ATTORNEY FOR PETITIONER:
ATTORNEYS FOR RESPONDENT:
DAVID L. PIPPEN
ATTORNEY AT LAW
ROBERT B. WENTE
DEPUTY ATTORNEY GENERAL
INDIANA TAX COURT
ZORN INDUSTRIES, )
v. ) Cause No. 49T10-0008-TA-90
DEPARTMENT OF LOCAL )
ON APPEAL FROM A FINAL DETERMINATION OF
THE STATE BOARD OF TAX COMMISSIONERS
NOT FOR PUBLICATION
October 22, 2004
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 Zorns improvements are entitled to additional
FACTS AND PROCEDURAL HISTORY
Zorn owns land and improvements in Elkhart County, Indiana. For the 1991
assessment, local assessing officials awarded Zorns 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 Zorns petition on May
30, 1996. On November 22, 1996, the State Board issued its final
determination upholding the BORs 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 Boards 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 BORs 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
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.
Dept of Local Govt 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.
Obsolescence, which is a form of depreciation, is defined as a loss of
value and classified as either functional or economic. Freudenberg-NOK Gen. Pship v.
State Bd. of Tax Commrs, 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
Commrs, 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 Commrs, 748 N.E.2d
943, 954 (Ind. Tax Ct. 2001). In the commercial context, this loss
of value usually means a decrease in the propertys 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 improvements 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 Zorns 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 Commrs, 742 N.E.2d 46, 52 (Ind. Tax
Ct. 2001), review denied; see also Heart City Chrysler v. State Bd. of
Tax Commrs, 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; Petr Br. at 5.)
Zorns 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 propertys record cards (Cert. Admin. R. at 48-49, 52-53,
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 Zorns
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 Zorns 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 Boards 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 Zorns calculations, the State
Board overlooked a more fundamental flaw in Zorns 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 propertys
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 Boards
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 propertys value
i.e., how much money they are causing Zorn to lose. Indeed,
apart from identifying Zorns 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. Zorns failure to provide this evidence is fatal to its quantification
of additional obsolescence.
Because Zorn failed to link the factors causing obsolescence with an
in its propertys value, it could not make a prima facie case quantifying
the amount of obsolescence to which it was entitled. Accordingly, the State
Boards final determination affirming the 60% obsolescence depreciation adjustment must stand.
For the foregoing reasons, the Court AFFIRMS the final determination of the State
Board valuing Zorns property for the 1991 tax year.
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),
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.
Zorn also raises the same state and federal constitutional claims that this
Court declined to reach in Zorns first appeal. Because Zorns 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 Commrs, 694 N.E.2d 1230, 1241 (Ind. Tax Ct. 1998).
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 Commrs, 704 N.E.2d 1113, 1119
(Ind. Tax Ct. 1998), review denied.