Case Title: DEPT OF REVENUE v PACIFIC POWER

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Docket Number: 

State: montana

Court: Montana Supreme Court

Date: 1976-12-29T00:00:00Z

Document:
No. 13273 I N T H E SUPREME C O U R T OF T H E STATE O F M O N T A N A 1976 T H E DEPARTMENT O F REVENUE O F T H E STATE O F M O N T A N A , Appellant, PACIFIC P O W E R AND LIGHT C O M P A N Y , Respondent. Appeal from: District Court of t h e F i r s t J u d i c i a l D i s t r i c t , Honorable Peter G. Meloy, Judge presiding. Counsel of Record: For Appellant: Robert A. Poore argued, Butte, Montana R. Bruce McGinnis argued, Helena, Montana For Respondent: Murphy, Robinson, Heckathorn and P h i l l i p s , K a l i s p e l l , Montana Douglas D . Dasinger argued, K a l i s p e l l , Montana Mark H. Peterman argued, Portland, Oregon Submitted: October 21, 1976 Decided : DEC 2 9 1976 Mr. Justice Frank I. Haswell delivered the Opinion of the Court. This appeal involves the validity of the Montana Department of Revenue's method of assessment of taxes on the Montana property of an interstate electric utility. The state tax appeal board and the district court held the method of assessment invalid, reduced the assessment, and a 1974 tax reduction of approximately $100,000 resulted. We reverse. By way of overview, the general method of assessment by the Department of Revenue (DOR) was the unitary method of assessment. DOR used a formula calculated to value the utility's operating property in Montana on the basis of its value as a part of the utility's total interstate electric generating and trans- the mission system. The validity of/method of assessment by use of this formula is the underlying issue on appeal. Pursuant to statute, Pacific Power & Light Company (Utility) submitted its annual statement of earnings, stock, and debt information to DOR for use in assessing its Montana properties. DOR assessed the Utility based on information contained in the statement using the "unitary" method of assessment employed in valuing the property of interstate corporations and systems. A three-factor formula of stock and debt, cost of plant, and capitalization of income was employed. Each of the factors was used to ascertain a TOTAL system value. These were as follows: INDICATOR OF VALUE - - - - . - ---. TOTAL UTILITY SYSTEM VALUE - - - Stock and debt $1,076,198, 551 Plant at Cost $1,347,395, 000 Income (Capitalized at 8.25% over 2 years) $ 857,201,842 , Each of these indicators was weighted by a percentage r e f l e c t i n g DORIS evaluation of i t s r e l a t i v e importance i n the overall s t r u c t u r e of the U t i l i t y ' s e l e c t r i c system. Stock and debt was assigned a weight of 10%; plant a t 50%; and income a t 40%. These values, when totaled, resulted i n a composite estimated t o t a l value f o r the U t i l i t y ' s e n t i r e i n t e r s t a t e e l e c t r i c generating and transmission system of $1,124,198,092. The next s t e p i n t h e assessment procedure involved alloca- t i o n of a proper portion of t h i s system value t o the physical plant located i n Montana. DOR calculated t h e r a t i o of the c o s t of the Montana plant t o the t o t a l plant and obtained a percentage of 1.60%. The value of the two water plants of the U t i l i t y i n Montana were excluded on the b a s i s they were not a continuous p a r t of the opera- t i o n of the i n t e r s t a t e e l e c t r i c system and accordingly were taxed a t the county level. DOR a l s o computed t h e r a t i o of Montana plant t o t o t a l plant on a revenue producing b a s i s and determined Montana produced 2.37% of t o t a l system revenue. These two r a t i o s were averaged and resulted i n a f i n a l r a t i o of 2% representing t h e portion of t o t a l system value of Montana operating properties. The weighted estimate of t o t a l system value was multiplied by t h i s 2% figure t o obtain the value of Montana property of $22,4839962. This value was equalized a t 44%, the percentage figure used i n equalization of computations of e l e c t r i c a l u t i l i t y property, f o r a t o t a l assessed value of $9,892,943. The U t i l i t y objected t o the foregoing assessment on the ground t h a t it resulted i n imposition by Montana of a property t a x on generating f a c i l i t i e s located outside t h e s t a t e . It argued t h i s made i t s system unique and by reason thereof, DORIS method of assessment was i l l e g a l and inequitable. The U t i l i t y contended the h i s t o r i c cost of Montana's portion of t h e system must be u t i l i z e d i n computing the c o s t of plant indicator. The u t i l i t y ' s asser- t i o n was t h a t a figure of $23,118,600 was a proper figure f o r cost of plant t o be "weighted" by 50% t o give a t o t a l Montana plant value of $11,5591300. Totaling of t h e a l t e r n a t e plant c o s t with t h e other two figures (stock and debt; capitalized income) computed i n t h e same manner a s DORY yields a t o t a l valuation of $19,127,710. This figure, "when equalized" a t 44% gives a t o t a l assessed value of $8,416,192, asserted by the U t i l i t y t o be the correct figure. The U t i l i t y a l s o objected t o DOR's computation of t h e a l l o c a t i o n factor used t o determine t h e percentage of t o t a l system value i n Montana. It claimed the only proper elements f o r com- parison were i n - s t a t e system cost compared t o t o t a l system cost. The U t i l i t y claimed any attempt t o compare revenue produced i n Montana t o t o t a l system revenue would r e s u l t i n taxation of out- o f - s t a t e properties because a l l i t s generating f a c i l i t i e s were located outside Montana. A hearing before DOR was held a t t h e ' U t i l i t y l s request and resulted i n a r e f u s a l t o a l t e r DOR's assessment. The U t i l i t y appealed DOR1s decision t o the s t a t e t a x appeal board (STAB) and a majority of S T A B determined the U t i l i t y ' s methodology and f i n a l assessment computations t o be correct. The pertinent findings of f a c t of the majority were: "The Department of Revenue used a reasonable approach t o a l l o c a t e system stock and debt value t o Montana. "The Department of Revenue had information available t o show the a c t u a l h i s t o r i c cost of plant i n Montana, but they substituted an allocated value of plant t h a t resulted i n a f i c t i t i o u s amount t h a t was i n excess of the a c t u a l cost of plant. "The Department of Revenue plant cost values and the corrected values are as follows: "The Department of Revenue computations: " Sys tem Montana Ratio $1,335,568,826 $21,310,719 1.60% "Whereas, the correct total of all properties should be: "System Montana Ratio $1,372,463,365 $23,118,600 1.68% "Difference : "System - - - - Montana -- Ratio - $36,894,539 $1,807,881 . 0 8 % 1 1 The STAB majority concluded: "The unitary approach to value is a proper method to be utilized but in some instances must be modified to produce equitable results. "The Department of Revenue adopted a fundamentally wrong principle of assessment when, knowing the actual historic cost of the subject plant, they substituted an allocated value of plant that exceeded the actual cost; thereby violating the requirement to determine the actual cash value for taxation of that portion of the plant and property situa ted in Montana . ' I Based on these conclusions, STAB ordered DOR to utilize the 1.68% ratio and the "correct totals" set forth above. STAB member Peterson dissented and submitted findings and conclusions in dissent, asserting the methodology employed by DOR to be correct. The pertinent part of the dissent was expressed in this language : "Market value is based on the concept of what a willing and informed buyer would pay a willing and informed seller. It is inconceivable that income would not be considered in such a hypothetical transaction. Therefore, when in- come is not considered in calculating the ratio of the subject u t i l i t y company's property i n Montana i n relation t o the value of the system i n other states which the company operates, the effect i s t o export value out of Montana. '1 DOR appealed the S T A B decision t o the d i s t r i c t court, Lewis and Clark County, which upheld the S T A B decision. DOR appealed t o t h i s Court. A t issue here i s a determination of the proper method of valuation of the U t i l i t y ' s Montana operating properties. Montana has utilized the 3-factor, unitary assessment approach for appraisal of interstate u t i l i t y property for many years. The method has been approved by t h i s Court i n the past as a f a i r and appropriate way of determining the value of the Montana portion of an interstate entity for property taxation. Yellowstone Pipe Line Co. v. State Board of Equalization, 138 Mont. 603, 358 P.2d 55; Western Airlines, Inc. v. Michunovich, 149 Mont. 347, 350, 351, 1 t I n discussing the "unitary" or going concern'' approach i n Western Airlines, Inc., we stated: I f * * * The 'unitary' method represents an attempt t o realize a f a i r assessment value on property which i s not habitually loca ted i n any given s t a t e , but which is used extensively i n interstate commerce. The under- lying philosophy of the 'unitary' method is that property so used forms a part of an organic system and may be assessed i n terms of the economic contribution which each compenent makes t o the entire system. This approach has been firmly established i n a series of de- cisions of the Supreme Court of the United States. * * * "A good statement of the purpose and operation of the I unitary' method i s found i n Pullman Co. v. Richardson, 261 U.S. 330, 338, 43 S.Ct. 366, 368, 67 L ed 682. "'And, i f the property be part of a system and have an augmented value by reason of a connected opera- tion of the whole, it may be taxed according to i t s value as part of the system, although the other parts be outside the s t a t e ; i n other words, the tax may be yade t o cover the enhanced value whichcomes t o the property i n the s t a t e through i t s organic relation t o the-system."' (Emphasis added.) --- The U t i l i t y urges t h i s Court t o hold the actual cost of the physical plant as an appropria te measure of "value" for assessment purposes and asserts the method utilized by DOR results i n an a r t i f i c i a l and contrived "value". Section 84- 401, R.C.M. 1947, requires assessment of property a t i t s " f u l l cash value". Value does not equal cost. Western Union Telegraph Co. v. Taggart, 163 U.S. 1, 16 S.Ct. 1054, 41 L ed 49; Cleveland &c Railway Co. v. Backus, 154 U.S. 439, 445, 14 S.Ct. 1122, 38 L ed 1041. In Cleveland a decision involving s t a t e taxation of interstate railway property, the United States Supreme Court said: "* * * the value of property results from the use t o which it is put and varies with the profitableness of that use, present and prospective, actual and antici- pated. There i s no pecuniary value outside of that which results from such use. The amount and profitable character of such use determines the value, and i f the property i s taxed a t i t s actual cash value it i s taxed upon something which i s created by the uses t o which it i s put. * * *I1 The e l e c t r i c system property of the U t i l i t y i n Montana, although only 1.6% of the t o t a l u t i l i t y system, provides 2.37% of the t o t a l annual revenue of the Utility. Any measure of the value of t h i s property must include consideration of the use t o --.- - which the property is put and the income contributed t o the system. DOR, i n an e f f o r t t o assess t h i s value, averaged the 1.6% figure, representing the Montana share of the physical plant within the t o t a l e l e c t r i c a l system, with the 2.37% figure repre- senting the income provided by Montana through effective, efficient use of the plant. This averaging yielded the 2% used as an appropriate percentage of t o t a l value of the u t i l i t y ' s property within Montana. This reflects a consideration of the worth or value of the Montana property as a part of an on-going, profitable enter- prise, the value of the parts of which i s greater when combined into an integrated u t i l i t y system. To accept the U t i l i t y ' s contention that actual cost i s controlling (as did S T A B and the d i s t r i c t court) i s t o ignore t o t a l l y the "value" flowing from the operation of the system. Again, in Western - Airlines, Inc. the Court stated: "Thus the 'unitary' method determines not only the appropriate share of the e n t i r e enterprise which may be taxed by each s t a t e but also determines the 'en- hanced value' attriburable t o the equipment used by virtue of i t s being a component part of the system. The 'unitary' method assumes that the value of the e n t i r e system, as a going concern, is somewhat greater than the t o t a l f a i r market value of its equipment." See also: Yellowstone Pipe Line Co. v. State Board of Equal., supra. W e further hold that DOR correctly excluded the waterplant f a c i l i t i e s that a r e taxed locally by the counites where they are located. These water plants are not properly a part of the operating interstate e l e c t r i c a l system and as such do not affect the valua- tions of interstate properties dealt with i n t h i s opinion. The exclusion of these properties requires affirmation of the 1.60% figure used by DORY rather than the 1.68% offered a s an alterna- tive by the Utility, i n applying the unitary assessment method. The judgment of the d i s t r i c t court i s reversed. The assessment of DOR i s reinstated i n conformity with t h i s opinion. Hon. L. C. Gulbrandson, ~istrict Judge, sitting for Justice Wesley Castles.