Title: Mohave County v. Duval Corp.
Citation: 119 Ariz. 105, 579 P.2d 1075
Docket Number: 13068
State: Arizona
Issuer: Arizona Supreme Court
Date: April 10, 1978

119 Ariz. 105 (1978) 579 P.2d 1075 MOHAVE COUNTY, a body politic; Mohave County Treasurer; and Arizona Department of Revenue, Appellants, v. DUVAL CORPORATION, a corporation, Appellee. No. 13068. Supreme Court of Arizona, In Banc. April 10, 1978. Rehearing Denied May 9, 1978. Bruce E. Babbitt, former Atty. Gen., by James D. Winter, Donald P. Roelke, Mary Z. Chandler, Asst. Attys. Gen., Phoenix, for appellants. Bilby, Shoenhair, Warnock &amp; Dolph by Michael Lacagnina, David A. Paige, Tucson, for appellee. STRUCKMEYER, Vice Chief Justice. This appeal focuses on the ad valorem assessment practices of the Arizona Department of Revenue in the mining industry. Pursuant to A.R.S. §§ 42-146, 42-151 and 42-152, appellee, Duval Corporation, sought a refund of ad valorem property taxes assessed against its Mineral Park Mine near Kingman in Mohave County, Arizona for the year 1975. On appeal to the State Board of Tax Appeals, the value was fixed as $35,000,000. On further appeal to the Superior Court, that value was found to be *106 excessive. The court made an independent determination that the full cash value was $14,300,000. We hold the valuation as fixed by the Board of Tax Appeals was not excessive. The judgment of the Superior Court is reversed and the valuation of appellee's Mineral Park Mine as fixed by the Board of Tax Appeals is affirmed. At the outset, certain principles should be emphasized. We have held: and In Navajo County v. Four Corners Pipe Line Company, 106 Ariz. 511, 522, 479 P.2d 174, 185 (1970), we quoted with approval this language: By statute A.R.S. § 42-201, 4, for property tax purposes "market value" and "full cash value" are synonymous and mean: The trial court, in rejecting the State's valuation, found: The dispositive question, then, is whether the State's appraisal was inappropriate as not having been derived through the use of standard appraisal methods and techniques. There are three accepted approaches to estimating value: (1) the reproduction cost of the property, (2) income projected into the future (capitalization of income), and (3) market data appraisal which is the comparison of sales of similar property. Navajo County v. Four Corners Pipe Line Company, 106 Ariz. 511, 479 P.2d 174 (1970). The State's method of appraisal is a form of capitalization of income. Appraisal by capitalization of income is "an approved appraisal method." Graham County v. Graham County Electric Co-op., Inc., 109 Ariz. 468, 471, 512 P.2d 11, 14 (1973). James Bonbright, in his treatise on the Valuation of Property, Volume 1 at page 230, makes this observation: In fixing the value of the Mineral Park Mine, the State did not estimate the mine's net income for 1975 by estimating its probable gross revenues and deducting the estimated probable cost of production. Rather, the State averaged the net income received from the last five years of the mine's operation and after comparing past years of operation with the mine's probable operations in 1975 concluded that a projection of the average rate of income over the remaining life of the mine would fairly represent its net earnings for 1975. For the year 1974, the Mineral Park net earnings were $6,666,243; for 1973, $7,334,851; for 1972, $5,707,403; for 1971, $6,475,039; for 1970, $9,485,660; a five-year average of $7,133,839. The *107 life of the Mineral Park Mine at the then current rates of production was estimated as approximately ten years, with leaching operations extending its life five years more at reduced earnings. We note that under the Superior Court's determination of value of $14,300,000, unless economic conditions radically changed from the preceding years, Duval's shareholders would recover the entire value of the mine in the two-year period 1975 and 1976. Roland Parks, in his work, "Examination and Valuation of Mineral Property," discusses extensively the Michigan mining appraisal system. In Michigan, a five-year average of income has been used to estimate the value of copper mines since 1924. Examination of past earnings is an appropriate means of determining future earning ability. As the Supreme Court of California said: We think it is plain that the examination of net income of past years, modified where necessary by consideration of probable changes in economic conditions, is a recognized, standard appraisal technique by which full cash value may be fairly determined. Duval's position is that "the State mechanically used the average of the previous five years' profits at Mineral Park", meaning that the State did not consider the differences in the mine's future operations to determine its earning ability. But we do not think so. The testimony in the Superior Court established that Duval's 1974 shareholders' report contained this statement: The State did not, however, rely solely on Duval's statement that no adverse changes in mining costs were anticipated. The State's appraiser, Donald E. Ross, examined the Mineral Park Mine in February of 1975. He investigated virtually every phase of the operation of the mine as to what was to be expected in the future. He testified concerning a discussion with the mine superintendent and geologist: and: Ross further testified: *110 Duval does not argue that erroneous assumptions were made by the State in testing the future cash flow against the past. Nor was the projection forward of past earnings into the future, examined in the light of the State's approach, criticized by any of Duval's witnesses. Duval simply argues that the Department of Revenue's use of the historical data technique is "in violation of Arizona law" and "contrary to Arizona law," relying on this statement from State Tax Commission v. Magma Copper Co., 41 Ariz. 97, 99, 15 P.2d 961, 962 (1932): If we assume that this Court in 1932 intended to say that this was the exclusive way to assess producing copper mines, the legislative definition enacted in 1968 that "full cash value for property tax purposes * * * means that estimate of value that is derived annually by the use of standard appraisal methods and techniques," A.R.S. § 42-201, supra, is the controlling law and Magma Copper is not precedent against the use of historical data to forecast future income. Anything which may be considered as inconsistent with the views expressed in this opinion arising out of the language used in State Tax Commission v. Phelps Dodge Corp., 62 Ariz. 320, 157 P.2d 693 (1945), if such exists, is expressly overruled. We said in Navajo County v. Four Corners Pipe Line Company, 106 Ariz. 511, 479 P.2d 174 (1970), that a trial court in reviewing the action of the Board of Tax Appeals may superimpose its opinion only in the event that the State agency abused its legislatively-delegated duty. And we pointed out that a taxpayer is not entitled to relief because the value of his property would be fixed substantially lower if computed by a different method, even if the court thought such method to be preferable. Duval Corporation did not establish that the State abused its legislatively-delegated duty, nor did it point out by competent evidence wherein the assessment was legally excessive. Since the court may not fix the value of property at a substantially lower amount even though the court thinks the taxpayer's method is preferable to the one adopted by the taxing authority and courts will not give relief against an assessment on account of mere differences of opinion, the judgment of the Superior Court is reversed and the valuation as fixed by the Board of Tax Appeals is affirmed. Judgment reversed. HAYS and HOLOHAN, JJ., and HENRY S. STEVENS, Court of Appeals Judge, Retired, concur. CAMERON, Chief Justice, dissenting. I dissent. Note: GORDON, J., did not participate in the determination of this matter. HENRY S. STEVENS, Court of Appeals Judge, Retired, was called to sit in his stead. [1] In State Tax Commission v. Eagle Picher Mining &amp; Smelt Co., 73 Ariz. 372, 241 P.2d 804 (1952), this Court affirmed a valuation in which the Hoskold formula was used to derive the value of the mining company's property. For an analysis of capitalization of future net profits, see Note, Property Taxation of the Mining Industry in Arizona, 12 Ariz.L.Rev. 763, 780 (1970). [2] John Buehler, an economist and head of the Economics Department at the University of Arizona, testified: "Q. Historical data is employed in forecasting, isn't it? A. Oh, all the time. Q. And why is it used in forecasting? A. Because in most cases there is no other alternative, so, essentially what is being done is to take the historical data, determine if it is representative of what is going on in the present and try to determine if it may well be representative over of what may be expected to occur in the future. Then one would test that historical data against some other basic theoretical principle. For example, if one were going to predict a price of an industrial commodity, one would want to know the uses of that industrial commodity over a time and would want to forecast the consumption or demand for those products that are going to use that industrial commodity. I know of no other way of really going at it. In the case of what the Department of Revenue did, was to take a five year average in the past. There is some justification for that on economic grounds because it is consistent with the theory of efficient market. If you take an industrial commodity that is produced over a period of time, that industrial commodity will have to generate sufficient profit over a period of time such that it generates a normal rate of return to the investment capital to maintain a normal flow of investment capital into the industry and maintain the industry as a viable force in the economy. If for some reason or the other price should rise very dramatically with respect to costs for that particular commodity, then you would have abnormal profit for a period of time, and an abnormal rate of return, and that could not be sustained over a long period of time because investment capital would readily flow into that industry to take advantage of the abnormally high profits, ultimately driving the price down such that the profits ultimately that would be generated would be back in line with the profit or the rate of return of other alternative industries. Similarly, if for some reason or the other price was depressed for a very short period of time, profits would fall and the rate of return would fall dramatically, and capital would be withheld from moving into that industry. After all, investment capital has many, many alternatives, and if the rate of return were very low and the capital would not flow into that industry, production would be constrained somewhat and as demand continues to rise over a time, the price would rise very dramatically with it probably much faster than the historical trend, until the rate of return that has been normal over a long period of time has returned to that industry. If you are going to try to predict for a specific year what the price is going to be and what the profit is going to be and the rate of return is going to be, that is a foolish job because in any one year there is no reason that the economics of the situation has to be enslaved to a twelve month calendar. In any one year, anything can happen, and it takes time for the adjustment in profits to occur. If you are going to look over a long period of time, say a decade, then one can reasonably assume that the rate of return, say, the copper industry or any other industry, is going to be roughly commensurate with the rate of return of all other industries. That is the American production process. That is if the product, in this case copper, is going to continue to be used in the American industrial process. I think it will be. Q. Are you familiar with the literature in regard to forecasting? A. Yes, I am. Q. And what literature supports the use of historical data in forecasting? A. Every economic journal that I am familiar with. The whole field of econometrics, which is the sophisticated technique of forecasting is built on economic models based upon utilization of historical data."