Case Title: PACIFICORP, INC. v. STATE DEPARTMENT OF REVENUE

Citation: 

Docket Number: 

State: wyoming

Court: Wyoming Supreme Court

Date: 2001-09-07T00:00:00Z

Document:
PACIFICORP, INC. v. STATE DEPARTMENT OF REVENUE2001 WY 8431 P.3d 64Case Number: 00-155Decided: 09/07/2001

 

APRIL 
TERM, A.D. 2001

 

                                                                                                            

 

PACIFICORP, 
INC., 

Appellant(Petitioner),

 

v.

 

DEPARTMENT 
OF REVENUE,

STATE OF 
WYOMING, 

Appellee(Respondent).

 

 

W.R.A.P. 
12.09(b) Certification from the District Court of Laramie 
County

The 
Honorable Edward L. Grant, Judge

 

Representing 
Appellant:

Richard 
G. Smith of Hawley Troxell Ennis & Hawley LLP, Boise, Idaho; and W. Perry 
Dray of Dray, Thomson & Dyekman, P.C., Cheyenne, Wyoming  

 Representing 
Appellee:

Gay 
Woodhouse, Attorney General; Rowena L. Heckert, Deputy Attorney General; Harold 
E. Meier, Senior Assistant Attorney General; and Jay Jerde, Senior Assistant 
Attorney General  

  

Before 
LEHMAN, C.J., and GOLDEN, HILL, KITE, and VOIGT, JJ.

 
            
KITE, Justice.

 [¶1]      PacifiCorp, Inc. 
(PacifiCorp) appealed its ad valorem valuations for tax years 1997, 1998, and 
1999 claiming the Department of Revenue (the Department) undervalued its tax 
exempt pollution control equipment resulting in an overpayment of tax.  The State Board of Equalization (the 
Board) affirmed the Department's action.  
PacifiCorp filed a petition for review in the district court, and the 
district court certified the case to this court pursuant to W.R.A.P. 
12.09(b).

 

[¶2]      This same issue 
was raised in PacifiCorp, Inc. v. Department of Revenue, 13 P.3d 256 
(Wyo. 2000) (PacifiCorp I), and we affirmed the Department's 
actions.  A petition for rehearing 
was filed in that case, and we held the petition in abeyance pending our 
consideration of this case, which involves a full evidentiary hearing on the 
same issues in later tax years.

 

[¶3]      PacifiCorp 
contends the Department must utilize the ratio of Wyoming market value to 
Wyoming book value when determining the market value of the tax exempt property 
in Wyoming and that amount should be deducted from PacifiCorp's taxable 
property.  The Department disagrees 
and relies instead on the ratio of the entire system's market value to system 
book value.  In addition, the 
Department contends PacifiCorp failed to carry its burden of proof and the 
system ratio approach is necessary to assure uniformity among taxpayers.  After reconsideration of the issue with 
the additional evidence produced by PacifiCorp, we conclude PacifiCorp is 
correct and, to obtain an accurate valuation of this taxpayer's Wyoming exempt 
property, the net book value of the exempt property must be reduced by the ratio 
of the fair market value of Wyoming property to the net book value of that same 
Wyoming property.

 

[¶4]      We reverse and 
remand.

 

 

ISSUES

 

[¶5]      PacifiCorp raises 
the following issue for our review:

 

            
I.  Did the State Board err in failing to conclude that the 
1997-1999 valuation of PacifiCorp's exempt property by the Department of Revenue 
was erroneous, and that accordingly PacifiCorp's assessed value for those years 
exceeded the fair market value of PacifiCorp's property, in violation of W.S. §§ 
39-2-102 and 39-2-201(a)?

 

The 
Department rephrased the issue as:

 

            
I.  Does substantial evidence exist in the record to support 
the Department's use of the system market value to system book value ratio 
method to derive the fair market value of PacifiCorp's exempt Wyoming 
property?

 

 

STANDARD 
OF REVIEW

 

[¶6]      Wyo. Stat. Ann. § 
16-3-114(c) (LexisNexis 2001) delineates the scope of appellate review for 
agency decisions:

 

(c)  To 
the extent necessary to make a decision and when presented, the reviewing court 
shall decide all relevant questions of law, interpret constitutional and 
statutory provisions, and determine the meaning or applicability of the terms of 
an agency action.  In making the 
following determinations, the court shall review the whole record or those parts 
of it cited by a party and due account shall be taken of the rule of prejudicial 
error.  The reviewing court 
shall:

 

(i) 
Compel agency action unlawfully withheld or unreasonably delayed; 
and

 

(ii) 
Hold unlawful and set aside agency action, findings and conclusions found to 
be:

 

(A) 
Arbitrary, capricious, an abuse of discretion or otherwise not in accordance 
with law;

 

(B) 
Contrary to constitutional right, power, privilege or 
immunity;

 

(C) In 
excess of statutory jurisdiction, authority or limitations or lacking statutory 
right;

 

(D) 
Without observance of procedure required by law; or

 

(E) 
Unsupported by substantial evidence in a case reviewed on the record of an 
agency hearing provided by statute.

 

In 
PacifiCorp I, we cited Basin Electric Power Cooperative, Inc. v. 
Department of Revenue, State of Wyoming, 970 P.2d 841, 851 (Wyo. 1998), for 
the proper standard of review wherein the situation at issue concerns the 
Department's choice of accepted appraisal methods.  PacifiCorp, 13 P.3d  at 259.  The issue in the instant case centers on 
the proper application of the Department's market-to-book ratio 
methodologyspecifically, whether the system value to book ratio or the state 
value to book ratio should be applied.  
The proper application of appraisal methods to the facts is an issue of 
ultimate fact requiring de novo review.  
Id.  An ultimate fact 
is a mixture of fact and legal precept.  
Basin Electric Power Cooperative, Inc., 970 P.2d  at 850.  

 

When an 
agency's determinations contain elements of law and fact, we do not treat them 
with the deference we reserve for findings of basic fact.  When reviewing an "ultimate fact," we 
separate the factual and legal aspects of the finding to determine whether the 
correct rule of law has been properly applied to the facts. We do not defer to 
the agency's ultimate factual finding if there is an error in either stating or 
applying the law.  

 

Id. at 
850-51 (citations omitted).

 

 

DISCUSSION

 

[¶7]      This rather 
simple dispute is made exceedingly complex by the nature of the tax computation 
process and the parties' inability or unwillingness to directly address the 
rationale for their respective positions.  
As a public utility, the fair market value of PacifiCorp property for tax 
purposes is determined by the unitary method, which means the value of its 
entire system is measured by various appraisal methods not at issue here.  Those methods establish the value of 
PacifiCorp's integrated, multi-state system, and that value is then reduced for 
depreciation and obsolescence to reach the fair market value; i.e., what a 
willing buyer would pay a willing seller for the entire system.  Wyo. Stat. Ann. § 39-13-103(b)(ii) 
(LexisNexis 2001).  The result of 
the appraisal process was a market value for the entire PacifiCorp system of 
$6,530,000,000.

 

[¶8]      After 
establishing market value for the system, the Department allocates a portion of 
the total system market value to Wyoming using a long-standing formula.  That allocation formula considers the 
percentage of plant cost (net book less depreciation), product sales, sales 
revenue, capacity, and generation located in Wyoming.  In the case of PacifiCorp's property, 
that allocation formula results in a higher percentage of the value of the 
system being allocated to Wyoming (21.8482 percent) than is represented by the 
net book value of the actual property located in this state (19.685 
percent).  The parties agree the 
allocation process concluded PacifiCorp property located in Wyoming is more 
valuable as compared to its original cost or net book value than its property 
located in other states.  The 
allocated fair market value of $1,426,687,460 is then subject to tax assessment 
in Wyoming.

 

[¶9]      Before the tax is 
imposed, the Department must deduct the fair market value of any exempt property 
actually located in Wyoming, such as pollution control equipment.  The problem arises when one attempts to 
determine the fair market value of the individual tax exempt property located in 
Wyoming which heretofore has only been valued as an integrated part of the 
entire system.  PacifiCorp's 
financial statements clearly set out the net book value, sometimes referred to 
as "cost," of the individual exempt property as $358,684,824.  However, since the exempt property is no 
longer worth its original cost, that number must be adjusted for depreciation 
and obsolescence.  The same methods 
used for making that adjustment on the system net book value, or cost, cannot be 
applied to individual property because those methods rely on a consideration of 
the entire integrated system.  
Therefore, the Department simply reduced the net book value of the exempt 
property by the same ratio of market value to book value, which was the result 
of the adjustment made to the entire system.  The Department has historically adjusted 
the net book value of particular exempt property by calculating what percentage 
the entire system's fair market value is of the entire system's net book value 
and applying that percentage to the net book value of the Wyoming exempt 
property.  PacifiCorp's system ratio 
is 81.8 percent, which results in the Department calculating a fair market value 
for the exempt property of $293,433,957.

 

[¶10]   The Department's past practice 
rests on the assumption that the Wyoming exempt property has experienced the 
same depreciation and obsolescence as the entire system.  That assumption would certainly be 
logical and reasonable if, at the outset, the Wyoming property is considered to 
be of equal value to the system, on a dollar-for-dollar basis, as the rest of 
the property in the system.  In 
PacifiCorp's case, however, the Department has determined, based on its 
allocation formula, that the Wyoming property is more valuable to the system as 
a whole than its property in other states.  
That allocation formula results in a Wyoming ratio of fair market value 
to net book value of 91 percent and fair market value for the tax exempt 
property of $326,462,014.  The 
Department's determination of market value of the exempt property using the 
system ratio was $32,050,098 less than that generated by the state ratio urged 
by PacifiCorp.  The Department's 
market value resulted in less of a deduction and $280,000 more in tax paid than 
would have resulted from the use of the state ratio.  Both parties agree that each dollar of 
value in the tax exempt property contributes equally to the total system 
value.

 

[¶11]   The Department provided no evidence 
that the Wyoming tax exempt property, which is essential to the operation of the 
remaining Wyoming property, is any less valuable to the entire system than the 
total Wyoming property.  Logic 
dictates the Wyoming tax exempt property should be valued in the same manner as 
the Wyoming taxable property.  
Indeed,

 

this 
court has consistently interpreted Wyo. Const. art. 15, § 11 to require "only a 
rational method [of appraisal], equally applied to all property, which results 
in essential fairness."  
Teton [Valley Ranch v. State Board of Equalization], 735 
P.2d [107,] 115 [(Wyo. 1987)]  
(Urbigkit, J., summarizing Wyoming value-assessment-taxation 
jurisprudence in a concurring opinion).

 

Holly 
Sugar Corporation v. State Board of Equalization for State of 
Wyoming, 839 P.2d 959, 964 (Wyo. 1992); see also Basin Electric Power Cooperative, 
Inc., 970 P.2d  at 852.

 

[¶12]   This conclusion is supported by a 
study commissioned by the Department in 1994 which reviewed all aspects of 
Wyoming's procedures used in valuing state assessed property.  Study of State-Assessed Property (Dec. 
9, 1994) (State Study).  
Ad Valorem Services, Inc., a consulting firm, performed the study.  The professionals involved in conducting 
the study and making objective recommendations to the state for modifications of 
its procedures were experienced in property tax valuation and represented no 
particular group or taxpayer.  The 
consultants sought input from taxpayers, the Department, and the public.  They made twenty-two recommendations and 
ranked them in order of importance.  
The recommendations were tested by applying them to seven selected 
companies to determine how they would affect the determination of fair market 
value for tax purposes of those companies' properties.  Some companies' valuations went up, some 
went down, and others were unaffected.  
Public hearings were held to review the results.

 

[¶13]   The State Study's Recommendation 
No. 19 addressed the same question we face in this case:  What is the proper method for valuing 
tax exempt property?  The report 
recognized the need to adjust the net book value of exempt property to account 
for depreciation and obsolescence to reflect its current market value and that 
it was inappropriate to simply deduct the net book value of the exempt property 
from the allocated market value of taxable property.  It also concluded the method utilized by 
the stateapplying the system ratio of market value to net book valuewas 
appropriate in most instances.  
However, the State Study identified the problem we face in this case when 
the Department's allocation formula attributes proportionately more value to 
Wyoming property and concluded, "Since the state value is the result of both the 
valuation and the allocation process, we conclude that the adjustment for 
non-taxables should reflect the same logic."  State Study at 74.  The State Study described its approach 
as "rather simple and straightforward logic" which resulted in the market value 
of the exempt property bearing the same relationship to the total state market 
value as the net book value of that property bore to the total state net book 
value.  Id. at 75.1 

 

[¶14]   Recommendation No. 19 specifically 
provided:

 

            
In most cases, it should make little valuation difference whether the 
deduction for non-taxables is made based upon a relationship between system 
value or allocated state value and property investment.  When a significant difference does 
arise, the appraiser should first reconsider his/her allocation factor then, 
when comfortable, base the deduction for non-taxables on the investment 
relationship between non-taxables and total state investment (i.e. state 
investment in non-taxable assets divided [by] total state investment) and apply 
this ratio to the allocated state value.

 

[¶15]   During the public hearings and 
discussions with the Department concerning the recommendations, no one 
questioned the propriety of Recommendation No. 19.  At the hearing before the Board in this 
matter, David W. Shank, President of Ad Valorem Services, Inc., one of the 
authors of the State Study, testified and explained the basis for the 
recommendations.  He explained how 
recognized texts were reviewed on this issue and, while those texts did not 
directly address this issue, application of accepted appraisal concepts required 
use of the state ratio.  For 
example, the principle of matching, which is recognized in appraisal texts, 
would require using the same valuation method for taxable property as for tax 
exempt property.  Following 
presentation of the recommendations, the Department prepared a document 
outlining its response to the recommendations, and, with regard to 
Recommendation No. 19, it stated, "This will be reviewed by staff for 
implementation for 1995.  It[]s full 
implementation may not be until 1996 as the models and data sets will need 
taxpayer assistance for full application."  
However, the recommendation was not implemented, and, instead, the 
Department rejected PacifiCorp's appeals in tax years 1996 through 1999. 

 

[¶16]   As the Board found, no statute, 
rule, or regulation required use of the system ratio.  None of the reasons given by the 
Department for failing to implement Recommendation No. 19 addressed the 
substance of the recommendation and why it was inappropriate.  The Department first contended the issue 
was in litigation in another case; however, the Board properly found the issue 
was not addressed in that litigation.  
Next, the Department argued it had historically used the system ratio 
which is not surprising given, as noted in Recommendation No. 19, in most 
situations there is no difference between the system ratio and the state 
ratio.  It failed to address why 
that historic approach was appropriate in situations where the system and the 
state ratio differed significantly.  
The Department also claimed uniformity required by the constitution and 
statutes was a reason for using the system ratio for all utility taxpayers.  The uniformity requirement of Article 
15, Section 11 of the Wyoming Constitution is not violated simply because the 
Department may use the system ratio for other companies which do not have 
significantly different state ratios.  
The constitution simply demands that all property be "uniformly valued at 
its full value as defined by the legislature."  Wyo. Const. art. 15, § 11.  In fact, the Department's failure to 
consider a situation unique to one taxpayer risks overvaluing or undervaluing 
its property, which would violate the uniformity requirement.  J. Ray McDermott & Co. v. 
Hudson, 370 P.2d 364, 368-69 (Wyo. 1962).  As justification for rejecting 
Recommendation No. 19, the Department cited use of the system value by some 
other states.  The Board rejected 
the Department's attempt to show other states agreed with its approach after 
PacifiCorp objected to such evidence as hearsay and unreliable because of the 
vast differences in state law.  We 
find such information of little use in any event since it is clear other states 
fall into both camps and little consistency exists between the various states' 
legal and procedural environments.  
Finally, the Department's witness suggested that a change in Department 
personnel was occurring at the same time the recommendations were being 
considered leaving the impression this issue had simply not been 
addressed.

 

[¶17]   A careful review of the record 
before the Board reveals no substantial evidence supporting the Department's 
conclusion that a system ratio accurately reflects the true market value of 
Wyoming tax exempt property.  
PacifiCorp carried its burden of proving the state ratio did so.  Expert testimony was provided from Mr. 
Shank, who has vast national experience in ad valorem taxation, concerning the 
application of accepted appraisal principles.  His ability and expertise were 
recognized by the state when he was retained in 1994 to conduct the audit of 
Wyoming's valuation procedures.  
PacifiCorp also provided testimony from Norman Ross, its own tax manager, 
and Larry Richards, a statistician who opined on the mathematical inaccuracy of 
the Department's use of the system ratio.  
This evidentiary record, along with simple logic and accepted appraisal 
principles, persuades us to conclude a taxpayer's tax exempt property should be 
valued in the same manner as its taxable property in order to assure an ultimate 
fair market value as required by Wyoming law.  Wyo. Stat. Ann. § 39-1-101(a)(vi) 
(Michie 1997) (repealed 1998); Wyo. Stat. Ann. § 39-11-101(a)(vi) (LexisNexis 
2001); Wyo. Const. art. 15, § 11.

 

[¶18]   The Department suggests that the 
disputed tax of $280,000 is relatively small, and the Board's order infers the 
taxpayer is lucky to enjoy the "largess of the Wyoming legislature" by being 
granted any exemption at all.  It 
is, in fact, the legislature's responsibility to determine tax policy for the 
state subject to the limitations of the constitution, and the legislature has 
determined that certain property should be exempt from taxation.  Neither the Department, the Board, nor 
this court has authority to do less than assure the taxpayer enjoys the full 
exemption created by the legislature valued in the same manner as the property 
subject to tax.  The Department has 
concluded PacifiCorp's Wyoming property is worth proportionately more than its 
property in other states, and the state willingly collects property tax on that 
basis.  Fairness, logic, and the 
evidentiary record in this case require that same conclusion for the tax exempt 
property.

 

[¶19]   Our opinion in PacifiCorp I 
was to the contrary.  We held the 
Petition for Rehearing in that case in abeyance pending consideration of this 
case (PacifiCorp II) which raises the same issues but for different tax 
years.  In PacifiCorp I, the 
matter was decided by the Board in an expedited proceeding without the 
presentation of evidence.  Our 
decision relied heavily on our conclusion that PacifiCorp had failed to carry 
its burden of proof and, absent such credible evidence, the Department's 
valuation is presumed valid.  
Chicago, Burlington & Quincy Railroad Company v. Bruch, 400 P.2d 494, 499 (Wyo. 1965).  In 
contrast, in PacifiCorp II the Board considered the issue after two days 
of hearings, the presentation of multiple expert witnesses, and voluminous 
exhibits.

 

[¶20]   The Board's order in PacifiCorp 
II and our opinion in PacifiCorp I raised a new issue that must be 
addressed.  It was implied that 
something was amiss with a comparison of an allocated Wyoming market value to an 
actual book value, suggesting these were apples and oranges and the proper 
approach would be to also allocate the net book value to Wyoming in the same 
manner as the market value and then compare the two, which would, of course, 
result in the same ratio as the system ratio.  No expert in any of these proceedings, 
including the public consideration of the State Study, suggested such an 
approach was appropriate.  If this 
suggestion had technical merit, surely the Department would have relied upon it 
for support.  The allocation of the 
system market value is necessary to determine the market value of the Wyoming 
property which is unknown and cannot be separately calculated because it 
operates as part of an integrated system.  
However, it is unnecessary and somewhat deceiving to allocate the net 
book value using the same formula because that value is known as found in 
PacifiCorp's financial statements. 

 

[¶21]   This case proves the old adage, "I 
understood what you said until you explained it to me."  The Department's and PacifiCorp's 
arguments often misdirected this inquiry from the basic question:  Should a taxpayer's taxable property be 
valued in the same manner as its tax exempt property?  We are convinced the answer commanded by 
the statute and the constitution is in the affirmative.

 

[¶22]   Accordingly, we modify 
PacifiCorp I to the extent that opinion approved the Department's 
valuation methodology for PacifiCorp's exempt property.  As mentioned, this conclusion was 
reached after careful reconsideration of the issues and with the aid of useful 
expert testimony which permitted PacifiCorp to carry its requisite burden of 
proof.   However, the result 
reached in PacifiCorp I must stand due to PacifiCorp's failure to carry 
its burden of producing evidence in that particular case to overcome the 
presumption of correctness that attached to the valuation methodology used by 
the Department.  PacifiCorp, 
Inc., 13 P.3d  at 261. The Board's decision in the instant case is reversed, 
and the matter is remanded for further proceedings consistent with this 
opinion.

 

FOOTNOTES

  1The net book 
value of PacifiCorp's exempt property is 22.85 percent of the total net book 
value of its Wyoming property, and 22.85 percent of the total market value of 
its Wyoming property is $358,684,824, which is, as noted in the State Study, 
"mathematically equivalent to using the state . . . ratio."  State Study at 75 
n.78.