Case Title: Panhandle Eastern Pipe Line Co. v. Dwyer

Citation: 207 Kan. 417, 485 P.2d 149

Docket Number: 46,257

State: kansas

Court: Kansas Supreme Court

Date: 1971-05-15T00:00:00Z

Document:
207 Kan. 417 (1971)
485 P.2d 149
PANHANDLE EASTERN PIPE LINE COMPANY, A Corporation, Appellant,
v.
RONALD F. DWYER, Director of Property Valuation of the State of Kansas; STATE BOARD OF TAX APPEALS OF KANSAS and STATE BOARD OF EQUALIZATION OF KANSAS; and CHARLES B. JOSEPH, RALPH McCARTY, EUGENE E. LEE, and WILLIAM D. ANDERSON, JR., the Members of the State Board of Tax Appeals of Kansas and the State Board of Equalization of Kansas; and JOHN E. ROYSTON, Attorney and Secretary of the State Board of Tax Appeals of Kansas and the State Board of Equalization of Kansas, Appellees.
No. 46,257

Supreme Court of Kansas.
Opinion filed May 15, 1971.
John S. Seeber, of Adams, Jones, Robinson and Manka, of Wichita, argued the cause, and C.A. Conoley, of Kansas City, Missouri, was with him on the brief for the appellant.
Clarence J. Malone, Chief Attorney for the Property Valuation Department, argued the cause, and John L. Bingham, Attorney for the Property Valuation Department, and John E. Royston, Attorney and Secretary of the State Board of Tax Appeals, were with him on the brief for the appellees.
The opinion of the court was delivered by
HATCHER, C.:
This is an appeal from a judgment of the district court of Johnson County, Kansas upholding an order of the State Board of Tax Appeals which determined the state-wide 1969 ad *418 valorem assessment of the appellant's interstate natural gas pipeline property located in Kansas.
The primary issue presented for this court's determination is whether the trial court erred in not finding that the order of the State Board of Tax Appeals (hereinafter referred to as the Board) was unreasonable, arbitrary or capricious in not granting the appellant relief from the order.
The facts leading up to this appeal will be stated.
The appellant operates an interstate pipeline system originating in gas fields in the Texas and Oklahoma panhandles and the Hugoton field in southwest Kansas. From Liberal, Kansas the appellant operates four parallel pipelines running through twenty-six counties in Kansas and extending through the states of Missouri, Illinois, Indiana and Ohio and into southeast Michigan where it serves an area in and about Detroit.
The Federal Power Commission at this time controls and limits the earnings which appellant is permitted to make by limiting appellant to a rate of return of 6 5/8% on the original cost of its property less depreciation. Any buyer of plaintiff's property would also be limited to the same earnings base and rate as appellant now has. The F.P.C. requires depreciation to be taken at the rate of 3 1/2% per year on appellant's property in Kansas, and the rate base on which appellant is permitted to earn is reduced each year by additional mandatory depreciation except for net adjustment made to increase original cost less depreciation as a result of replacements of items that are part of the system or for new construction. All figures relating to the original cost and depreciation of appellant's entire system used by both parties have as their basic source appellant's annual report filed with the F.P.C.
Appellant filed with the Director of Property Valuation, on statements and schedules prescribed by the director, a report showing a "Return Value" of $30,967,805.00 for 1969 for properties in the state of Kansas. The director, by an order dated May 28, 1969, assessed appellant's tangible properties in the state of Kansas for 1969 in the sum of $56,078,497.00.
Appellant's timely appealed to the Board on June 27, 1969, from the findings, rulings, orders, decisions and other final action of the director pursuant to K.S.A. 74-2438. On August 1, 1969, the Board, having heard all the evidence presented by appellant and the director on said appeal, entered its final order August 20, 1969, denying the appeal.
*419 The appellant then appealed the order of the Board to the district court of Johnson County, where part of its property is located. The appellant challenged the order of the Board as unreasonable, arbitrary or capricious and sought relief therefrom under the provisions of K.S.A. 1970 Supp. 74-2426.
The trial court concluded:
The appellant has now appealed to this court raising substantially the same issues.
Before considering the specific objections we will give attention to the limited extent of this court's power to review.
The statute under which this appeal is taken, K.S.A. 74-2426, closes with the following statement:
However, regardless of the statute it has always been the rule of this court that matters of taxation, especially assessments, are administrative in their character and should remain free of judicial interference in the absence of fraud, corruption or conduct so oppressive, arbitrary or capricious as to amount to fraud. (Harshberger v. Board of County Commissioners, 201 Kan. 592, 442 P.2d 5; Mobil Oil Corporation v. McHenry, 200 Kan. 211, 436 P.2d 982.)
In the early case of Symns v. Graves, 65 Kan. 628, 70 Pac. 591, we stated at page 636 of the opinion:
Unless there has been fraud, corruption or conduct so oppressive, arbitrary or capricious as to amount to fraud in the assessment, the courts cannot interfere.
Appellant first contends 
In considering the merits of this appeal, it is necessary to have *421 before us K.S.A. 79-501 (Laws of 1963, Chapter 460, § 3) which provides in part:
K.S.A. 1968 Supp. 79-503 provides how justifiable value shall be determined as follows:
"(b) the size thereof;
"(c) the effect of location on value;
"(e) cost of reproduction or improvements;
"(f) productivity;
"(h) rental or reasonable rental values;
The appellant contends that "(d) depreciation, including physical deterioration or functional, economic or social obsolescence; (e) cost of reproduction or improvements; (f) productivity; (g) earning capacity as indicated ... by capitalization of net income;" and "(j) comparison with values of other property of known or recognized value;" are pertinent factors listed in the statute and should have been given consideration.
*422 Our attention is called to Garvey Grain, Inc. v. MacDonald, 203 Kan. 1, 453 P.2d 59, in which we held the standards prescribed by the statute may not be ignored by taxing officials.
The commission contends and the trial court found that  "all factors specified by K.S.A. 79-503 for determining justifiable value were considered by the assessing authorities."
We have some difficulty in finding the basis for appellant's contentions.
The appellant's expert witness capitalized his anticipated income of $30,383,113.00 at a rate of 7% and got a value on the income approach of $434,044,400.00. He made certain adjustments and arrived at a value of $437,500,000.00 for the total plant. He then took 29.47% of that amount as the indicated values of operating properties within the state of Kansas and arrived at a value of $128,931,250.00. He next took 30%, the assessment ratio for Kansas, of the total value in Kansas and arrived at assessment for properties in Kansas of $38,373,865.00.
The Board's expert witness capitalized his anticipated income of $29,854,000.00 at a rate of 5% and got a value on the income approach for the property in Kansas of $186,928,324.00 after certain adjustments. He then took the assessment ratio of 30% and arrived at an assessment for properties in Kansas of $56,078,497.00.
The chief difference in the results obtained by the two experts is the rate used for capitalization of income. The net operating income for 1969 was used by the Board's expert witness  $29,854,662.00. The appellant's expert witness took the past five years and arrived at an average income of $30,383,113.00. The difference was not material. The difference in the rate used of 2% resulted in a difference in value of $150,000,000.00 for the system at large, or a difference in the value of the property in Kansas of slightly less than $50,000,000.00. We have used round figures to stay within the realm of our ability to calculate. Neither do our figures take into consideration adjustments for materials and supplies, etc.
If the Board was not guilty of unreasonable, arbitrary or capricious conduct in using the 5% figure for capitalizing income this court should not interfere with the assessment order.
The trial court found that the use by the Board of a 5% capitalization rate was a matter of judgment and not unlawful. We are inclined to agree.
The appellant argues that the assessment should be close to the *423 rate base and therefore the rate of capitalization should be at least equal to the rate of return.
The Board argues that a prudent purchaser would be satisfied with a lower rate of return on investment if he knew at the same time he would receive annually a partial return of the investment. We do not care to engage in an argument over a statement made in good faith by the Board.
When the Board used the income approach, there was reflected in the results reached physical functional productivity and economic depreciation.
The Board's engineer also used original cost and reproduction cost less depreciation and the weighted results arrived at a comparable figure.
A careful examination of the record discloses no showing by appellant which would justify a finding of unreasonable, arbitrary and capricious conduct on the part of the Board in using the capitalization rate of 5%.
The appellant next contends that the Board and the trial court erred in failing to use the median real estate assessment ratio of the official sales ratio study for the assessment ratio in each county in which appellant had property in order to provide a uniform rate of assessment and taxation of appellant's property in each county under Article 11, Section 1, of the Kansas Constitution.
We are forced to conclude that the ratio study standing alone is not conclusive as to value. In Cities Service Oil Co. v. Murphy, 202 Kan. 282, 447 P.2d 791, we held:
It might also be suggested that the 1969 legislature passed a law, (K.S.A. 79-503 [j]) not made applicable to this case, stating:
It would at least indicate the legislature was not out of harmony with the decisions of this court.
There are too many speculative elements involved and too few properties are subject to sale for the ratio study to be relied on for appraisal purposes. It may, however, serve as a signal that a reappraisal is in order.
*424 We are forced to conclude that the appellant has not by the ratio study alone presented sufficient evidence of inequality to justify a reduction of their assessment apportioned to the various counties.
The appellant complains that:
The Board concluded and the conclusion was approved by the trial court:
A careful search of the record by us discloses no evidence which would justify a finding that there was not a good faith attempt to equalize the assessment of appellant's property and property of other pipeline companies. It is disclosed the sixty-two pipelines have been appraised by the Kansas taxing authorities using the factors that were used here in arriving at the assessed value. It would result in real lack of uniformity if a single taxpayer were assessed on a different basis. It would serve no useful purpose to attempt to state what is not in the record or to attempt a justification of one isolated appraisal of the old Board as affecting the appraisals of the new Board.
The judgment is affirmed.
APPROVED BY THE COURT.
KAUL, J., dissenting:
I dissent from the holding stated in subsection (1) of paragraph 2 of the syllabus for the reason that the assessment was not made in accordance with the mandate of K.S.A. 79-503.
As indicated in the majority opinion, this court has repeatedly said matters of taxation especially assessments are administrative in character and should remain free of judicial interference in the absence of fraud. It is equally true that this court has frequently said that assessment of property for taxes must be made in accordance with the provisions of applicable statutes and where taxing officials fail in this respect the issue presented to the court is not the exercise of their administrative judgment, but the legality of *425 their acts. (Garvey Grain, Inc., v. MacDonald, 203 Kan. 1,453 P.2d 59.)
The controlling issue in this case is whether the control of appellant's earnings by the Federal Power Commission was recognized in determining the justifiable value of appellant's property by the taxing authorities involved.
It was admitted by Director Dwyer and Mike Gillgannon, an expert witness called by the State Board of Tax Appeals, that FPC control of earnings was a factor to be considered under 79-503 (d). On this point Dwyer testified as follows:
"A. Yes.
The Board's expert Gillgannon was questioned on the point by reference to Dwyer's testimony as follows:
"A. Today?
"Q. Yes.
"A. Yes, I was here.
"A. I would agree to that, yes."
Although it was admitted to constitute economic obsolescence, I am unable to find FPC control reflected or recognized by Gillgannon in his calculations of the three approaches  income, cost *426 and reproduction cost less depreciation which he used as correlated value indicators with allocated mathematical weights of twenty, forty and forty percent, respectively, in arriving at justifiable value.
In calculating reproduction cost less depreciation, Gillgannon did use a three and one-half percent depreciation rate in which he says he allowed one percent for functional obsolescence and one-half of one percent for economic obsolescence. However, he made no claim that either allowance reflected the abnormal factor of FPC control of appellant's earnings based on a rate base of original cost less depreciation.
Despite the admissions of Director Dwyer and Gillgannon previously referred to, the trial court in Finding No. 33 found that "F.P.C. regulation and control does not constitute functional, economic or social obsolescence."
Time does not permit a discussion of appellant's evidence. It will suffice to say the undisputed evidence discloses that because of the abnormal factor of FPC control, appellant is limited to earnings of six and five-eighths percent on a rate base equal to the original book cost of its property less accrued depreciation. F.P.C. control was admitted by appellees to fall within the scope of economic obsolescence under K.S.A. 79-503 (d). It was not applied as a factor in assessing appellant's property.
In Finding No. 34 the trial court found  "The rate base of FPC or any other regulatory body is not named in K.S.A. 79-503 as one of the factors to be considered." It is true that 79-503 does not mention the rate base of a regulatory body as a factor to be considered. However, in addition to what has been said with respect to subsection (d), subsection (g) specifically enumerates "earning capacity as indicated by ... capitalization of net income," as a factor to be considered. In his calculation of capitalization of net income, Gillgannon used a capitalization rate of five percent. It should be kept in mind that the use of a lower capitalization rate results in a higher value indicator, while the effect of the use of a higher rate is conversely a lower indicator. On cross-examination Mr. Gillgannon admitted that prudent investors would have wanted a rate of seven and one-half percent or more. Gillgannon failed to supply any satisfactory explanation for his choice of a five percent capitalization rate. In view of the limitation on appellant's earnings, Gillgannon's arbitrary choice of a five percent capitalization *427 rate appears unrealistic and reflects a further failure to consider an obviously pertinent factor enumerated in 79-503.
In view of our holding in Garvey Grain, Inc., v. MacDonald, supra, the judgment should be reversed.
FATZER and SCHROEDER J.J., join in the foregoing dissent.