INDIANA TAX COURT
ATTORNEYS FOR PETITIONER
: ATTORNEYS FOR RESPONDENT:
STEPHEN H. PAUL KAREN M. FREEMAN-WILSON
MATTHEW R. GUTWEIN
Attorney General of Indiana
Baker & Daniels Indianapolis, Indiana
MICHAEL B. SHAPIRO
VINCENT S. MIRKOV
Honigman Miller Schwartz
& Cohn Deputy Attorney General
INLAND STEEL COMPANY, )
v. ) Cause No. 49T10-9803-TA-00027
STATE BOARD OF TAX COMMISSIONERS, )
ON APPEAL FROM A FINAL DETERMINATION
OF THE STATE BOARD OF TAX COMMISSIONERS
November 22, 2000
Inland Steel Company (Inland) appeals the final determination of the State Board of
Tax Commissioners (State Board) fixing the assessed value of its property (Plant 2)
as of March 1, 1993. Inland presents several issues for this Courts
consideration. The Court consolidates and restates these issues as follows:
I. Whether the State Board properly calculated Plant 2s functional obsolescence
due to excess construction costs, excess operating expenses, and excess inventory and capital
II. Whether the State Board applied the appropriate model in calculating the base reproduction
costs for Plant 2s Major Buildings; and
III. Whether the State Board applied the proper grades to Plant 2s Basic Oxygen
Furnace (BOF) Buildings and Major Buildings.
FACTS AND PROCEDURAL HISTORY See footnote
Inland is a Delaware corporation engaged in business in the State of Indiana.
Inland owns a large integrated steel production plant located in East Chicago,
Indiana. The plant was initially constructed in 1901 and has been
modified over the years; it consists of facilities designated as Plant 1, Plant
2, Plant 3 and Plant 4. Inland owns several hundred buildings, which
are located on several parcels of land. The overwhelming majority of Inlands
improvementsincluding the plants principal operating segmentsare part of Plant 2, which is the
subject of this original tax appeal.
On January 24, 1995, Inland filed a Form 131 petition for review challenging
Plant 2s assessment as of March 1, 1993. A hearing regarding Inlands
petition was held on October 30, 1995. Supplemental hearings were held on
June 17-19, 1996. On February 19-20, 1997, the State Boards hearing officers
met with Inlands representatives to analyze and audit the supporting data to certain
answers to questions the State Board had submitted to Inland. (Respt Br.
at 2.) The State Board, on July 29, 1997, issued its proposed
final assessment determination. Another supplemental hearing was held on August 28, 1997,
and on November 4, 1997, the State Board conducted a final hearing.
On February 16, 1998, the State Board issued its final determination, assigning Plant
2 a total value of $35,834,200 ($2,950,430 for land and $32,883,770 for improvements).
Inland filed its original tax appeal petition on March 27, 1998. The
Court conducted a trial in this matter on January 12, 1999. Oral
arguments were heard on October 5, 1999.
Additional facts will be supplied as necessary.
ANALYSIS AND OPINION
Standard of Review
This Court gives the final determinations of the State Board great deference when
the State Board acts within the scope of its authority. Wetzel Enters.,
Inc. v. State Bd. of Tax Commrs, 694 N.E.2d 1259, 1261 (Ind. Tax
Ct. 1998). Accordingly, this Court reverses final determinations of the State Board
only when those decisions are unsupported by substantial evidence, are arbitrary or capricious,
constitute an abuse of discretion or exceed statutory authority. Id. The
taxpayer bears the burden of demonstrating the invalidity of the State Boards final
determination. Clark v. State Bd. of Tax Commrs, 694 N.E.2d 1230, 1233
(Ind. Tax Ct. 1998).
I. Functional Obsolescence
Inland argues that the State Board erroneously calculated Plant 2s functional obsolescence.
Specifically, Inland contends that it presented a prima facie case supporting its identification
and quantification of functional obsolescence and that the State Board failed to sufficiently
refute this prima facie case. According to Inland, the State Board did
not support its final determination with substantial evidence. In response, the State
Board asserts that it properly used its discretion in calculating Plant 2s functional
Inland presents various sub-issues for consideration. These involve challenges to the State
Boards calculation of functional obsolescence due to excess construction costs, excess operating expenses,
and excess inventory and capital costs. First, the Court will review the
definition of functional obsolescence and the methodology for calculating functional obsolescence. Next,
the Court will consider the evidence needed to support a prima facie case
of functional obsolescence. Finally, the Court will address each of Inlands sub-issues.
Obsolescence, which is a form of depreciation, is defined as a loss of
value and is classified as either functional or economic. Freudenberg-NOK Gen. Partnership
v. State Bd. of Tax Commrs, 715 N.E.2d 1026, 1029 (Ind. Tax Ct.
1999) (citing Ind. Admin. Code tit. 50, r. 2.1-5-1 (1992) (codified in present
form at id., r. 2.2-10-7(e) (1996))), review denied. Functional obsolescence is either
a physical element that buyers are unwilling to pay for or a deficiency
that impairs the utility of a property when compared to a more modern
replacement, leading to a loss in value.
Id. (citing Michael D. Larson,
Identifying, Measuring, and Treating Functional Obsolescence in an Appraisal, 10 J. Prop. Tax
Mgmt. 42, 44 (1999)). It is caused by factors internal to the
property and is evidenced by conditions within the property. Pedcor Invs. v.
State Bd. of Tax Commrs, 715 N.E.2d 432, 435 (Ind. Tax Ct. 1999)
(citations omitted). As the State Boards regulations explain, Functional Obsolescence may be
due to a poor floor plan, mechanical inadequacy or superadequacy, functional inadequacy or
superadequacy due to size, style, age, or other losses. Ind. Admin. Code
tit. 50, r. 2.1-5-1. Functional obsolescence works as a penalty against the
propertys value. Larson, supra at 44. The State Board expresses
this penalty in terms of a percentage reduction from the subject propertys value;
the obsolescence deduction can range from 0% to 95%.
Ind. Admin. Code
tit. 50, r. 2.1-5-1.
The determination of obsolescence is a two-step inquiry. Freudenberg-NOK, 715 N.E.2d at
1029. The regulations require that an assessor first identify the causes of
obsolescence and then quantify the amount of obsolescence to be applied. Id.;
see also Ind. Admin. Code tit. 50, r. 2.1-5-1 (stating that accurate determination
of obsolescence requires an assessor to recognize the symptoms of obsolescence and exercise
sound judgment in equating his observation of the property to the correct deduction
in value . . . .). The State Boards regulations provide
no specific guidance as to how obsolescence should be quantified. Clark, 694
N.E.2d at 1240. However, one permissible means of quantifying obsolescence under the
true tax value system is the use of generally recognized appraisal methods.
Id. at 1242 n.18 (citations omitted). Ultimately, the State Board must support
its quantification of obsolescence with substantial evidence.
Id. at 1240.
As with all challenges to final determinations issued by the State Board, a
taxpayer challenging the State Boards quantification of obsolescence must submit probative evidence sufficient
to establish a prima facie case demonstrating the invalidity of the State Boards
final determination. See Western Select Properties v. State Bd. of Tax Commrs,
639 N.E.2d 1068, 1075 (Ind. Tax Ct. 1994); King Indus. Corp. v. State
Bd. of Tax Commrs, 699 N.E.2d 338, 343 (Ind. Tax Ct. 1999).
A prima facie case is one consisting of evidence that is sufficient to
establish a given fact and which if not contradicted will remain sufficient [to
establish that fact]. Canal Square Ltd. Partnership v. State Bd. of Tax
Commrs, 694 N.E2d 801, 804 (Ind. Tax Ct. 1998) (citation omitted). The
evidence needed to make a prima facie case depends on the issues raised
by the [taxpayers] challenge.
Clark, 694 N.E.2d at 1234.
Probative evidence is evidence that tends to prove or disprove a point in
issue. Sterling Management-Orchard Ridge Apartments v. State Bd. of Tax Commrs, 730 N.E.2d
828, 833 (Ind. Tax Ct. 2000) (quoting Blacks Law Dictionary 579 (7th ed.
1999)), rehg denied. Cf. Phelps Dodge v. State Bd. of Tax Commrs,
705 N.E.2d 1099, 1104-05 (Ind. Tax Ct. 1999) (providing examples of probative evidence
that taxpayer could submit regarding physical depreciation), review denied. Conclusory statements are
not probative evidence. CDI, Inc. v. State Bd. of Tax Commrs, 725
N.E.2d 1015, 1019 (Ind. Tax Ct. 2000). Cf. Heart City Chrysler v.
State Bd. of Tax Commrs, 714 N.E.2d 329, 333 (Ind. Tax Ct. 1999)
(stating that references to photographs and regulations, without explanation, are not probative evidence).
A taxpayers appraisal, if it quantifies obsolescence according to generally recognized appraisal
principles, may constitute probative evidence that supports a prima facie case. Canal
Square, 694 N.E.2d at 807. When a taxpayer offers probative evidence,
the State Board must deal with the evidence in some meaningful manner.
Clark, 694 N.E.2d at 1235. Once the taxpayer has submitted probative evidence
establishing a prima facie case, the burden of production shifts to the State
Board; the State Board must then rebut the taxpayers evidence and support its
final determination with substantial evidence.
Id. at 1233. See also Thorntown
Tel. Co. v. State Bd. of Tax Commrs, 629 N.E.2d 962, 965 (Ind.
Tax Ct. 1994) (observing that, while a taxpayers burden of proof may not
shift, the duty of going forward may shift several times). If the
State Board fails to make any findings as to evidence rebutting the taxpayers
prima facie case, or enters unsupported conclusions or findings, the State Boards decision
will be reversed. Canal Square, 694 N.E.2d at 805.
Excess Construction Costs
Inland claims that the State Board erroneously calculated Plant 2s functional obsolescence due
to excess construction costs. Inland asserts that the State Board failed to
apply the actual physical depreciation applicable to Plant 2, which had a composite
age of forty-four years as of March 1, 1993, in determining the facilitys
See footnote Rather, according to Inland, the State Board erroneously substituted the
physical depreciation allowance for a hypothetical building that had been built only fifteen
years prior to the assessment date. The State Board responds that it
properly exercised its discretion in using a fifteen-year age to calculate the replacement
facilitys physical depreciation.
Measurement of functional obsolescence is most often associated with the cost approach to
valuing property. Larson,
supra at 43 (comparing cost approach with the two
other approaches to classical appraisal theory, the sales comparison and income capitalization approaches).
The cost approach considers the cost to reproduce or replace the property
appraised. From this amount, a deduction is made for all forms of
depreciation present, whether arising from physical, functional, or economic causes. Larson,
at 43; see also Appraisal Institute, supra at 313-23 (describing basics of cost
approach); Ind. Admin. Code tit. 50, r. 2.1-6-1 (1992) (codified in present form
at id., r. 2.2-1-19 (1996)) (defining cost approach).
See footnote The cost approach is
concerned with two types of cost new: cost of reproduction and cost
See Larson, supra at 46. Cost of reproduction refers to
the estimated amount to reproduce a duplicate or replica of the subject improvement
in like kind and materials; cost of replacement is the estimated amount required
to replace the entire improvement at one time with a modern new unit
using the most current technology and construction materials. Id.; see also Appraisal
Institute, supra at 318-19 (defining reproduction and replacement costs). The important underlying
distinction to be made with respect to the concepts of reproduction cost and
replacement cost is that the reproduction cost is the cost to construct an
exact duplicate, whereas the replacement cost is the cost of constructing a building
of equal utility. Larson, supra at 46-47.
Superadequate construction and excess construction are two forms of functional obsolescence.
construction represents the existence of past construction practices that are not currently used
to build facilities of a like utility. Larson, supra at 47.
Excess construction, in turn, represents the existence of current building volume that
is [neither] currently nor likely to be used in the future.
Functional obsolescence due to excess construction cost is usually quantified by calculating the
difference between the subject improvements cost of reproduction and its cost of replacement.
Id. However, as mentioned supra note four, the State Boards
regulations require first that an improvements physical depreciation be deducted from its reproduction
cost and second that the obsolescence reduction be applied to the improvements remainder
value. Ind. Admin. Code tit. 50, r. 2.1-5-1. As properly explained
by Inland, the full amount of functional obsolescence due to excess construction cost
cannot be subtracted from remainder value under this method, because some of the
obsolescence has already been deducted as physical depreciation. Therefore, in Indiana, an
assessing official must determine the subject improvements depreciated excess construction cost in calculating
an improvements functional obsolescence.
To determine depreciated excess construction cost, both parties generally applied the same methodology
in subtracting replacement cost less physical depreciation from remainder value (which is reproduction
cost less physical depreciation),
see supra note 13.
The dispute between the
parties involves the source used for determining the physical depreciation of the replacement
facility. Inland claims that Plant 2s composite age of forty-four years should
be used to calculate the physical depreciation adjustment for the replacement facility.
Inland submitted Exhibit 31, its Functional Obsolescence Study, to support its quantification of
depreciated excess construction cost. Mr. Lee P. Hackett, the Executive Vice President
of American Appraisal Associates, authored the study (Hackett Study). (Trial Tr. at
141.) In its final determination, the State Board found the Hackett Study
to be generally scientifically reliable and identified Mr. Hackett as an expert in
the field of industrial appraisal who applied well accepted principles of appraisal and
valuation in his study. (Finding #108.) The Hackett Study does not
state what composite age it assigned the replacement plant. However, it did
apply to the replacement plant a physical depreciation percentage of 48%the same percentage
that was applied in determining the remainder value of Inlands four plants.
(Hackett Study, Ex. A at 17.)
In contrast, the State Board assigned the replacement plant an age of fifteen
Finding #118 of the State Boards final determination states:
The Replacement Plant has a layout even more efficient than that of the
last greenfield steel mill built in the United States, the Bethlehem Burns Harbor
Plant . . . . This was a plant layout that became
feasible only around 1970. Therefore, it is unreasonable to use the remainder
value of Plant 2 to derive the cost of the Replacement Plant.
No replacement plant with a layout similar to that of the Replacement Plant
could have been built before the mid-1970s, so all of the Replacement Plant
should be depreciated as if it were 13-17 years old as of the
1989 reassessment date. Because a replacement plant of a design similar to
the Replacement plant could not have been built until the mid-1970s, a 44
year old replacement plant does not satisfy the principle of substitution, because no
prospective purchaser, or under true tax value no operator of a steel mill,
would have the ability to compare a 44 year old replacement plant to
a 44 year old integrated mill. The replacement plant, if it existed
at all, and it does not, would be 15 years old as of
the 1989 [general] reassessment date. Therefore to be a valid substitute, the
replacement plant must be treated as if it were 15 years old.
The State Board essentially reasoned that the hypothetical replacement
plant could not have been built until approximately fifteen years prior to the
1989 general reassessment date and thus could not have been subjected to forty-four
years of wear and tear as of the assessment date in question, March
1, 1993. Ultimately, the State Board applied a 20% physical depreciation
to the replacement facility. (Finding #119.)
B. Excess Operating Expenses & Excess Inventory and Capital Costs
The Hackett Study, made pursuant to generally recognized appraisal principles, establishes a prima
facie case as to a proper method for quantifying Plant 2s functional obsolescence
due to excess construction cost. As previously mentioned, in the study Inland
applied the same percentage of physical depreciation to the replacement plant as was
applied in the determination of the remainder value of Plants 1-4. (Hackett
Study, Ex. A at 17.) At trial, Mr. Hackett explained that, whether
the appraising official started with reproduction cost or replacement cost, the same depreciation
percentage should be applied. (Trial Tr. at 149.) This is because
the appraiser is trying to arrive at the depreciated cost of the subject
improvement, not that of a hypothetical structure. (Trial Tr. at 149-50.)
According to Mr. Hackett, it makes no sense to deduct different depreciation percentages,
because the objective is to reflect the physical condition of the subject property.
(Trial Tr. at 150.) Another expert witness, Dr. Jeffrey Fisher of
the Kelley School of Business at Indiana University in Bloomington, Indiana, agreed with
this position, stating, Its the subject property that has suffered the loss in
value due to depreciation, so it is the subject property that we have
to use as the basis for determining depreciation. (Trial Tr. at 196.)
Dr. Fisher opined that the date upon which a replacement improvement could
have been built it is irrelevant, as long as it could have been
constructed on the date of assessment. (Trial Tr. at 200.)
The testimony of these witnesses is logical. Determining excess construction cost involves
comparisons of the costs new of two hypothetical buildings: an exact replica
of the subject improvement and a modernized, yet equally efficient, building. As
new structures, these fictitious buildings in theory suffer no physical depreciation whatsoever.
Because Indiana is concerned with the depreciated excess construction cost of an improvement,
physical depreciation must first be applied to the hypothetical buildings before replacement cost
is subtracted from the cost of reproduction. If the same percentage of
physical depreciation is not assigned to both buildings, the resulting figure will not
accurately reflect the subject improvements depreciated excess construction cost. Such cost will
be arbitrarily lowered. In effect, in arriving at the subject improvements true
tax value, part of the physical depreciation subtracted in arriving at remainder value
will be added back in the form of a lower value for excess
The State Board correctly observes that it has the discretion to chose between
valid methods in calculating functional obsolescence. (Respt Br. at 3.) While
Finding #118 explains why the State Board treated the replacement plant as if
it were fifteen years old, it offered no authoritative explanation of this decision.
Instead, Finding #118 is an unsupported, conclusory statement. In contrasts, through
expert testimony and by the Hackett Study, Inland established a prima facie case
as to a proper methodology for quantifying functional obsolescence due to excess construction
cost, with respect to the need to apply the same physical depreciation percentage
deduction to both an improvements reproduction and replacement costs.
The State Board identified no valid appraisal principle refuting Inlands methodology and presented
no probative evidence supporting its conclusion on this sub-issue. In Finding #115,
the State Board does argue that the replacement plant is not a realistic
alternative to Plant 2. This, according to the State Board, is because
the replacement plant compares a forty-four year old subject facility to a forty-four
year old replacement plant. Thus, the State Board implies, the replacement plant
violates the principle of substitution because a prudent buyer would not purchase a
replacement building having an equal level of wear and tear. The State
Board is mistaken. As previously noted, supra note 10, the principle of
substitution concerns a prudent buyers desire to pay no more for property than
the cost to construct improvements of equal desirability and utility. Appraisal Institute,
supra at 313 (emphasis added). The Hackett Study indicates that the replacement
plant was developed by Inland and its consultant . . . to achieve
the utility of the Inland Facility. (Hackett Study at 6.) Finding
#115 is conclusory and thus provides no evidence that the hypothetical replacement facility
in the present case is either less desirable or less useful and efficient
than Plant 2 as it is currently designed and constructed. Therefore, the
Court considers Inlands replacement facility to be a realistic alternative to Plant 2.
The fifteen-year age applied by the State Board resulted in a lower depreciation
percentage being assigned to Plant 2s cost of replacement than was assigned to
its cost of reproduction. The State Board offered only conclusory statements in
support of its decision. These did not rebut Inlands prima facie case
as to a methodology for quantifying Plant 2s excess construction cost. Neither
Finding #115 nor Finding #118 is supported by substantial evidence; Inland has demonstrated
that both findings are invalid. The Court finds that the State Board abused
its discretion in applying a fifteen-year age to the replacement plant, for purposes
of calculating its applicable level of physical depreciation. Therefore, its decision on
this sub-issue is REVERSED. This sub-issue is REMANDED to the State Board
with instructions to calculate Plant 2s depreciated excess construction cost using an age
for the replacement plant that results in the same percentage adjustment for physical
depreciation being applied to both Plant 2s cost of reproduction and its cost
Inland raises three sub-issues regarding the State Boards calculations of Plant 2s functional
obsolescence due to excess operating expenses and excess inventory and capital costs (collectively
Penalties). First, Inland claims that the State Board should have adhered to
accepted appraisal methodology and calculated the Penalties over the remaining useful life of
Plant 2. Second, Inland asserts that the State Board mistakenly applied a
three percent annual inflation rate, rather than the actual change in the Producer
Price Index, to convert the excess operating expenses and the excess inventory costs
from 1993 dollars to 1985 dollars. Third, Inland contends that the State
Board erroneously reduced the Penalties for Plant 2 by fifteen percent after having
adjusted the dollar values for the Penalties from 1993 to 1985 dollars.
The Court will discuss the nature of these Penalties and then consider each
sub-issue in turn.
Operating expenses are the periodic expenditures necessary to maintain the real property and
continue the production of the effective gross income.
Appraisal Institute, supra at
444. Functional obsolescence from excess operating costs is present when the subject
propertys design results in operating inefficiencies that cause higher expenses for the owner
Larson, supra at 48. This penalty is measured by
estimating the increase in operating expenses for the subject property over the modern
Id.; see also Appraising Machinery and Equipment 98 (John Alico
ed., 1989) (stating that calculation of functional obsolescence due to excess operating costs
or operating obsolescence involves a comparison of the operating characteristics of the subject
property to its modern equivalent).
Excess inventory and capital costs are other forms of functional obsolescence. Excess
inventory refers to the cost of carrying additional inventory, in raw materials or
semi-finished products, because of the inefficient production process required by the subject facilitys
See footnote (Trial Tr. at 156.) In comparison, excess capital costs
(or necessary capital expenditures) represent equipment and improvements that the buyer considers necessary
to operate the property into the future.See footnote Larson,
supra at 48.
These extra costs reduce the amount a prospective buyer would be willing to
pay for the subject facility. Id.
1. Remaining Useful Life
Inland maintains that, according to generally accepted appraisal principles, excess operating expenses and
excess inventory costs must be calculated over the remaining useful life of Plant
2. The Hackett Study applied a ten-year useful life to most of
See footnote However, the State Board disagreed, imposing a six-year limitation on
excess operating costs and a two-year period on excess inventory and capital costs.
(Findings #158 & 161.) The six-year period represented the time between
Indianas general reassessments, and the State Board reasoned that an assessor should not
consider effects extending beyond this limited periodan approach that it deemed to be
consistent with true tax values status as a value in use assessment system.
There is authority supporting Inlands position. Larson,
supra at 48, asserts that
the present value of functional obsolescence due to excess operating expenses is calculated
by discounting the annual excess operating cost, net of all tax benefits, over
the remaining life of either the deficiency or the improvement, to arrive at
an indication of the present value. In addition, Appraising Machinery and Equipment,
supra at 98, states:
Operating obsolescence can be defined as the present worth of the future excess
operating costs. The subject property will continue to incur an additional expense over
and above that of a modern facility. The penalty will continue until
either the problem is corrected, the assets wear out, or, in extreme cases,
the company goes out of business.
See also Institute of Property Taxation, supra at 118 (providing example wherein penalty
for excess operating cost is calculated based upon remaining economic life of building).
Oregons Supreme and Tax Courts have previously considered and implicitly acknowledged the
propriety of determining excess operating expenses over the remaining useful life of the
subject facility. See Reynolds Metal Co. v. Department of Revenue, 477 P.2d
888, 891-93 (Or. 1970) (en banc) (accepting calculations of appraiser who determined present
value of excess operating expenses based on ten-year remaining life of plant), rehg
denied; Oregon Portland Cement Co. v. Department of Revenue, 8 Or. Tax 78,
94-95 (Or. T.C. 1979) (analyzing and generally approving of two competing assessments, both
of which determined excess expenses over plants useful life); and Reynolds Metal Co.
v. Department of Revenue, 9 Or. Tax 417, 423 (Or. T.C. 1984) (In
order to process the net operating costs into an estimate of functional obsolescence,
one must determine the remaining economic life of the property and the appropriate
rate of return for the subject industry.).
In addition, Mr. Hackett described the process for quantifying excess operating expenses as
Generally, when you are looking at excess operating expenses, you compare your subject
plants operations in the various different categories of operations within that facility with
the replacement facility and its similar groups or categories of operations. And
you develop an annual or yearly excess operating expense, and then that amount
is capitalized or discounted over the remaining useful life of the facility that
will generate that annual operating expense.
(Trial Tr. at 153.) Dr. Fisher applied this same method for quantifying
excess operating expenses, explaining You would take the present value of the annual
cost over the remaining economic or remaining useful life of the property.
(Trial Tr. at 204.) Mr. Hackett further instructed that, as regards excess
inventory, the concern is calculating the opportunity cost lost by having that investment
tied up over the remaining useful life of . . . the subject
facility. (Trial Tr. at 158.) 2. Inflation Adjustment
The Hackett Study applied this methodology for excess operating and inventory costs.
The State Board admits that the Hackett Studys overall approach used to calculate
penalties [is] credible . . . . (Finding #123.) The
Court agrees that the Hackett Study is credible and further finds that it
is based upon generally accepted appraisal principles. Therefore, the Hackett Study establishes
a prima facie case as to the correct methodology for calculating functional obsolescence
due to excess operating expenses and excess inventory costs for Plant 2, with
respect to whether these penalties are calculated over the remaining useful life of
the subject improvement.
The State Board counters Inlands argument by pointing to the great deference afforded
it as Indianas property tax expert and by quoting Finding #158, which declared
the State Boards limited six-year period for determining excess operating expenses to be
consistent with true tax values status as a value in use assessment system.
(Respt Br. at 4.) Finding #158 reasons that a taxpayer should
be entitled to obsolescence in the amount that its use value of the
property is impaired between assessment dates and that Plant 2s market value .
. . at some point beyond the next assessment date has no bearing
on the true tax value of the property today. However, even as
Indianas acknowledged expert on property taxation, the State Board must support its conclusions
with substantial evidence and may not abuse its discretion in making its decisions.
The self-serving statements in Finding #158 offer no substantive or authoritative basis
for the conclusions reached therein. They are conclusory and are based upon
neither an identified source in the State Boards regulations and published instructions nor
a generally accepted appraisal principle. Likewise, Finding #161, which limits the period
for determining excess inventory costs from ten to two years, is baseless and
therefore conclusory. These findings do not qualify as substantial evidence supporting the
State Boards final determination on this sub-issue. Because Inland has made a
prima facie case that its methodology for quantifying excess operating expenses and excess
inventory costs is correct, these excess costs must be calculated based upon the
remaining useful life of Plant 2. While the State Board does have
discretion in choosing among valid assessment methods, it has abused its discretion in
the present case by imposing invalid limitations for quantifying excess operating expenses and
excess inventory costs.
At trial, Mr. Hackett testified that excess capital costs are not calculated over
the remaining useful life of the subject facility. Instead, according to Mr.
Hackett, they are calculated based upon the net value that can be realized
for the asset as of the date of assessment. (Trial Tr. at
158.) The Hackett Study calculated the value of redundant mobile equipment and
cranes, determining the penalties based upon what the depreciated excess equipment would yield
if sold in an arms-length transaction at depreciated value. (Hackett Study at
14 n.1.) Inland does not explain why this is the appropriate method.
In Finding #161, the State Board determines functional obsolescence due to excess
equipment investments by calculating the redundant equipments carrying costs over a two-year period.
Even assuming that the useful life of Plant 2 is applied in
determining excess capital costs (or, specifically in this case, the carrying costs of
redundant equipment), use of a two-year period is an invalid limitation representing an
abuse of the State Boards discretion.
The State Boards final determinations in Findings #158 & 161, regarding
quantification of the Penalties over Plant 2s remaining useful life, is REVERSED and
REMANDED. Upon remand, the State Board is instructed to calculate Inlands functional
obsolescence due to excess operating expenses and inventory costs according to the remaining
useful life of Plant 2.
See footnote Further, the State Board is instructed to
recalculate Plant 2s excess capital costs, after first deciding whether such excess capital
costs are determined over the plants remaining useful life or whether these excess
costs are determined as a net value for the equipment as of the
date of assessment.
Inland alleges that the State Board erroneously assumed and applied a three percent
annual inflation rate in converting the Penalties from 1993 dollars to 1985 dollars.
According to Inland, the appropriate discount factor for this conversion is the
Producer Price Index (PPI). The State Board counters by arguing that Inland
has waived this issue on appeal by not objecting to use of the
three percent figure at the administrative level. Further, the State Board contends
that, notwithstanding Inlands waiver, the record of evidence supports use of a three
percent inflation rate because Inland itself applied this rate in the Hackett Study.
Inland agrees that, for purposes of this appeal, the Penalties must be discounted
because the cost tables used by the State Board to assess Plant 2
are based on 1985 costs. (Petr Br. at 21-22.) In Finding
#162, the State Board reduced the total of Inlands penalties using a True
Tax Value Deflator, which it determined in part by compounding a 3% inflation
rate between 1985 and 1993 over 8 years. However, the State Boards
findings provide no basis for applying a three percent inflation rate.
Inland did not waive this sub-issue. The general rule in original tax
appeals is that the Court is bound by the evidence and issues raised
at the administrative level. Therefore, where a taxpayer fails to raise an
issue at the administrative level, the issue is waived and may not be
considered by the Court.
Hoogenboom-Nofziger v. State Bd. of Tax Commrs, 715
N.E.2d 1018, 1022 (Ind. Tax Ct. 1999) (citing State Bd. of Tax Commrs
v. Gatling Gun Club, Inc., 420 N.E.2d 1324, 1328 (Ind. Ct. App. 1981)).
The State Board claims that a complete review of the transcripts of
the hearings held on August 26, 1997 and November 4, 1997 shows that
Inland did not challenge the use of the inflation rate at the administrative
hearings. (Respt Br. at 5.) However, at the administrative hearing
held on June 19, 1996, Mr. Hackett testified before the State Board that
a deflator based upon the PPI should be applied to convert the Penalties
from 1993 to 1985 dollars.
See footnote (Ex. G-3 at 544-46.)
However, Mr. Hackett did not explain what the PPI represented, how it is
calculated or why it is the appropriate factor to determine the deflator.See footnote
In short, Mr. Hacketts testimony does not prove that use of the PPI
in this situation is a generally accepted appraisal technique. Even though Mr.
Hackett is a recognized appraisal expert, his testimony, without explanation, is conclusory and
therefore lacks probative value as to quantification of the Penalties.
v. State Bd. of Tax Commrs, 613 N.E.2d 874, 878 (Ind. Tax Ct.
1993) (finding experts opinion as to application of negative influence factor, without additional
evidence, to be insufficient to overcome State Boards discretion).
This lack of probative evidence does not end the Courts inquiry. The
administrative hearings in this case took place before the Courts decision in Clark
v. State Board of Tax Commissioners, 694 N.E.2d 1230 (Ind. Tax Ct. 1998).
In Clark, this Court announced a prospective rule that requires taxpayers to
quantify obsolescence at the administrative level with generally accepted appraisal techniques. See
Clark, 694 N.E.2d at 1241-42. Although Inland failed to sufficiently support its
quantification on this sub-issue, it was not required to do so before the
Courts opinion in Clark.
To avoid remand, the State Board must show that its use of the
three percent inflation rate is supported by substantial evidence. The State Board
maintains that evidence of record, i.e., the Hackett Study, supports use of the
three percent inflation rate. Specifically, the State Board asserts that the calculations for
both real and personal property in Exhibit F of the Hackett Study, titled
Excess Manufacturing Costs Plate Operations result in a three percent increase for each
subsequent year. The State Board opines that this illustrates that although the
Final Determination does not explain the source of the inflation rate, the evidence
in the record supports the 3% inflation rate. (Respt Br. at 6.)
As Inland explains, the State Board is grasping at straws with this argument.
(Petr Reply Br. at 7.) The Hackett Study used an assumed
three percent annual inflation rate between 1993 and 1995 in calculating the present
value of excess operating expenses for Inlands plate operations; this three-year period represents
the remaining useful life of the plate operations. See supra n.18.
The State Board fails to explain how the use of a projected three
percent inflation rate by Mr. Hackett in calculating excess operating expenses necessitates use
of the same inflation rate percentage in converting the Penalties from 1993 to
The State Boards use of the three percent inflation rate in Finding #162
is not supported by substantial evidence and must therefore be REVERSED. This
sub-issue is REMANDED to the State Board.
3. Fifteen Percent Reduction
Inland next challenges the State Boards reduction by fifteen percent of its Penalties
in Finding #162, after they were converted to 1985 dollars. Inland contends
that the State Boards assessment regulations do not support use of this fifteen
percent discounting factor. Further, Inland claims that no evidence shows that the
State Board has ever made such a fifteen percent reduction for any other
taxpayer in calculating functional obsolescence.
The State Board counters that the cost tables used to determine Inlands 1993
assessment were based on 1985 costs, less fifteen percent. The State Board
states that this fact is a matter of public record and relies upon
this Courts decision in St. John III, 690 N.E.2d at 373 n.5, as
proof. See supra note 9. In footnote five of the St.
John III opinion, the Court observed in dicta that the cost schedules effective
for the 1989 general reassessment reflect 1985 reproduction costs . . . that
were then reduced across the board by 15%. To support its position,
the State Board also relies upon the testimony of its witness, Mr. Joseph
E. Beres, a property tax consultant who indicated during an administrative hearing held
on August 28, 1997 that the 1989 Manuals costs were based upon 1985
costs reduced by fifteen percent. (Ex. U at 589-90, 652-53, 656-61.)
On this sub-issue, Inlands basic argument is that Finding #162, in applying a
fifteen percent reduction to the Penalties, is not supported by substantial evidence.
The State Boards determination is supported with substantial evidence if a reasonable person
could view the record in its entirety and find enough relevant evidence to
support the State Boards determination. Amax Inc. Through Amax Coal Co. v.
State Bd. of Tax Commrs, 552 N.E.2d 850, 852 (Ind. Tax Ct. 1990).
Substantial evidence is more than a scintilla. It means such relevant
evidence as a reasonable mind might accept as adequate to support a conclusion.
Id. (citing South Shore Marina, Inc. v. State Bd. of Tax Commrs,
527 N.E.2d 738, 742 (Ind. Tax Ct. 1988)). The Court, in reviewing the
State Boards final determination, does not weigh the evidence or judge witness credibility.
Freudenberg-NOK, 715 N.E.2d at 1030.
Finding #162 on its face is a conclusory statement. It cites to
no source supporting its contention that the costs used to value Plant 2
were based upon 1985 costs less fifteen percent. This is troubling, because
the Court cannot properly review a determination unless it is apprised of the
basis for the determination. Bailey Seed Farms, Inc. v. State Bd. of
Tax Commrs, 542 N.E.2d 1389, 1392 (Ind. Tax Ct. 1989). In Bailey
Seed Farms, Inc. v. State Board of Tax Commissioners, the Court held that
the State Boards final determination, finding the taxpayer-seed company liable for property tax
on inventory in its possession on the date of assessment, was not supported
by substantial evidence. Id. The assessment was made after the State
Board considered and accepted the claim of a second seed company that it
did not own the seeds in question. The State Board relied upon
the hearing officers recommendation in making its determination; however, the record was silent
as to the basis for this recommendation. Upon remanding the case to
the State Board, the Court observed that the State Board failed to submit
any evidence to the court establishing a reasonable basis for its subsequent assessment
against [the taxpayer-seed company]. Id.
A review of the administrative record in the present case supports the State
Boards finding as regards the fifteen percent adjustment. Mr. Beres testified on
both direct and cross-examination that the costs used for assessments in the 1989
Manual reflected 1985 costs that had been deflated by fifteen percent. Mr.
Beres indicated that he had been president of a company with which the
State had contracted to update the Manuals cost tables for the 1989 general
reassessment. (Ex. U at 581.) The 1989 tables were based upon
1985 costs. (Ex. U at 581.) Mr. Beres stated that his
company developed costs for the 1989 Manual and that the State, without explanation,
had reduced these costs by fifteen percent. (Ex. U at 657-58.)
Unlike the facts in Bailey Seed Farms, where the State Board provided
no evidentiary foundation whatsoever for its final determination, the State Board in the
present case does cite to testimony in the record supporting its position.
While Mr. Beres testimony does not explain why the State Board made this
adjustment, it is relevant to the issue of whether the adjustment was made.
Further, it was reasonable for the State Board to rely upon the
testimony of Mr. Beres, who had first-hand knowledge of the development of the
cost tables. His testimony thus qualifies as substantial evidence that the fifteen
percent adjustment was made.
See footnote The Court cannot and will not reweigh that
testimony or judge the witnesss credibility.See footnote Therefore, Finding #162 is AFFIRMED, with
regard to use of the fifteen percent adjustment.
As its second major issue, Inland contends that the base reproduction costs for
the Major Buildings, see supra note 1, should have been determined by application
of the GCI Heavy Manufacturing model, not the Mill Manufacturing model.
See footnote Inland
describes the Major Buildings as basic steel-framed, metal sided buildings. . . .
[They] are large, generally rectangular, simply designed buildings. Most of them
consist of a series of side by side bays, each bay typically of
uniform height and width, in which any type of industrial operation could be
carried out. (Petr Br. at 42.) In Finding #27, the State
Board concluded that all the Major Buildings are more properly classified as Mill
Manufacturing. In so doing, the State Board noted that, consistent with this
model, Many of the buildings in Plant  are characterized by excessive floor
and column tolerances, pre-engineered sheet metal walls with 20 wall height and limited
openings. (Finding #27.)
Under Indianas property tax assessment system, assessors use cost schedules to determine the
base reproduction cost of a particular improvement.
See Whitley Prods., 704 N.E.2d
at 1116. Schedule A of the State Boards regulations includes cost schedules
listing the base prices for different commercial and industrial improvements. See Ind.
Admin. Code tit. 50, r. 2.1-4-5 (1992) (codified in present form at id.,
r. 2.2-11-6 (1996)). As the State Boards regulations state:
[Schedule A] consists of base square foot unit rates by floor for various
use and finish types for two types of exterior walls. The rates
have been developed for a range of perimeter-to-area ratios for a specified type
of construction and adjustments are provided to account for variations in wall heights
and structural framing.
Ind. Admin. Code tit. 50, r. 2.1-4-3. To help identify and define
various classes of buildings, the State Board has categorized improvements into several models.
Ind. Admin. Code tit. 50, r. 2.1-4-7 (1992) (codified in present form
at id., r. 2.2-11-1 to -3 (1996)); see also Herb v. State Bd.
of Tax Commrs, 656 N.E.2d 890, 893 (Ind. Tax Ct. 1995).III. Grade
A taxpayer, including Inland in the present case, is entitled to have its
property assessed using the correct cost schedule. Indianapolis Racquet Club v. State
Bd. of Tax Commrs, 722 N.E.2d 926, 937 (Ind. Tax Ct. 2000) (citing
Zakutansky v. State Bd. of Tax Commrs, 696 N.E.2d 494, 497 (Ind. Tax
Ct. 1998)), review granted on other grounds. The State Board may adjust the
base reproduction cost for quality (i.e., adjust for grade) only after first using
the correct cost schedule. Zakutansky, 696 N.E.2d at 497. The model
that most closely resembles the subject improvement with respect to physical features is
to be used. Indianapolis Racquet Club, 722 N.E.2d at 938 (quoting Herb, 656
N.E.2d at 893). As this Court has previously noted, a classification for
taxation purposes is not invalid when it rests on a reasonable basis of
actual difference between those [items] included and those excluded. Id., 722 N.E.2d at
937 (quoting Herb, 656 N.E.2d at 894). Moreover, because a building may
not conform perfectly with the model specifications, a hearing officer must use subjective
judgment to decide which model the building most closely resembles. Id. (quoting
Herb, 656 N.E.2d at 894). Thus, the State Board and its hearing
officers have some discretion in selecting which model to use. Id.
To demonstrate that the State Board abused its discretion in selecting the Mill
Manufacturing model, Inland must submit probative evidence to establish a prima facie case
that another model was more appropriate. See id. at 939 (noting that
taxpayer had an affirmative duty to present evidence showing that the State Board
abused its discretion). In Indianapolis Racquet Club v. State Board of
Tax Commissioners, the taxpayer claimed that the State Board improperly determined the base
rate for ninety percent of its tennis facility by applying the rates for
the GCM Health Club model, rather than the GCI Light Warehouse model.
The taxpayer identified eight features found in the Health Club model that the
property in dispute lacked. Also, the taxpayer identified three features in the
Light Warehouse model that the area in question possessed. The taxpayer
did acknowledge that the tennis facility did not possess all the features of
the Light Warehouse model, specifically with respect to lighting, heating and the presence
of a hot water boiler. The Court noted that the ninety percent
of the tennis facility in dispute lacked a substantial number of features described
in the health club model . . . . Indianapolis Racquet Club,
722 N.E.2d at 939. The Court also observed that the tennis facilitys
interior matched the description Unfinished, as found in the Light Warehouse model, better
than the description Finished Open, as used in the Health Club model.
Id. Finally, the Court noted that the hearing officer primarily supported his
selection of the Health Club model by referring to the Indiana Assessment Manuals
instructions to apply that model to tennis barns. Id. (citing Ind. Admin
Code tit. 50, r. 2.1-4-4 (1992) (codified in present form at id., r.
2.2-11-5.1 (1996))). The Court found that the taxpayer had carried its burden
to show that the State Board abused its discretion by applying the incorrect
model in assessing the ninety percent of the tennis facility at issue; the
Court reasoned that Considered in its entirety, the evidence shows that the tennis
facilitys features clearly better match those of the light warehouse model than those
of the health club model.
Inland supports its position that the GCI Heavy Manufacturing model should be applied
with several assertions. First, Inland claims that the vertical column tolerance of
the BOF Buildings far exceeds that of the Major Buildings. Inland supports
this claim by citing the testimony of Kerry Spitznagle, a certified engineer whom
the State Board recognized as having significant experience in steel mill construction projects
. . . . (Finding #32.) The State Board also observed
that Mr. Spitznagles conclusions were, for the most part, persuasive. (Finding #33.)
Mr. Spitznagle stated that the size of the columns in the BOF
Buildings is two to four times larger than the columns in the Major
Buildings. (Ex. BB at 118-19.) This difference is important, Inland explains,
in that the Mill Manufacturing model is characterized by excessive vertical column tolerance,
whereas the Heavy Manufacturing model has only heavy vertical column tolerance. (Petr
Br. at 43.) Second, Inland points out that the per square foot
costs and the foundation costs for the BOF Buildings are greater than those
for the Major Buildings. (Petr Br. at 43.) Third, Inland indicates
that even though the exterior walls of the Major Buildings are largely constructed
of pre-engineered sheet metal (which is consistent with the Type 1 wall structure
in the Mill Manufacturing model), the construction cost of such metal walls is
actually less than the construction cost of the reinforced concrete block exterior walls
(also Type 1 walls) that characterize the Regulation 17 Heavy Manufacturing use type
model. (Petr Br. at 44.) Fourth, Inland claims that the floor
loads of the Major Buildings were not excessive (per the Mill Manufacturing model);
instead, they at most can be deemed to have only heavy floor load
capacity (per the Heavy Manufacturing model). (Petr Reply Br. at 14-15.)
Inland has not established a prima facie case that the Heavy Manufacturing model
is the more appropriate model to use in determining the base reproduction costs
for the Major Buildings. Inlands evidence was not probative as to
what model should be used. Mr. Spitznagles testimony does show that the
BOF Buildings have a greater vertical column tolerance than the Major Buildings; however,
it is plausible that both the BOF and Major Buildings have excessive vertical
column tolerances. Inland offers no evidence showing the differences between excessive and
heavy vertical column tolerances. Without evidence indicating otherwise, the Court will not
assume in this case that two different sized columns cannot both be deemed
to have excessive vertical column tolerances. Furthermore, the comparative square foot costs,
including foundation costs, of the BOF and Major Buildings does not assist the
Court in determining whether the physical features of the Major Buildings best match
those of the Mill Manufacturing or Heavy Manufacturing models. The actual square
foot cost of a particular building says nothing about the features of that
building, for purposes of selecting an appropriate model from the regulations. Inlands
third argument actually supports the State Boards selection of the Mill Manufacturing model.
The Mill Manufacturing model includes Type 1 walls made up of Pre-engineered
corrugates, metal panels with insulation and exterior paint for a wall height of
Ind. Admin. Code tit. 50, r. 2.1-4-7. Inland admits that
the Major Buildings have exterior walls constructed mostly of pre-engineered sheet metal.
It does not matter whether the sheet metal walls are more costly than
concrete brick wall; the assessing officials concern is to select the model that
the subject improvements most closely resemble. Relative costs of construction materials are
irrelevant in deciding whether the Major Buildings better resemble the characteristics attributed to
the Mill Manufacturing or Heavy Manufacturing models.
In addition, Inland offers no
proof as to the floor load capacities of the Major Buildings; it only
contends that the floors have no greater load capacities than the BOF Buildings,
which Inland alleges have floors with only heavy load capacities. Without evidence
as to the actual construction of the floors in the Major Buildings, Inland
cannot establish whether the buildings floors have either heavy or excessive load capacities.
Moreover, even if their construction were similar to or of less quality
than the floors in the BOF Buildings, Inland does not sufficiently explain how
or why the BOF Buildings floors have only heavy floor load capacities.
The present case is distinguishable from Indianapolis Racquet Club, where the
taxpayer established a prima facie case that the State Board abused its discretion
in choosing the incorrect model by pointing to several identifiable, objective deviations of
the subject improvement from the model chosen by the State Board. The
Court reasoned in Indianapolis Racquet Club that, when considered in its entirety, the
evidence demonstrated that at least one model better resembled the features of the
subject facility. Here, as explained supra, Inlands evidence was insufficient to establish
that the Heavy Manufacturing model or any other model was the better model
for assessing the Major Buildings. The Court finds that the State Board
did not abuse its discretion by applying the Mill Manufacturing model to the
Major Buildings. Therefore, the State Boards final determination on this issue is
For its third major issue, Inland claims that the State Board improperly applied
a B grade to its Basic Oxygen Furnace (BOF) Buildings
See footnote and a C+1
grade to the Major Buildings. Inland argues that the BOF Buildings should
not be assigned a composite grade factor higher than C+2 and that a
C grade is appropriate for all the Major Buildings. The Court will
briefly review the basics of grade calculation and then separately address the grade
issue for the BOF and Major Buildings.
Assessors assign each improvement a grade based upon its materials, design and workmanship;
the grade represents a multiplier (i.e., a factor) that is applied to the
improvements base reproduction cost. See Ind. Admin. Code tit. 50, r. 2.1-4-3
(1992) (codified in present form at id., 2.2-10-3 (1996)); Whitley Prods., 704 N.E.2d
at 1116. Five major grade classifications, designated grades A through E, are
provided for by the State Boards regulations. Descriptions for the B and
C grades are as follows:
GOOD: B GRADE
Architecturally attractive buildings constructed with good quality materials and workmanship throughout. High
quality interior finish with abundant built-in features. Custom heating and air conditioning
system, and very good lighting and plumbing fixtures.
AVERAGE: C GRADE
Moderately attractive buildings constructed with average quality materials and workmanship throughout and conforming
with the base specifications used to develop the pricing schedule. Minimal to
moderate architectural treatment. Average quality interior finish with adequate built-in features.
Standard grade mechanical features and fixtures.
Ind. Admin. Code tit. 50, r. 2.1-4-3. The B grade has a
corresponding factor or multiplier of one hundred twenty percent, while the C grade
has a corresponding factor of one hundred percent. Id. Prices
contained in the regulations cost schedules reflect C grade standards of quality and
design. Id. Intermediate grade levels between the major classifications may also
be assigned an improvement. Id. A plus or minus two (+/-2)
indicates that the grade falls halfway between the assigned grade classification and the
grade immediately above or below it. Id. A plus or minus
one (+/-1) indicates that the grade falls slightly above or below the assigned
grade classification or, as the regulations indicate, at a point approximately 25% of
the interval between the assigned grade classification and the grade immediately above or
Id.; see also Ind. Admin. Code tit. 50, r. 2.1-4-5
(1992) (Schedule F) (codified in present form at id., 2.2-11-6 (1996)).
Subject improvements often deviate from the model used to assess them.
Clark, 694 N.E.2d at 1237 n.9. Deviations often affect the reproduction cost
of an improvement. Whitley Prods., 704 N.E.2d at 1117. As this
Court noted in Whitley Products, Inc. v. State Board of Tax Commissioners:
The preferred method of accounting for this deviation 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
The other means of accounting for an improvements 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 assessors subjective judgment.
Where possible, this type of adjustment should be avoided. However, because the
component (base rate adjustment) schedules are not comprehensive, this type of adjustment may
Id. (citations omitted); see also Clark, 694 N.E.2d at 1236 n.6 (noting that
regulations provide objective methods for accounting for deviations from the models and that
these adjustments, not grade adjustments, should be used where possible). A. BOF Buildings
The Lake County Board of Review initially assigned a C grade to both
the BOF and Major Buildings. (Petr Br. at 26.) In its
Proposed Final Assessment Determination, issued July 29, 1997, the State Board indicated for
the first time that it intended to increase the grade of the BOF
Buildings to B+2 and the grade of the Major Buildings to B.
(Ex. R at ¶ 19.) The State Board heard rebuttal evidence from
Inland concerning the proposed increases in grade at a hearing conducted on November
4, 1997. (Ex. BB at 3.) In its final determination,
the State Board applied a B grade to Inlands BOF Buildings. (Finding
The State Board, upon hearing an appeal initiated by a taxpayer pursuant to
Ind. Code Ann. 6-1.1-15-3 (West 1989) (amended 1993 & 1997) (the Form 131
review process), may assess the property in question, correcting any errors which may
have been made.
Ind. Code Ann. 6-1.1-15-4(a) (West 1989) (amended 1993, 1995 &
1997). Thus, the State Board may address and correct errors not raised in
a taxpayers petition for review. Castello v. State Bd. of Tax Commrs,
638 N.E.2d 1362, 1364 (Ind. Tax Ct. 1994) (quoting Wirth, 613 N.E.2d at
879). However, if the State Board does choose to address issues not
raised by the taxpayer, the taxpayer is constitutionally empowered to respond to the
State Boards disposition of those issues. Id. (citing Wirth, 613 N.E.2d at
879). The taxpayer must be given notice and an opportunity to
Wirth, 613 N.E.2d at 879.
In the present case, Inland did not raise the issue of grade
at the administrative level; the State Board reviewed the grade issue and first
notified Inland of its intent to increase the grades of the BOF and
Major Buildings in its proposed assessment. Inland was then given an opportunity
to respond. Because the State Board placed the grading of these buildings
at issue, Inland was not obligated to (but nevertheless chose to) respond to
the proposed grade adjustment at a subsequent administrative hearing. Under these circumstances,
Inland was not required to present probative evidence establishing a prima facie case
as to grade, in order to trigger the State Boards duty to support
its final determination with substantial evidence. But cf. supra note 7 (citing
Whitley Prods., 704 N.E.2d at 1119-20). Regardless of the rebuttal evidence and
supporting arguments offered by Inland to counter the State Boards proposed grade adjustment,
the State Board was required to support its final determination as to grade
with substantial evidence. Clark, 694 N.E.2d at 1234; White Swan Realty v.
State Bd. of Tax Commrs, 712 N.E.2d 555, 560-62 (Ind. Tax Ct. 1999)
(holding that State Boards final determination, wherein it sua sponte lowered the negative
influence factor applied to taxpayers property, was unsupported by substantial evidence), review denied.
The State Board made various findings as to the grade of the BOF
Buildings. In assigning a B grade, the State Board pointed to the
significant pilings of the BOF Buildings. (Finding #28.) In Finding #57,
the State Board commented that the buildings of No. 2 BOF possessed foundations
and supports capable of bearing extreme loads and also are supported on pilings
run through the slag to fill to bedrock. In addition, the State
Board determined that, like the No. 2 BOF, the No. 4 BOF is
supported by significant pilings. (Finding #58.) The State Board further found
that the No. 2 BOF Building had engineering costs closer to ten percent
of the total cost of the building.
(Finding #33.) According to
the State Board, this fact alone is sufficient to warrant application of a
B grade to the BOF Buildings. (Finding #33.) The State Boards
Finding #34 states that Inland failed to consider certain adjustments relating to the
absence of partitions, heat and wall finish in calculating a recommended grade of
C+2; the State Board contends that the presence of these adjustments suggests that
the BOF Buildings should receive a grade closer to B than to C+2.
(Finding #34.) Finally, in Finding #35, the State Board reached the
following conclusion: Taking the effect of engineering costs together with adjustments for
partitions, heat and flooring, the Board determines that the grade of the BOF
[buildings] is between B and B+1. However, in fairness to Inland, the
grade of B has been used.
The BOF Buildings pilings do add value to the improvements. Moreover, they
are not included as part of the Mill Manufacturing model. Therefore, they
must be accounted for either by the preferred method, an objective adjustment using
the unit-in-place tables, or by a grade adjustment. See Whitley Prods., 704
N.E.2d at 1117. The State Boards findings, however, do not explain how
the significant nature of the pilings translates into or equates with a B
grade. A piling may indeed be significant, but such a label does
not explain whether the piling itself (or any part of the building) is
architecturally attractive, constructed with good quality materials or has good workmanship throughoutsome of
the designated features of the B grade. Moreover, the State Board does
not explain whether the BOF Buildings have other features of a B grade,
i.e., a High quality interior finish with abundant built-in features [or a] Custom
heating and air conditioning system [or] very good lighting and plumbing features.
Ind. Admin. Code tit. 50, r. 2.1-4-3.
The State Board asserts that the foundation and supports for the No. 2
BOF are capable of bearing extreme loads. (Finding #57.) This finding
is related to Finding #33, which determined that the engineering cost for the
No. 2 BOF Building was above normal. Mr. Spitznagles testimony reflects his
estimate that for buildings such as the No. 2 BOF Building, the average
costs for engineering (as a percentage of total costs) would be around ten
percent. (Ex. BB at 123-24.) The State Board insists that grade
is a method for adjusting for costs in excess of the model and
that Architectural costs incurred in constructing a steel mill will raise the cost
of the buildings even without improving the buildings appearance. (Respt Br. at
8.) In short, the State Board appears to argue that the increased
engineering costs of the BOF Buildings demonstrate the use of higher quality materials,
workmanship or designs for these buildings.
The State Boards regulations provide virtually no insight as to the role of
engineering costs in assessing improvements.See footnote The grade descriptions provided in the State
Boards regulations do reference an improvements architecture with regard to the improvements style
and design (A grade), attractiveness (B grade) or treatment (C and D grades).
Ind. Admin. Code tit. 50, r. 2.1-4-3. Thus, as used in
the regulations, to the extent that an improvements engineering costs relate to or
describe its architecture (which, in turn, relates to or describes the improvements quality
of materials, workmanship and design), engineering costs can be relevant to a determination
of the structures proper grade.
The Court also notes that presumably engineering costs are factored into the base
rate of a given model. If this is so, then perhaps the
Mill Manufacturing model, with its references to excessive floor load capacity and excessive
vertical column tolerance, incorporates an above normal figure for engineering costs into its
base rates. Ind. Admin. Code tit. 50, r. 2.1-4-7. The Court
does not state this to be true. What the Court does conclude,
however, is that if the State Board desired to reference engineering costs as
a basis for assigning a B grade to the BOF Buildings, it should
have explained how engineering costs either relate to the B grade description and/or
relate to the models base rates. If engineering costs are in fact
factored into a models base rates, the State Board should have separated out
the engineering costs for the BOF Buildings that go above those factored into
the base rates for the Mill Manufacturing model.
However, the State Board in its final determination fails to explain how the
engineering costs of the No. 2 BOF Building relate to its architecture, reflect
an increase in the quality of the materials, workmanship or design of the
improvement, or increase the costs of the improvement beyond those costs already incorporated
in the models base rates (which are based upon C grade standards).
Moreover, assuming that the No. 2 BOF Building had engineering costs of ten
percent of the buildings total costs and that such costs do reflect a
higher quality structure, the State Board offers no explanation as to how the
ten percent figure translates into a B grade, as opposed to a different
grade above C. The State Boards decision in Finding #33 that increased
engineering costs alone are sufficient to raise the grade of the BOF Buildings
is conclusory and therefore does not qualify as substantial evidence supporting a B
The State Board also concluded that Inland failed to properly account for certain
physical features absent from the No. 2 BOF Building in arguing for a
grade of C+2. The State Board found that Inlands requested grade was
based upon a determination of the construction cost of No. 2 BOF Building
as a whole using the unit-in-place tables. The State Board observed that,
in Inlands analysis, When all of the elements of 2 BOF were added
up, the price of the components totaled 112% of the mill manufacturing model
and that, per Mr. Spitznagles conclusion, the buildings grade should be no higher
than C+2. (Finding #32.) According to the State Board, Inland, in
reconstructing the entire No. 2 BOF using the unit-in-place tables, excluded costs for
certain featurespartitions, heat and wall finishthat are found in the Mill Manufacturing model.
The State Board reasoned that, because the absence of these items reduced the
per square foot price of the No. 2 BOF Building by approximately ten
percent, the Mill Manufacturing model should have been adjusted for the absence of
these features prior to being used to compare to the model constructed using
the unit-in-place tables. This fact also suggests that the grade of these
buildings is closer to B than to C+2. (Finding #34.) In other
words, the State Board posits that with these deviations present, the pilings added
almost twenty percent to the value of the BOF Buildingsnot just twelve percent.
In disagreeing with Inlands requested grade, the State Board misunderstood and mischaracterized Inlands
methodology for determining the BOF Buildings proper grade.
Exhibit 90 illustrates the methodology used by Inland, which proposes a grade no
higher than C+2 for the BOF Buildings based upon a four-step process.
(Petr Br. at 35.) Exhibit 90 states:
The following is a methodology for comparing the State Tax Board proposed Regulation
17 reproduction cost using grade factor B+2 (140%)
See footnote to a Regulation 17 reproduction
cost determined by: (1) using a grade factor of C (100%); and
(2) adjusting the Total Base (the cost before application of the grade factor)
to account for variations between the actual characteristics of the building foundation and
the characteristics of the building foundation found in the Regulation 17 model for
STEP 1 Identify Regulation 17 cost from the Unit in Place (UIP) tables for
building characteristics included in the model but not present in the building:
(a) 12 reinforced concrete perimeter grade walls; and
(b) 12 x 18 strip footings.
STEP 2 Identify Regulation 17 cost from the UIP tables for building characteristics not
included in the model but present in the building:
(a) grade beams;
(b) wall footings;
(c) foundation piles;
(d) foundation pile caps; and
(e) foundation piers.
STEP 3 Subtract from the State Tax Board Total Base the total cost from
STEP 1, then add the total cost from STEP 2.
STEP 4 Divide the result from STEP 3 by the State Tax Board Total
Base and compare this percentage to the 140% grade factor applied by the
Exhibit 92 explains in detail how Inland, using the unit-in-place tables, calculated the
cost for each listed item in applying the above steps to reach a
base price adjustment of one hundred twelve percent, which rounds downward to one
hundred ten percentthe corresponding factor for a C+2 grade. B.
The State Board incorrectly asserts that Inlands analysis reconstructs the entire No. 2
BOF Building. Rather, Inlands analysis focuses only on the buildings foundation, including
the perimeter grade walls, strip footings, grade beams, wall footings, foundation piles, pile
caps and piers. (Petr Br. at 30 & 31.) According to
Inland, its method isolates the effect of the particular characteristics of the BOF
Building foundations and pilings on the grade factor determination. (Petr Br. at
31.) Thus, Inlands methodology excludes calculations of the effects of the other
identified deviations in the model, i.e. those relating to partitions, heat and wall
finish. These adjustments, Inland maintains, were incorporated into the Total Base
of the No. 2 BOF Buildings
before a grade adjustment for the foundation
was determined using its methodology. (Petr Br. at 31-32.)
However, Inlands method, even considered in its proper light, is not supported by
the regulations, which do not articulate a method for using calculations made via
the unit-in-place tables to ascertain an improvements grade. Inland should have subtracted
those items in the model but not found in the BOF Buildings from
the buildings base reproduction costs and then added the increased costs of the
foundations, ending the calculation at that point. In other words, Inland should
have stopped its calculation at STEP 3. As noted supra, the preferred
method for calculating deviations from the models is to use separate schedules showing
the costs of components. See Whitley Prods., 704 N.E.2d at 1117.
See footnote Inlands
evidence does not establish a prima facie case that the BOF Buildings should
be assigned a grade no higher than C+2.
Findings #32 and #34 lack any basis in fact. As with Finding
#33, they cannot be considered substantial evidence supporting Inlands grade assignment. Moreover,
Findings #28, 57 & 58 are not supported by substantial evidence. Therefore,
the State Boards assignment of a B grade to the BOF Buildings is
REVERSED and this sub-issue is REMANDED to the State Board.See footnote
The State Board assigned the Major Buildings a grade of C+1. As
with the BOF Buildings, the State Board was obligated to support its grade
assignment with substantial evidence. In Finding #28, the State Board observed that
a significant number of [the Major Buildings] exceed the specifications of the mill
manufacturing model and therefore are properly graded as C+1 grade buildings. These
buildings include substantial clamshell type monitors not included in the model and have
walls and columns that exceed the specifications in the model. In its
findings discussing the individual buildings comprising the group of Major Buildings, the State
Board did not elaborate as to why a C+1 grade was generally applied.
(Findings #47-54 & 56.)
That the Major Buildings exceed the specifications of the Mill Manufacturing model is
a conclusory statement; it thus cannot be considered substantial evidence supporting the C+1
grading. Likewise, the assertion that the Major Buildings have walls and columns
exceeding the models specifications is conclusory. It does not instruct the Court
as to the extent of the alleged deviations or how the deviations justify
a C+1 grade. Therefore, this statement too is not substantial evidence.
See CDI, 725 N.E.2d at 1019.
Finally, as to the presence of clamshell monitors, the State Board once more
does not explain how these items support application of a C+1 grade.
Clamshell monitors are not listed in the regulations, and neither party sufficiently instructs
the Court as to the design or construction of these features, other than
to say they are substantial.
See footnote Mr. Spitznagle, Inlands witness, did testify that
the monitors are typically all off-the-shelf items that just get added on .
. . top of the building. (Ex. BB at 130.) Furthermore,
according to Mr. Spitznagle, they are relatively cheap, representing less than one-half of
one percent of the buildings costs. (Ex. BB at 130-31.)
The presence of the monitors is probative as to grade; if they cannot
be accounted for using the unit-in-place tables (and assuming that no deviations otherwise
warranting a reduction in base rate are present), then a grade adjustment may
be necessary to account for them. However, the evidence of record cannot
be deemed substantial. The only real evidence as to the value of
the monitors tends to show that they do not add any significant value
to the Major Buildings. Thus, the State Board has not supported its
grade assignment, as to the Major Buildings, with substantial evidence.
Inland claims that it has demonstrated that a straight C grade is appropriate.
Citing Mr. Spitznagles testimony, Inland maintains that a C grade is warranted
for the following reasons: (1) the BOF Buildings were the most expensive
structures in the plant; (2) the column shafts for the Cold Mill Buildings
and the Hot Strip Buildings were only one-half to one-fourth the size of
the BOF Buildings strip columns; and (3) the vertical column tolerance of the
BOF Buildings far exceeds the vertical column tolerance of the Major Buildings.
Inland provides no other evidence supporting its position.
Inland did not offer probative evidence showing that the Major Buildings should be
assigned a C grade. Inland essentially argues that the most appropriate grade
factor to apply to the BOF Buildings is C+1 (and not higher than
C+2) and that the Major Buildings have lower reproduction costs than the BOF
Buildings. (Petr Br. at 40.) Accordingly, Inland maintains, the Major Buildings
must receive a grade lower than the BOF Buildings and, therefore, the most
appropriate grade for the Major Buildings is C. (Petr Br. at 40)
(Ex. BB at 120-21.) Without further explanation, the costs of the Major
à vis the BOF Buildings is irrelevant in selecting an appropriate
grade. Inland should have referenced and incorporated the regulations in explaining how
the relative costs either indicate that the Major Buildings have average quality or
lack any deviations from the model that must be accounted for via a
Inland does point out that the Major Buildings have smaller columns with lower
vertical column tolerances than those found in the BOF Buildings. However, differences
in the sizes of columns in the buildings do not necessarily prove that
these columns are different in quality, for purposes of selecting grade. Compare
Section II, supra (observing that different sized columns may both be considered to
have excessive vertical column tolerances). Column tolerances in the subject improvement that
are different from those listed in the model used to assess the improvement
may require adjustments in its grade; however, merely showing that a subject improvements
columns differ in size from those found in another improvement does not prove
that the subject improvement should receive a grade adjustment.
The State Board did not support its assigned grade of C+1 with substantial
evidence. In addition, Inland did not submit probative evidence demonstrating that a
C grade is appropriate. Therefore, the State Boards decision on this sub-issue
is REVERSED and REMANDED.
For the aforementioned reasons, the Court REVERSES and REMANDS the State Boards final
determinations as to Issues I & III. However, the State Boards decision
in Finding #162 to apply a fifteen percent adjustment in converting 1993 dollars
to 1985 dollars is AFFIRMED. Also, the Court AFFIRMS the State Boards
final determination as to Issue II.
See footnote Upon remand, Inland may submit additional
probative evidence supporting its positions, and the State Board shall deal with this
evidence in a meaningful manner. The State Board is expected to support
its new findings with substantial evidence.
Reproduction Cost $150
Replacement Cost $100
Subject Physical Dep. 40%
Traditional Textbook Appraisal Indiana Regulation 17 Method
Method to Determine Depreciated Cost to Determine Depreciated Costs/True Tax Value
Reproduction Cost $150
Excess Construction Cost $ 50
Reproduction Cost $150 Reproduction Cost
Excess Construction Cost
- 50 Physical Depreciation (40%) - 60
Replacement Cost $100 Remainder Value
Physical Depreciation (40%)
- 40 Functional Obsolescence-
Construction Cost -
Depreciated Cost/ True
Tax Value $
Reproduction Cost $150 Reproduction Cost $150
Less Total Depreciation
- 90 Less Total Depreciation
Depreciated Cost $ 60
True Tax Value $ 60
Reproduction Cost $150
Less Physical Dep. (40%)
Remainder Value $ 90
Less Functional Obsol.
True Tax Value
*$50 x .40= $20; $50-$20= $30
Note: The excess construction cost under the traditional method ($50) is 33
1/3% of the improvements reproduction costs ($150). Likewise, using the true tax
value method, the depreciated excess construction ($30) costs is 33 1/3% of the
improvements remainder value ($90), which is the improvements reproduction costs minus physical depreciation.
(Trial Tr. at 166-67.)
Inland and the State Board classify the buildings in Plant 2 into
two basic categories, for purposes of this appealthe BOF Buildings and the Major
Buildings. In its brief, Inland lists the individual buildings that comprise these
two groupings. (Petr Br. at 25 n.2 & 40 n.7.) The
Court will use these same categories in this opinion.
Footnote: Pursuant to
Ind. Code Ann. § 6-1.1-35-9(a) (West 2000), which allows all
information related to earnings, income, profits, losses, or expenditures to remain confidential, the
Court will not disclose certain facts that were admitted into the record.
(Trial Tr. at 7.) The State Board has agreed to Inlands request
for confidentiality. Id. Therefore, the facts consist only of information that provides
sufficient background information to understand the basic facts and procedural history of this
case. Also, the parties have stipulated to certain facts by highlighting
those facts on a copy of the final determination that was submitted to
the Court on January 15, 1999. (Submission of Stipulations at 1.)
The Appraisal Institute defines functional obsolescence as a loss in value resulting
from defects in design. It can also be caused by changes that,
over time, have made some aspect of a structure, such as materials or
design, obsolete by current standards. Appraisal Institute, The Appraisal of Real Estate 352
(10th ed. 1992). The Institute of Property Taxation instructs that functional obsolescence
is a form of depreciation resulting in loss of value due to lack
of utility or desirability inherent in the design of the property. Institute
of Property Taxation, Property Taxation 114 (Jerrold F. Janata ed., 2d ed. 1993).
The adjustment for obsolescence depreciation is applied using the Remainderment Method.
Ind. Admin. Code tit. 50, r. 2.1-5-1. With this method, an assessing
official determines a propertys remaining value, which is its reproduction cost minus physical
depreciation suffered by the property. Id. The obsolescence reduction is then
applied to this remaining value, resulting in the propertys true tax value.
Id.; see also Ind. Code Ann. § 6-1.1-31-6(c) (West 2000) (providing that true
tax value does not mean fair market value but rather is the value
determined under the rules of the [State Board]). The State Board illustrates
the Remainderment Method and the calculation of true tax value as follows:
REPRODUCTION COST PHYSICAL DEPRECIATION = VALUE [and]
VALUE OBSOLESCENCE DEPRECIATION = TRUE TAX VALUE.
Ind. Admin. Code tit. 50, r. 2.1-5-1.
The substantial evidence requirement facilitates judicial review and protects due process rights.
Clark, 694 N.E.2d at 1240 (citations omitted). Moreover, given the complexity
involved in calculating obsolescence, it is imperative that the State Board provide an
authoritative explanation for its calculation. Cf. Thorntown Tel. Co. v. State
Bd. of Tax Commrs, 629 N.E.2d 962, 966 (Ind. Tax Ct. 1994) (The
complexity involved in calculating . . . economic obsolescence percentages makes it imperative
that the State Board supply authoritative explanation and evidence demonstrating that economic obsolescence
is indeed accounted for in its method.).
For example, circumstances may require the taxpayer to offer evidence supporting a
competing view of the disputed assessment.
Clark, 694 N.E.2d at 1234.
In other cases, a taxpayer may simply have to show that the State
Boards assessment was inaccurate. Id. In still other situations, the taxpayer
may need to establish that the State Board acted improperly in arriving at
its final determination. Id. The Court notes that, to the extent
that its discussion in Clark, 694 N.E.2d at 1234, suggests that a prima
facie case is only required where the taxpayer has chosen or is required
to offer evidence of a competing view of an assessment, such an interpretation
is overly restrictive. A prima facie case must be presented in all
cases where a taxpayer challenges the validity of the State Boards final determination.
See Canal Square, 694 N.E.2d at 804; King Indus., 699 N.E.2d at
343. Cf. Peabody Coal Co. v. Ralson, 578 N.E.2d 751, 754 (Ind.
Ct. App. 1991) (observing that, as in criminal prosecutions, the burden of production
may shift to the alleged violator [of agencys rules] when the agency pursuing
[punitive] sanctions for the violation has demonstrated a prima facie case of violation,
but the ultimate burden of persuasion may never so shift because to do
otherwise would be fundamentally unfair).
The Court must reverse a final determination if it is unsupported by
Clark, 694 N.E.2d at 1234. However, the State Boards
duty to support its final determinations with substantial evidence is not triggered until
the taxpayer presents a prima facie case as to the issues in dispute.
See Whitley Prods., Inc. v. State Bd. of Tax Commrs, 704 N.E.2d
1113, 1119-20 (Ind. Tax Ct. 1998) (finding that taxpayer presented no probative evidence
as to grade and therefore concluding that taxpayer failed to place the grading
of the subject improvement at issue so as to trigger the substantial evidence
standard); King Indus., 699 N.E.2d at 343. But cf., infra, slip op.
Physical Depreciation is the impairment of condition as a result of wear
and tear and disintegration.
Ind. Admin. Code, tit. 50, r. 2.1-5-1 (1992).
A structures physical depreciation is based upon its age, condition, and structure
type. Phelps Dodge, 705 N.E.2d at 1103 (citing Ind. Admin. Code
tit. 50, r. 2.1-5-1). An improvements physical depreciation is expressed as a
percentage. This percentage is determined by ascertaining the age and condition of the
improvement and then consulting the economic life table corresponding to the structure type
of the improvement. Id. (citations omitted).
The Court identified these three valuation methods in
Town of St. John
v. State Board of Tax Commissioners, 690 N.E.2d 370, 379 (Ind. Tax Ct.
1997) (St. John III) (identifying the three recognized methods of determining value using
market data, including the reproduction cost minus depreciation method), review granted. However,
in affirming in part and reversing in part this Courts opinion in St.
John III, the Indiana Supreme Court stated that the State Boards regulations are
not required to use all three standard market-value measures of value in its
assessment system. State Bd. of Tax Commrs v. Town of St. John,
702 N.E.2d 1034, 1041 (Ind. 1998).
The cost approach is based upon the principle of substitution, which affirms
that no prudent buyer would pay more for a property than the cost
to acquire a similar site and construct improvements of equal desirability and utility
without undue delay.
Appraisal Institute, supra at 313.
Inland refers only to excess construction costs in its briefs. However,
its arguments clearly use the term to identify both superadequate and excess construction
costs. For ease of reference and to avoid confusion, the Courts opinion
will use the term excess construction to refer to both superadequate and excess
Footnote: As an example of superadequate construction, Larson states that, using todays construction
techniques, solid-brick or brick-on-concrete-block wall construction would be replaced with metal-clad steel frame
supra at 47. In addition, an example of excess
construction might be vacant or abandoned building space, such as an automated storage
and retrieval (ASRS) warehouse space, which, due to its physical layout design, renders
it useless. Id. at 47-48.
To explain why this is so, Inland provided the Court with a
hypothetical example, which assumes that a subject improvement has a reproduction cost of
$150, a replacement cost of $100 and is subject to physical depreciation of
40%. (Petr Br. at 15-16) (Trial Tr. at 163-70, 197-200.) This
hypothetical, with minor alterations, is included in the
Appendix to this opinion.
Under the traditional appraisal method for determining an improvements depreciated cost (where the
only obsolescence involved is excess construction cost), an assessing official would subtract the
structures replacement cost ($100) from its reproduction cost ($150) to arrive at its
excess construction cost ($50). Having determined this, the adjustment for physical depreciation
is then applied to the replacement cost ($100 x .40 = $40).
The improvements total depreciated cost is determined by subtracting the combined excess construction
cost and physical depreciation adjustment ($50 + $40 = $90) from the reproduction
cost ($150 - $90 = $60). Compare with Larson, supra at 51-52
(providing an eight-step formula for accounting for each form of depreciation that begins
by subtracting an improvements functional obsolescence due to superadequate and excess construction from
its cost of reproduction to arrive at its cost of replacement, before going
on to subtract various other forms of depreciation).
Using the same assumptions, to calculate the improvements true tax value under the
State Boards regulations, an assessing official would first apply the physical depreciation adjustment
to the improvements reproduction cost to arrive at a remainder value of $90
($150 x .40 = $60 and $150 - $60 = $90). If,
at this point, the total excess construction cost of $50 was applied, the
improvements true tax value would be $40 ($90 - $50 = $40)$20 less
than the figure produced using the traditional method. Therefore, the assessing official
must first determine the depreciated excess construction cost by (1) multiplying the full
excess construction cost ($50) by the physical depreciation adjustment (40%) and (2) subtracting
this value from the full excess construction cost. In Inlands hypothetical, $50
is multiplied by 40%, which creates a value of $20. The $20
is subtracted from $50, and the resulting $30 represents the depreciated excess construction
cost. As Inland aptly states, the $20 of the excess construction cost
. . . has already been deducted as physical depreciation. (Petr Br.
at 15.) As a percentage reduction, the $30 is 33 1/3% of
the improvements $90 remainder value. (Trial Tr. at 166-67.) Though not
explicitly described in Inlands hypothetical, an improvements depreciated excess construction cost can also
be determined by subtracting the improvements replacement costs less the physical depreciation adjustment
($100 - $40 = $60) from its remainder value ($150 - $60 =
$90). (Petr Br. at 13.) The same result for depreciated excess
construction cost is achieved ($90 - $60 = $30). Inserting the $30
into the true tax value formula, $150 (reproduction cost) minus $60 (physical depreciation
adjustment of 40%) equals a remainder value of $90. Subtracting $30 (depreciated
excess construction cost) from the $90 equals a true tax value of $60;
this, of course, is the same value produced using the traditional method.
Both parties in calculating excess construction cost first determined the excess construction
cost associated with all four plants and then reduced this figure by a
percentage representing the excess construction cost for only Plant 2. The State
Board subtracted the remainder value of the replacement plant ($240,823,656) from the collective
remainder value of Plants 1-4 ($256,562,569) and then multiplied this figure ($15,738,913) by
82% (Plant 2s percentage of all improvements throughout the four plants) to reach
a final value of $12,905,909 of excess construction cost for Plant 2. (Finding
#119 & 120.) By comparison, in calculating the excess construction cost for
Plant 2s improvements, Inlands Hackett Study, Ex. A at 1, discussed
the ratio of excess construction cost of all plants ($83,289,570) to the remainder
value of all plants ($223,019,530) and applied this percentage (37%) to the remainder
value of Plant 2 ($183,226,020) in computing a value of $67,793,630 for excess
Some elements of excess operating cost include labor, material, equipment, utilities, and
supra at 48. An example of excess operating expenses
is the additional material-handling costs associated with moving raw or finished materials between
multiple buildings; in a replacement facility, the operations would be adjacent to each
In the Hackett Study, Inland refers to excess inventory and capital costs
as excess capital investments that are divided into two categories: excess inventory
investments and redundant equipment investments. (Hackett Study at 13.)
Footnote: An example of excess capital costs is the need for additional forklifts
or tractor-trailers for moving materials throughout a multi-building manufacturing facility. Larson,
at 48. This equipment would not be necessary and would therefore be
deemed redundant if the replacement facility used a conveying or direct feed mechanism.
(Trial Tr. at 156.)
The study applied a three-year period to its plate operations. (Hackett
Study, Exs. F at 1 & H at 1.) Also, the parties
have stipulated that the total annual excess operating expenses is $19,500,000. (Finding
Footnote: The Court makes no judgment as to Plant 2s remaining useful life.
Inland will be permitted to submit evidence on this point at the remand
Footnote: Mr. Hackett found the appropriate deflator to be .83333. (Ex. G-3
Blacks Law Dictionary 1225 (7th. ed. 1999) defines producer price index as
an index of wholesale price changes, issued monthly by the United States Bureau
of Labor Statistics.
Because Mr. Beres testimony was, standing alone, sufficient to support the State
Boards position on this sub-issue, the Court does not consider Inlands argument that
the Court may not take judicial notice of footnote five in
III because the fact of the fifteen percent adjustment is neither generally known
in Indiana nor capable of accurate and ready determination as required by Ind.
Evidence Rule 201(a). Thus, the Court makes no determination as to whether
the fifteen percent adjustment is, as the State Board claims, a matter of
The State Board should have explained the basis for the fifteen percent
adjustment in its final determination. This Court has previously explained, Ideally, the
State Board would articulate its reasoning in its final determination. That would
provide the taxpayer and this Court with detailed written findings that explained how
the State Board arrived at its decision.
Loveless Constr. Co. v. State
Bd. of Tax Commrs, 695 N.E.2d 1045, 1049 n.5 (Ind. Tax Ct. 1998),
review denied. It would behoove the State Board in issuing future findings
to specifically reference the evidence supporting its quantification methodology. Of course, in
similar fashion, a taxpayer has an obvious responsibility to appear before the State
Board and present evidence and argument in support of its position. North
Park Cinemas v. State Bd. of Tax Commrs, 689 N.E.2d 765, 769 (Ind.
Tax Ct. 1997). Also, taxpayers are reminded that, in post-Clark cases, they
will not be able to rely on the inadequacies of the present method
for quantifying obsolescence to get a second bite at the apple. Clark,
694 N.E.2d at 1242.
Inland agrees that the Mill Manufacturing model is the appropriate model for
determining the base reproduction costs of the BOF Buildings. (Petr Br. at
Footnote: The current regulations describe a model as a conceptual tool used to
replicate reproduction cost of a given structure using typical construction materials. The
model assumes that there are certain elements of construction for a given use
Ind. Admin. Code tit. 50, r. 2.2-10-6.1 (1996). The State Boards
regulations further divide models, as regards commercial and industrial improvements, into one of
three use-association groupings: (1) General Commercial Mercantile (GCM); (2) General Commercial Industrial
(GCI); and (3) General Commercial Residential (GCR). See Ind. Admin Code tit.
50, r. 2.1-4-3 (1992). Current regulations add a fourth grouping, General Commercial
Kit (GCK). See Ind. Admin Code tit. 50, r. 2.2-10-6.1 (1996).
This original tax appeal involves only two models from the GCI group.
As the Court explained, the models are subdivided into one of four
descriptive classifications denoting the extent to which interior finish is included in the
base cost; these four classifications are: (1) Unfinished; (2) Semi-Finished; (3) Finished
Open; and (4) Finish Divided.
Indianapolis Racquet Club, 722 N.E.2d at 936
(quoting Ind. Admin. Code tit. 50, r. 2.1-4-3 (1992)).
The Court in
Indianapolis Racquet Club agreed that the taxpayer demonstrated that
the Light Warehouse model was better than the Health Club model for purposes
of assessing the ninety percent of the tennis facility in dispute. See
Indianapolis Racquet Club, 722 N.E.2d at 941 n.21. However, upon remand, the
Court indicated that the State Board could consider whether a different model even
more closely resembles the tennis facilitys physical structure. Id.
The model indicates that these walls are Typical of steel or large
Ind. Admin. Code tit. 50, r. 2.1-4-7 (1992). Even if
true, the Court notes that this is only a guide; as stated supra,
it is the model that most closely resembles the subject improvement with respect
to physical features that must be used, regardless of the models name.
See Herb, 656 N.E.2d at 893 (observing that actual use of property is
only starting point in determining proper model). Cf. Indianapolis Racquet Club, 722
N.E.2d at 939 (holding that Health Club model was not appropriate model for
tennis facility, even though Indiana Assessment Manual instructed that the Health Club model
was the proper schedule for calculating replacement cost for a tennis barn).
In both its post-trial and reply briefs, Inland contends that the Major
Buildings lack insulation, a characteristic found in the Mill Manufacturing model but not
in the Heavy Manufacturing model. (Petr Br. at 44; Reply Br. at
14.) However, Inland fails to reference testimony or evidence supporting this alleged
fact. Mr. Spitznagle did testify that the No. 2 BOF Building lacked
insulation, but this does not indicate whether the Major Buildings likewise lacked insulation.
(Ex. BB at 110.) Even if true, lack of insulation alone
does not mean that the Mill Manufacturing model is inappropriate, if other characteristics
of the subject improvements resemble the selected model.
Also, the Mill Manufacturing model is characterized by 1% 1 ¾ [inch] hollow
metal service doors [and] 20% Vented steel sash glass windows. Ind. Admin.
Code tit. 50, r. 2.1-4-7. In Finding #27, the State Board concluded
that many of the buildings in Plant 2 have limited openings. Inland
argues that The State Board made no reference anywhere in the record to
the number or nature of openings, or how the openings conform with any
particular Regulation 17 use type model. (Petr Br. at 44.)
Be that as it may, Inland likewise offers no such evidence or explanation
as to openings in Plant 2. This statement, however accurate, is not
probative as to the nature of the openings in Plant 2s Major Buildings.
Cf. CDI, 725 N.E.2d at 1022 n.8 (noting that Counsels questions to
hearing officer as to his general methodology and instructions for applying bulletin and
regulations is not probative evidence on the issue presented).
Inland admits that the wall heights of the Major Buildings exceed twenty
feet, the designated height in the Mill Manufacturing model. (Petr Br. at
44.) The designated wall height in the Heavy Manufacturing model is fourteen feet.
Ind. Admin. Code tit. 50, r. 2.1-4-7 (1992). Neither model
exactly matches the wall heights for the subject improvements. It is evident,
though, that the walls of the Major Buildings resemble more closely, in material
and height, the description found in the Mill Manufacturing model than the description
provided in the Heavy Manufacturing model.
Mr. Spitznagle testified that the average floor thickness of the No. 2
BOF Building is eight inches. (Ex. BB at 109.) Mr. Robert
Bond, an attorney representing Inland, supervised the collection of data about Inlands plants
for use in creating Inlands proposed assessment of its facility. (Ex. BB
at 79.) Mr. Bond explained that unit-in-place tables list the costs of
ground slabs ranging in thickness from four to twelve inches.
Code tit. 50, r. 2.1-4-10 (1992) (unit-in-place tables) (codified in present form at
id., r. 2.2-15-1 (1996)). According to Mr. Bond, the No. 2
BOF does not have excessive floor load capacity (per the Mill Manufacturing model)
because an eight-inch floor actually is not an excessive thickness of floor. (Ex.
BB at 109.) Inlands evidence only shows that the average floor thickness
for the No. 2 BOF falls within the range of thickness provided in
the unit-in-place tables. However, it does not prove that an eight-inch floor
cannot be considered to have excessive floor load capacity.
Inland has two BOF Buildings in dispute, the No. 2 and No.
4 BOF Buildings. (Petr Br. at 25.)
Footnote: Per the regulations, grades falling below an E are indicated by a
minus one through minus four, with each lower grade representing a reduction of
the factor by ten percent.
Ind. Admin. Code tit. 50, r. 2.1-4-3.
A grade of E-4 represents a factor of zero percent. Id.
Grades above an A are indicated by a plus one through plus
ten, with each higher grade representing an increase of the factor by twenty
percent. Id. An A grade has a factor of one hundred
sixty percent; thus, an A+10 grade has a factor of three hundred sixty
percent. Id. But cf. Garcia v. State Bd. of Tax Commrs,
694 N.E.2d 794, 798 (Ind. Tax Ct. 1998) (holding State Boards assessment to
be arbitrary and capricious where taxpayers home was given an A+4 grade but
regulations provide absolutely no definitions or guidelines that allow an assessor, this Court,
or the taxpayer[s] the ability to differentiate between an A+10 or an A
The State Board may only make such corrections if the assessment was
valid in the first place.
Scheub v. State Bd.of Tax Commrs, 716
N.E.2d 638, 644 (Ind. Tax Ct. 1999) (citing Joyce Sportswear Co. v. State
Bd. of Tax Commrs, 684 N.E.2d 1189, 1191 (Ind. Tax Ct. 1997, appeal
dismissed)). In other words, the State Board may not cure a failure
on the part of lower taxation authorities to comply with the statutory prerequisites
to a valid assessment by way of its ability to correct any assessment
error in taxpayer-initiated petitions. Joyce Sportswear, 684 N.E.2d at 1192. In
the present case, the parties do not challenge the validity of Inlands initial
assessment. Thus, the State Board was free to make corrections under section
Where taxpayers dispute the accuracy of the State Boards assessment, not just
its authority to make the assessment, the appropriate arena for the Taxpayers initial
rebuttal of the reassessment of their property is at the administrative level.
Castello, 638 N.E.2d at 1365.
This contrasts with the alleged typical ratio of engineering cost to building
cost in a basic steel mill building, which the State Board found equaled
one or two percent.
The State Board concedes that the Inland Steel Mill is not architecturally
attractive. (Respt Br. at 8.) Thus, the buildings architecture, as it
relates to their aesthetic qualities, is not an issue.
Footnote: Indeed, the State Boards regulations provide little assistance or insight as to
any aspect of grade selection. As this Court stated in
N.E.2d at 798, Although the State Boards regulations offer some guidance regarding characteristics
of the basic grades, those definitions are vague. Words such as generous
and extensive provide little in the way of direction with respect to selection
of the proper grade.
Exhibit 90 was drafted in response to the State Boards proposed final
assessment determination, which assigned a grade of B+2 to the BOF Buildings, instead
of the B grade (120%) actually assigned by the State Board in its
final determination. (Ex. R at
¶¶ 19, 36 & 37.) In
addition, the Court notes that Inlands exhibits and testimony refer only to No.
2 BOF. However, Inland asserts that Ex. 90 represents the same methodology
used to determine grade for both the No. 2 and No. 4 BOF
Buildings. (Petr Br. at 30.) Also, Mr. Spitznagle testified that the
two structures were similar in costs and that a similar analysis as to
foundations would apply. (Ex. BB at 117.)
Taking this approach, Inland could then have argued for application of a
straight C grade, grounding its argument in the language of the State Boards
regulations. However, the Court notes that in Ex. 92, Inland lists various
items that have no specific listing in the unit-in-place tables. For these
items, Inland could have, as it did, extrapolate approximate values based on the
tables or instead argued for a grade adjustment. Where the State Boards
regulations or informational bulletins do not provide values or guidance for valuing particular
items (i.e., the State Board provides no ascertainable standards for valuing the property),
a taxpayer may submit as proof of value any objectively verifiable evidence.
See Sterling Mgmt.Orchard Ridge, 730 N.E.2d at 838 (permitting submission of objectively verifiable
information as to taxpayers iron fencing, where State Board had provided no values
for the fencing).
In its Brief, the State Board further supports its grade assignment by
arguing that Inlands steel mill was built [l]ike most steel mills, . .
. with good quality construction. (Respt Br. at 8.) In addition,
the State Board relies upon its witness Mr. Beres, who testified at the
administrative level that, There is nothing average about buildings that house heavy manufacturing
and steel processing. (Respt Br. at 8) (quoting in part Ex. U
at 590.) These are also conclusory observations that do not support the
assignment of a B grade for the BOF Buildings.
See CDI, 725
N.E.2d at 1019.
Some portions of Building Nos. 2039, 2043 & 2096-99 (Mile Long Building)
were assigned a C grade. (Finding #50.) Moreover, some parts of
Building No. 2094 (No. 3 Cold Strip Mill) received a D grade.
Footnote: The current regulations define a monitor roof as a type of gable
roof, commonly found on industrial buildings, having a small raised portion along the
ridge with openings for the admission of light and air.
Code tit. 50, r. 2.2-16-2(60) (1996). Clamshell refers to an object or
esp[ecially] a piece of equipment or apparatus resembling or having a part that
resembles a clam or the valves of a clam (as in mechanical operation.)
Websters Third New Intl Dictionary 415 (1981). Thus, the Court assumes
that a clamshell monitor is a clam-shaped device used to provide light and
air within the Major Buildings. Moreover, the State Board does not instruct
the Court as to how these monitors are substantial. Substantial can mean
important or essential or, in terms of a structure, firmly or stoutly constructed.
Id. at 2280.
Inland initially raised two additional issues: whether the State Boards final
determination violated (1)
Ind. Code Ann. § 4-22-2-19.1 (West 1999) and (2) the
United States and Indiana Constitutions, see U.S. Const. amend XIV, § 1 (Equal
Protection Clause) and Ind. Const. art. I, § 23 (Equal Privileges and Immunities
Clause). At the oral argument in this case, Inland agreed to dismiss
these two issues. (Oral Argument Tr. at 44.) Therefore, the Court
does not consider these issues.