3) photocopies of “Comparative Cost Multipliers” from the Marshall Swift Valuation Service manual which Zorn used to convert a 1985 reproduction cost value of the improvements to a 1990 reproduction cost value; 4) the listing agreement for the subject property showing a sale price of $500,000; and 5) the property’s record cards (Cert. Admin. R. at 48-49, 52-53, 55-56, 75-79.)
    In its final determination, the State Board explained that although Zorn used an accepted and recognized method to calculate total accrued depreciation, the numbers it used were flawed in several respects (Cert. Admin. R. at 36.) Specifically, the State Board asserted that the sales contract Zorn presented did not indicate whether the property was sold in an arms-length transaction (Cert. Admin. R. at 32.) As a result, the State Board held that “[i]t is [] impossible . . . to examine all of the terms of th[e] contract to determine whether it is a ‘market sale.’” (Cert. Admin. R. at 37.) In addition, the State Board asserted that because the reproduction cost new used in the calculation was taken from the true tax value of all the improvements on the property (rather than just the improvements which are the subject of this appeal), that value was inaccurate and would be given no weight (Cert. Admin. R. at 39.) Finally, the State Board questioned Zorn’s calculation of the improvements’ sale price due to an unsupported deduction which was made for personal property sold (See Cert. Admin. R. at 39.) Accordingly, because of the multiple flaws in Zorn’s calculation, the State Board held that Zorn failed to prove that it was entitled to additional obsolescence. (Cert. Admin. R. at 41.)
    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, by focusing only on the numbers used in Zorn’s calculations, the State Board overlooked a more fundamental flaw in Zorn’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, Zorn presented no evidence indicating an actual loss – i.e., how the various causes of obsolescence present in its property are causing it to lose money. The administrative record contains only one rather cryptic reference to a loss in value. This reference is found in the State Board’s first final determination where it stated that there were “symptoms of loss [in] value due to limited use of the structure and decreases [in] market acceptability.” (Cert. Admin. R. at 51.) However, Zorn has offered no evidence indicating what those “symptoms” are or how, specifically, they are impacting the property’s value – i.e., how much money they are causing Zorn to lose. Indeed, apart from identifying Zorn’s improvements as two light manufacturing buildings (Cert. Admin. R. at 20, 81-85; Oral Argument Tr. at 25-27,29), the record contains no description of the improvements whatsoever and no indication as to what characteristics are causing the limited use of the structure or decreases in market acceptability. See id. Zorn’s failure to provide this evidence is fatal to its quantification of additional obsolescence. See footnote
    Because Zorn 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. Accordingly, the State Board’s final determination affirming the 60% obsolescence depreciation adjustment must stand.
CONCLUSION

    For the foregoing reasons, the Court AFFIRMS the final determination of the State Board valuing Zorn’s property for the 1991 tax year.
    


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. 2004)(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. 2004)(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. 2004)(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: Zorn also raises the same state and federal constitutional claims that this Court declined to reach in Zorn’s first appeal. Because Zorn’s claims and supporting arguments are identical to those previously rejected by the Court, the Court will not address them.

Footnote: Because the administrative hearing took place before April 24, 1998, Zorn was initially not required to quantify the obsolescence of the subject property; rather, Zorn was only required to identify the causes of obsolescence. See Clark v. State Bd. of Tax Comm’rs, 694 N.E.2d 1230, 1241 (Ind. Tax Ct. 1998).

Footnote: Stated differently, although the only issue in this case was the quantification of obsolescence, Zorn 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, Zorn 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, Zorn 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.