### NO. 95-130 INTHESUPREME

COURTOFTHESTATEOFMONTANA 1995

FARMERSUNIONCENTRAL EXCHANGE,INCORPORATED, d/b/a CENEX, Petitioner andAppellant,

v. THEDEPARTMENT

OFREVENUE OFTHESTATEOFMONTANA, ~~~-~~~~~~~~ CbG4K OF sljWli&ME &uwa andTHESTATETAXAPPEAL BOARDOFTHESTATEOFMONTANA, Respondents andRespondents.

APPEALFROM: District Court of the Thirteenth Judicial District,

In andfor the County of Yellowstone, TheHonorable William J. Speare, Judgepresiding.

COUNSELOFRECORD:

ForAppellant: David A.Veeder; Veeder LawFirm, Billings, Montana For Respondents: Lawrence G. Allen, Special Assistant Attorney General, Montana Department of Revenue, Helena, Montana

Filed: Submitted onBriefs: June 20, 1995 Decided: August 17, 1995

ClerKJustice Karla M. Gray delivered the Opinion of the Court.

The Thirteenth Judicial District Court, Yellowstone county, affirmed adecision of the State TaxAppeal Board (STAB) concerning the proper tax classification of certain property owned by Farmers Union Central Exchange, Inc., d/b/a Cenex. Cenex appeals. We affirm.The issues before us are whether the District Court applied the correct standard of review and whether it erred in affirming STAB's conclusion that the disputed property was class eight property rather than class four property. This action involves the classification, for state tax purposes, of equipment and machinery added to the Cenex oil refinery complex near Laurel, Montana, in 1991. The refinery complex is comprised of araw material storage facility, arefinery processing facility, and aproduct blending and storage facility. An industrial appraiser for the Department of Revenue (DOR) classified and appraised the new property for the year 1992. He determined that the property here in dispute was class eight property pursuant to §15-6-138(l) (c) and (o), MCA. Section 15-6-138(l) (c), MCA,provides that "all manufacturing machinery, fixtures

. . [and1 equipment" is class eight property. The items of property so classified included aboiler house fuel gas manifold, cooling tower header improvements, acoal filter bed upgrade, three parts of a hydrocarbon loss recovery system, aplant air drier, anopticrom ADVgasoline chromatograph,

aGrabner CCA-V, an alky unit KOHscrubber, two oxygen analyzers, 2asphalt product handling improvements, a crude truck unloading

system for tank storage, aheavy product flash point tester, and two spare fuel oil pumps. Section 15-6-138(l) co), MCA,provides that "all other property not included in any other class in this part" shall be taxed as class eight property. The DORappraiser placed eight hydrogen sulfide and carbon dioxide monitors, abreathing air compressor, a manlift, and tank level gauges in this category. Cenex appealed the DORIS assessment, arguing that some items of property hadbeen improperly classified asclass eight property. It contended that these items are components of astorage facility and, as aresult, are class four property under 515-6-134, MCA. The rate of taxation is significantly lower for class four property than for class eight property. The Yellowstone County Tax Appeal Board granted Cenex the class four classification it requested on most of the disputed property, with the exception of some computer software. The DOR then appealed to STAB, which reversed the decision of the Yellowstone County Tax Appeal Board and affirmed the DOR's appraisal and classification regarding the twenty-eight items at issue here. Cenex petitioned the District Court for judicial review. The District Court affirmed STAB's decision, thus upholding the DORIS appraisal and classification. Cenex now appeals to this Court. Issue 1 Did the District Court apply the correct standard of review?

3The standards for judicial review of administrative decisions,

such asthose of STAB, are set forth in §2-4-704, MCA. This court has interpreted §2-4-704, MCA, to meanthat an agency's findings of fact are subject to a "clearly erroneous" standard of review, while an agency's conclusions of law are reviewed to determine whether they are correct. Steer, Inc. v. Department of Revenue (1990), 245 Mont. 470, 474, 803 P.2d 601, 603. In the present case, STAB specifically concluded as amatter of law that "[t]he disputed properties have been properly classified in class eight." In reviewing that determination, the District Court reasoned: At the outset this Court finds that despite [Cenex's] contentions that there are no disputes with the Tax Appeal Board's Findings of Fact, this Court disagrees. The whole matter of fixing aclassification of property is factual as well as legal. In short it is a mixed matter of fact and law. This becomes important when the Court makes its determination as to the standard of review. The District Court applied the three-part "clearly erroneous" standard of review for findings of fact set forth in State Comp. Mut. v. Lee Rest Logging (1992), 252 Mont. 97, 102, 827 P.2d 85, 88. This Court has stated: In reviewing conclusions of law, questions of law, or legal components of ultimate facts, or mixed questions of law and fact, wewill decide if the

. . .determination as to law is correct. Maguire v. State (1992), 254 Mont. 178, 182, 835 P.2d 755, 757-58. Maquire clarifies that only "pure" findings of fact are reviewed under the clearly erroneous test. The issue of the proper

4

### classification ofproperty is reviewed under the "correct interpretation" standard. See United Grain v. Department of Revenue (1991), 248Mont. 297, 301-03, 811P.2d 555, 558-59. TheDistrict Court should havereviewed STAB'sconclusion that the DORhadproperly classified theproperty in class eight for its correctness asamatter of law. Weconclude, therefore, that the District Court applied the wrong standard of review. Wehave stated, however, that where adistrict court reaches the correct result, the decision will beaffirmed regardless of the court's reasoning. See Lindey's, Inc. v. Goodover (19941, 264 Mont. 449, 453, 872 P.2d 764, 766andTisher v. Norwest Capital Mgt. &Trust (1993), 260Mont. 143, 153-54, 859P.2d 984, 990. We proceed, therefore, to ananalysis of whether STAB's decision was correct asamatter of law. Issue 2 Didthe District Court err inaffirming STAB'sconclusion that the disputed property wasclass eight property rather than class four property? Theparties agree that the property at issue in this case is properly classified aseither class four or class eight property. Theproperty within these classes is set forth in §§15-6-134 and 15-6-138, MCA,respectively. Class four property includes, inpertinent part, "all improvements, including trailers or mobile homesused as a residence, except those specifically included in another class." Section 15-

56-134(l) (b), MCA. ARM 42.22.1303 further elaborates that "all

storage facilities shall be treated as improvements to land." Class eight property includes, in pertinent part, "all manufacturing machinery, fixtures, equipment

. [and] all other property not included in any other class in this part." Section 15-6-138(l) (c) and (o), MCA. STAR determined that the Cenex property did not constitute class four "improvements." It reasoned that the property was part of an overall manufacturing process andwas not part of astorage facility which might then warrant consideration as improvements to land. Therefore, STARclassified each of the twenty-eight items as class eight property, under 515-6-138(c) and (01, ,MCA. Cenex argues that the disputed property is not directly used in the manufacturing process and, as a result, that it is class four property rather than class eight property. It cites the testimony of its expert witness, Martin Perga, achemical engineer employed by Cenex for manyyears. Hetestified to the specific use of each item of disputed property. Cenex contends that examining the use of each of the twenty-eight disputed items of property establishes that the property either is not used in the manufacturing process or is part of astorage facility. At the STABhearing, Cenex bore the burden of proving that the DORIS classification was incorrect. SeeWestern Airlines, Inc. v. Michunovich (1967), 149Mont. 347, 353, 428 P.2d 3, 7, cert. denied 389 U.S. 952 (1967). Perga, Cenex's sole witness as to the actual classification of the property, admitted hedid not have experience

6

### in property tax classification andhadnot reviewed the relevant

Montana property tax classification statutes. Onthe other hand, during his testimony, the DORIS appraiser substantiated the statutory andadministrative rule bases for his classification of each item of contested property. Thus, weconclude that to the extent its argument is basedupon Perga's testimony, Cenexfailed to overcome the presumption that the DOR'sclassifications are correct. Cenexalso relies heavily uponthis Court's language in United Grain, where westated that 'I§ 15-6-134, MCA,together with ARM 42.22.1303, requires that if the machinery is used in a storage facility it is properly classified asclass four." United Grain, 811P.2dat 557. Cenexargues that seventeen items were incorrectly classified under §15-6-138(l) cc), MCA,aspart of amanufacturing, rather than astorage, facility. Cenex’s reliance on United Grain ignores the important distinction wedrew inthat casebetween storage andmanufacturing facilities. Thedistinction is based onwhether the endproduct

was "significantly changed" from the material entering the facility: A review of case law indicates that whether a process constitutes "manufacturing" turns upon whether the endproduct of thedisputed process is "significantly changed" from the original substance. Thestatutes do not define "manufacturing" but the administrative regulations define "manufacturing property" asthat "used to transform raw or finished materials into something possessing anewnature or nameand adopted to anew use.(8

7United Grain, 811 P.2d at 558 (citations omitted). Thus, our

resolution of this case depends in large part onwhether STABerred in concluding, based onthe evidence before it, that the disputed property which the DORclassified under §15-6-138(l) (c), MCA,was part of amanufacturing facility aswedefined it in United Grain. Perga testified that the refinery at Laurel receives crude oil by pipeline or truck and stores it in tanks. The processing unit draws on the crude oil contained in the storage tanks to make a number of intermediate products. Several product streams are then blended to achieve a final product. According to Perga, the blending of five product streams to produce afinished product with

agrven octane ratio was not a"transformation." While Perga's opinion that notransformation occurred may be correct within the purview of chemical engineering, it is not correct within the purview of the law. Indeed, Perga's testimony supports STAB's conclusion that the process which involved the disputed property is amanufacturing process rather than astorage process under United Grain. Cenex receives crude oil, processes it into intermediate products which differ from the crude oil received and then blends those products into afinished product. Cenex does not market any of the intermediate products separately; the blending is a necessary process for achieving afinished product marketable by Cenex. Thus, "the end product

. is 'significantly changed' from the original substance" received by Cenex. See United Grain, 811 P.2d at 558. The property the DORclassified as class eight

8under 515-6-138(l) (cl, MCA, is used in connection with the process

of transforming materials into something possessing anew nature and, therefore, it constitutes manufacturing property. SeeUnited Grain, 811 P.2d at 558. STABcogently summarized the dissimilarity between the facility in this case andthe facility wedetermined to be astorage facility in United Grain as follows:

The most conclusive disparity in attempting to use United Grain asaprobative foundation for Cenex, lies in the contrasts between the two firms in the performance of the acts of storage. United Grain is astorage business; it can provide a storage service for customers or for itself; it mayaccept products from alarge clientele; it does no manufacturing; it sells its product to a large class of potential buyers and users. Bycontrast, from the record, Cenex does not have or solicit storage customers; nobusinesses bring materials or products to be stored; Cenex does not sell intermediate products for itself or others for purposes not related to its refinery function and activities, including the processing and sale of waste products. Cenex is anintegrated manufacturer; its products are designed to beproduced by it and to be sold through its ownnetwork of outlets.

. . We repeat, Cenex performs storage functions but it is not astorage facility. Finally, Cenex incorrectly asserts that class eight property includes only property used directly in amanufacturing process. While it is true that §15-6-138(l) cc), MCA, specifically includes manufacturing machinery, fixtures, equipment, and tools, § 15-6- 138(l) (o), MCA, includes as class eight property "all other property not included in any other class in this part." The words "in this part" clearly relate to all of Title 15, Chapter 6, part 1, MCA,which is captioned "Classification" and includes class one property through class twelve property. Thus class eight property,

9

### including the eleven items here classified under subsection (1)

Co), is not limited to property used directly in amanufacturing process. Weconclude that STAE? did not err in classifying the disputed items of Cenexproperty asclass eight property. Therefore, we hold that the District Court did not err in affirming STAB's decision. Affirmed.

10