Case Title: In Re Tax Appeal of Horizon Tele-Communications, Inc.

Citation: 241 Kan. 193, 734 P.2d 1168

Docket Number: 59,837

State: kansas

Court: Kansas Supreme Court

Date: 1987-03-27T00:00:00Z

Document:
241 Kan. 193 (1987)
734 P.2d 1168
In the Matter of the Appeal of HORIZON TELE-COMMUNICATIONS, INC., Taxpayer, From an Order of the BOARD OF TAX APPEALS Relating to Assessment of Property for Ad Valorem Tax Purposes, and Consolidated Cases.
No. 59,837

Supreme Court of Kansas.
Opinion filed March 27, 1987.
David P. Troup, of Weary, Davis, Henry, Struebing & Troup, of Junction City, argued the cause and was on the briefs for appellants.
Carol B. Bonebrake, of Kansas Department of Revenue, of Topeka, argued the cause and was on the brief for appellee.
The opinion of the court was delivered by
HOLMES, J.:
This is an appeal by twenty cable television companies from an order of the Shawnee County District Court, which affirmed an order of the Kansas Board of Tax Appeals *194 (BOTA) concerning the valuation of personal property for ad valorem tax purposes for the tax year 1983.
In 1983 the Division of Property Valuation (PVD), a division of the Department of Revenue, devised and implemented a valuation guideline to be used by county appraisers to value for tax purposes personal property held by cable television systems. Prior to 1983, there were no published directives from the PVD concerning proper assessment methods of cable television personal property in Kansas. Cable television property was typically assessed for valuation purposes using straight-line depreciation from original cost, at the rate of 10% per year down to a base of 30% of the original cost as long as the property remained in service. A trended cost method was adopted under the new 1983 guidelines in order to better determine the fair market value of the property as required by K.S.A. 75-5105a(b). The trended cost involves applying an inflation factor to the original cost of the property to establish a replacement cost, and then applying an allowance for depreciation to the trended cost to arrive at fair market value. A "Trending Factor Table" was developed which incorporated two main components; the price trend index and the economic life of the equipment. The first component, the price trend index, was based upon the Consumer Price Index (CPI). Tables were then created based upon an assumption of straight-line depreciation down to a salvage value of 10%. In addition, a 15% reduction from the CPI was made to reflect the difference between retail cost to the owner and the price the owner could obtain upon resale (CPI minus 15%). The second component, the economic life of the equipment, was established for three broad categories of property and was derived from 5 categories used by the Internal Revenue Service. Each category of equipment was assigned a useful life in order to determine an appropriate annual depreciation rate and to select the proper column on the trending factor table. Headend equipment (includes assets such as towers, antennas, preamplifiers, converters, modulation equipment, microwave equipment, and program non-duplicating systems) was assigned a 20-year economic life; subscriber connection and distribution systems (includes assets such as trunk and feeder cables, connecting hardware, amplifiers, power equipment, passive devices, directional taps, pedestals, *195 pressure taps, drop cables, matching transformers, multiple set connector equipment, and converters) was assigned a 15-year economic life; and program origination (includes assets such as cameras, film chains, video tape recorders, lighting, remote location equipment excluding vehicles, and testing equipment tools) was assigned a 7-year economic life.
Following issuance of the valuation guidelines, numerous appeals were filed by various cable television companies throughout the state. The BOTA consolidated the appeals and the matter was tried before it with two taxpayers, The World Company d/b/a Sunflower Cablevision, and Kays, Inc., d/b/a Ellis Cable TV and d/b/a Hays Cable TV presenting the major portion of the taxpayers' evidence. The Kansas CATV Association was permitted to intervene, and the Director of Property Valuation was directed to intervene as a contingently necessary party.
Two issues were asserted before the BOTA; first, the taxpayers alleged the use of the CPI as an index for the trending factor was not appropriate and resulted in overestimating the replacement cost of new cable television equipment; and second, the taxpayers alleged the economic lives assigned to the various categories of property were excessive and dissimilar to the economic life assigned comparable equipment used in other industries.
In its order, the BOTA adopted the PVD's use of the CPI minus 15% as an appropriate index to generate the Trending Factor Table. The BOTA adopted the three property categories established in the new guidelines but modified the economic life assigned to two of those three categories. The economic life of headend equipment was reduced from 20 years to 15 years, and the economic life of subscriber connection and distribution systems was modified from 15 years to 12 years.
After the BOTA denied the taxpayers' motion for rehearing, approximately twenty taxpayers appealed the order of the BOTA to Shawnee County District Court, where it was affirmed. The taxpayers have appealed from the district court ruling. This case was transferred to the Supreme Court pursuant to K.S.A. 20-3018(c).
Appellants' first argument on appeal is that the district court erred in holding that the BOTA made adequate and sufficient *196 findings of fact as required by K.S.A. 74-2426(a). The statute provides in part:
It is true that the original order of the BOTA and its subsequent order on rehearing could have been more specific in setting forth the factual basis for its determinations and ultimate conclusions. The orders are quite general in stating the evidence and facts upon which the BOTA relied but scattered throughout are some specific references to the evidence and facts developed in the hearing. It is a general rule of administrative law that an agency must make findings that support its decision, and those findings must be supported by substantial evidence. Class I Rail Carriers v. State Corporation Commission, 191 Kan. 201, 208, 380 P.2d 396 (1963). The necessity for findings is to "facilitate judicial review, avoid judicial usurpation of administrative functions, assure more careful administrative consideration to protect against careless and arbitrary action, assist the parties in planning their cases for rehearing and judicial review, and keep such agencies within their jurisdiction as prescribed by the Legislature." Kansas Public Service Co. v. State Corporation Commission, 199 Kan. 736, 744, 433 P.2d 572 (1967).
In Northern Natural Gas Co. v. Dwyer, 208 Kan. 337, 492 P.2d 147 (1971), cert. denied 406 U.S. 967 (1972), this court addressed the issue of whether an order by the BOTA satisfied K.S.A. 1970 Supp. 74-2426. In analyzing the written findings, this court determined they were mere conclusions which failed to give the basis of the Board's determinations and final order. However, a review of the record indicated there was "nothing mysterious ... concerning the factual basis for the Board's order." 208 Kan. at 347. Even though the order did not comply with the statutory requirements, the Court, over a vigorous dissent by former Chief Justice Fatzer, did not find the failure fatal to appellate review. After combing the record, the Court determined that the record reflected sufficient evidence to support the order of the BOTA. Here, we are faced with a similar *197 situation, although the present orders are more informative than the order under review in Northern Natural Gas Co. v. Dwyer. In this case, the district court, in its memorandum decision, stated:
We agree with the district court. While a more detailed and specific order would have been preferable, the present orders, when considered along with the record, furnish a sufficient basis for meaningful appellate review.
Next, the taxpayers assert the district court erred in holding there was substantial competent evidence to support the Board's (1) implied finding that the pre-1983 valuation method did not achieve fair market value, (2) decision to use the PVD's CPI-based trending factors, (3) adoption of the PVD's three economic life categories, the economic life assigned to each category, and modification of the economic life assigned to two of those three categories, and (4) finding that steel towers should be assessed as personal property rather than as real estate.
The scope of judicial review from administrative proceedings has been stated in many cases and is also limited by statute. K.S.A. 74-2426(e), as it existed at the time of these proceedings, provided in part:
The general scope of review of administrative proceedings was set forth in the often-cited case of Kansas State Board of Healing Arts v. Foote, 200 Kan. 447, 436 P.2d 828 (1968), where we held:
While the statute which previously existed limited the scope of *198 review to a determination of whether the order is unreasonable, arbitrary, or capricious, it is clear that if an order is not supported by evidence or is not within the scope of the tribunal's authority the order would at least be arbitrary, if not fraudulent or capricious.
The first evidentiary issue raised by appellants is that there is not substantial competent evidence to support the implied finding of the BOTA that the pre-1983 valuation method failed to achieve fair market value for cable television property. It appears to be the position of the appellants that once a method of valuation is adopted, it can never be changed without a finding the method is faulty. Appellants cite no law to that effect and our research has disclosed none. Even though an acceptable method of valuation may be in existence, we know of no law that would prohibit a change to an equally appropriate or better method of valuation. In setting forth the position of the PVD, the BOTA stated in its original order:
Article 11, § 1 of the Kansas Constitution provides "[t]he legislature shall provide for a uniform and equal rate of assessment and taxation." K.S.A. 79-501 provides for tangible personal property to be appraised "at its fair market value in money at the place where the same may be held ... and assessed as required in K.S.A. 79-1439." Pursuant to K.S.A. 79-1439, tangible personal property subject to property tax is to be appraised at its fair market value and assessed at 30% of that value. K.S.A. 79-503a defines "fair market value" as "the amount in terms of money that a well informed buyer is justified in paying and a well informed seller is justified in accepting for property in an open and competitive market, assuming that the parties are acting without undue compulsion." K.S.A. 79-503a also lists factors to be considered by the assessor or appraiser in arriving at fair market value.
*199 Here, the taxpayers are concerned about the adoption of new guidelines by the PVD when, they argue, the old guidelines were fine. K.S.A. 75-5105a sets forth the powers and duties of the Director of Property Valuation and provides, in part, that the Director shall:
At the hearing before the BOTA, Henry Kingman, an appraiser with the PVD, testified they had experienced a number of cases, under the old appraisal system for cable TV systems, where the depreciated historical cost did not approximate market value. John Cooper, Supervisor of the PVD, testified it was not a policy of the PVD to allow original cost and straight-line depreciation. He also testified cable television property was the only property in the State being assessed and appraised for ad valorem taxation on the basis of original cost less straight-line depreciation to a 30% bottom; however, subsequent testimony indicated there were other exceptions. Mr. Cooper testified straight-line depreciation is keyed to a physical life and would not reflect functional or economic obsolescence of the asset. One of the reasons given by Mr. Cooper for changing the guidelines was the cable television companies did not follow the guidelines and did not stop at 30% of the original cost but kept on reducing book values until the property was written off the tax rolls completely.
The taxpayers' argument is not persuasive. The real question before the BOTA was whether the new guidelines established a fair market value for tangible personal property of cable television companies, and not whether the old guidelines failed to do so. In any event, there was testimony before the BOTA that the old system did not arrive at fair market value for cable television system equipment. No error is shown on this point.
Next, the taxpayers assert the district court erred in finding there was substantial competent evidence supporting the *200 Board's decision to use the PVD's CPI-based trending factors for valuing cable television personal property.
The CPI is compiled and published monthly by the Bureau of Labor Statistics. It is the name typically applied to the statistic that measures changes in prices of a large number of goods purchased by a theoretical family of four consisting of two adults, a fifteen-year-old girl, and an eight-year-old boy. Seven major categories are included in the CPI: food and beverage, housing, apparel, transportation, medical care, entertainment, and other, with housing making up the largest component. Appellants contend that use of the CPI does not reflect a proper trend index to use for their property because the components of the CPI bear no reasonable relationship to cable television property. It must be conceded that the original order of BOTA and the order on rehearing, which sought to clarify the initial order, are confusing in several respects, particularly as they apply to the adoption of an appropriate trending index.
At this point we note that the ideal method of valuation would be for each individual item of personal property to be separately examined and valued according to its actual physical condition and the prevailing market price for a similar item in similar condition. It is obvious that such a system would be totally impractical and expensive to the point of being confiscatory and self-defeating. Some appropriate method of mass valuation must be utilized even though individual inequities will result. The adoption of trending indices and their application to broad categories of property is an appropriate method of valuation so long as the results reasonably approach fair market value and the constitutional requirement of a "uniform and equal rate of assessment and taxation."
In addition to the testimony concerning the use of the CPI, there was considerable testimony about two other indices. The Producer Price Index (PPI) measures changes in price a producer would be experiencing as opposed to a consumer under the CPI. The three major components of the PPI are finished goods, intermediate goods, and crude materials. Within the PPI is a sub-index called the Capitol Equipment Index for non-manufacturing industries. A third approach would be to adopt an industry specific index such as the Standard Industrial Classification *201 Code 3674 (SIC 3674), which details equipment such as semiconductors and related devices, many of which may be used by the cable television industry. The major portion of the testimony before the BOTA concerned the application of the CPI, the PPI, and the SIC 3674 to cable television property.
In considering the various indices, the BOTA stated:
In the order denying the taxpayer's motion for rehearing, the BOTA stated:
While use of the CPI may be far from a perfect method of achieving fair market value, we cannot say on this record that its acceptance by the BOTA is fraudulent, arbitrary, or capricious. It does not matter whether this Court would have reached the same decision if it had the task of determining an appropriate methodology in the first instance. For this court to find a lack of substantial evidence to support the BOTA action in adopting the CPI minus 15% index, the decision must be "so wide of the mark as to be outside the realm of fair debate." Central Kansas Power Co. v. State Corporation Commission, 221 Kan. 505, 512, 561 P.2d 779 (1977).
The district court in the instant case stated:
We agree with the district court that the adoption of the CPI minus 15% as an index for the valuation of cable television personal property for the year 1983 is supported by substantial evidence.
Next, appellants assert that there was not sufficient evidence to support the adoption by BOTA of the three broad general categories of cable television property, i.e., headend equipment, subscriber connection and distribution systems, and program origination equipment, or to support the useful life the BOTA assigned to each category of property.
Henry Kingman testified he used an Internal Revenue Service guideline as a tool to group pieces of equipment together in order to aid the local appraisers. The IRS guideline used, 72-10, is for the write-off of equipment by use of accelerated depreciation *204 under the provisions of the Internal Revenue Code. The IRS guideline divides the personal property into five general categories: headend, subscriber connection and distribution systems, program origination, service and test, and microwave systems. Mr. Kingman testified he consolidated the five categories into three. The microwave system was included with the headend equipment and the service and test equipment was included with the program origination equipment. The taxpayers did present testimony challenging the economic life assigned to each of the three categories. However, no evidence was presented challenging the equipment grouped together under each category. Accordingly, the district court did not err in finding there was substantial evidence to support the adoption by the PVD of the three categories of equipment.
Next, the taxpayers challenge the economic life applied to each of the three categories of property by the PVD and the subsequent reduction of two of them by the BOTA. The PVD adopted a useful life for headend equipment of 20 years, 15 years for subscriber connection and distribution systems, and 7 years for program origination. The BOTA reduced the economic life of headend equipment to 15 years, and that of subscriber connection and distribution systems to 12 years. It adopted the 7-year economic life recommended by the PVD for program origination equipment. The appellants contend the economic life adopted for each category is excessive and not supported by the evidence. Witnesses for the appellants testified that the useful life of certain components of each category was substantially less than that established by the PVD and less than that finally approved by the BOTA. However, on cross-examination it was conceded that some of the components had a useful life as long as or longer than those assigned by the PVD and the BOTA. Without going into detail, it appears to us that the ultimate economic or useful life established by the BOTA for each category of property is supported by the evidence and within the range of the testimony. Therefore, no error is shown.
Finally, the taxpayers argue the district court erred in finding there was substantial evidence to support the Board's finding that steel towers owned by cable television companies should be assessed as personal property rather than as real estate.
*205 The initial order of the BOTA makes no reference to this issue. However, in the order denying the taxpayers' motion for rehearing the Board stated the following:
A review of the record indicates it wasn't until closing arguments that the taxpayers first raised the issue of the treatment of towers as real estate or personal property. No evidence was presented before the BOTA that radio towers in Douglas County were taxed as real estate while cable television towers were taxed as personal property and therefore this court cannot consider the issue on appeal. The issue of whether towers should be assessed as personal or real property was never directly presented to or determined by the BOTA.
The judgment of the district court is affirmed.