Opinion ID: 1291283
Heading Depth: 2
Heading Rank: 2

Heading: assessment of wiltel's system value

Text: ¶ 27 In the instant case, we have access to the price that actually was agreed upon by a willing owner and a willing purchaser. See Kennecott Copper Corp. v. Salt Lake County, 122 Utah 431, 434-35, 250 P.2d 938, 940 (1952). All of the parties accept the Commission's factual finding that in January of 1995 LDDS and other companies acquired WilTel for a stipulated sale price of $2,500,000,000. Fair market value is firmly established. ¶ 28 Neither is there any disagreement about the role of fair market value in property tax assessment. None of the parties take issue with the portion of Utah Code Ann. § 59-2-201(1), which provides: property... shall be assessed ... at 100% of fair market value. Furthermore, all of the parties recognize Utah Code Ann. § 59-2-103, which states in pertinent part that property shall be assessed and taxed at a uniform and equal rate. The controversy in the case before us centers rather on the value of tax-exempt intangibles that must be deducted from the fair market value. The Utah Constitution authorizes taxation only of [a]ll tangible property in the state, not exempt under the laws of the United States, or under this Constitution. Utah Const. art. XIII, § 2(1). Intangible property is additionally exempt from taxation under the Utah Constitution article XIII, section 2(10) of the Utah Constitution and Utah Code Ann. § 59-2-1101. However, the parties dispute whether (1) intangible property for tax-exemption purposes includes nonproperty intangible assets and value; (2) the privilege tax applies to intangibles; and (3) value-enhancing physical attributes of tangible property constitute tax-exempt intangibles.
¶ 29 The Commission determined in its ruling on the motions for partial summary judgment and subsequent decisions that intangible property, intangible assets, and intangible value are all exempt from taxation under Utah law. WilTel agrees, but the Counties maintain that intangible property should be limited to property that is capable of being separately owned, used, transferred, or merely held, and that nonproperty intangibles are simply elements of value associated with another asset. However, that argument is refuted by Utah Code Ann. § 59-2-102(19) (Supp.1995): Property means property which is subject to assessment and taxation according to its value, but does not include moneys, credits, bonds, stocks, representative property, franchises, goodwill, copyrights, patents or other intangibles. (Emphasis added.) The Commission correctly ruled that the terms intangible property, intangible asset, and intangibles are synonymous, and all intangibles are tax-exempt. We affirm that ruling.
¶ 30 We next turn to the Counties' contention that the Commission erred in determining that intangible property is exempt from the privilege tax levied in Utah Code Ann. § 59-4-101. This is a question of law. As such, we review it for correctness and accord the Commission's decision no particular deference. See Utah Code Ann. § 59-1-610(1)(b); Salt Lake City Southern R.R., 987 P.2d at 596. ¶ 31 Utah Code Ann. § 59-4-101(1)(a) provides, with exceptions not relevant here, that a tax is imposed on the possession or other beneficial use enjoyed by any person of any real or personal property which for any reason is exempt from taxation, if that property is used in connection with a business conducted for profit. The Counties argue that the plain language of the statute applies to the exemption for intangible property under Utah Code Ann. § 59-2-1101(2)(g) because WilTel's intangible property is used in connection with a business for profit. The Counties also contend that all exemptions to the privilege tax are listed in section 59-4-101 and because intangible property is absent from the list, WilTel's intangibles are subject to taxation. ¶ 32 We disagree. Because we decide this issue on the ground that the Counties' proposed application of section 59-4-101's privilege tax would be unconstitutional, we need not reach the arguments concerning the plain language of the statute. ¶ 33 Article XIII, section 2(10) of the Utah Constitution provides in relevant part: Intangible property may be exempted from taxation as property or it may be taxed in such manner and to such extent as the Legislature may provide, but if taxed as property the income therefrom shall not also be taxed. In accordance with these provisions, the legislature has exempted intangible property from taxation as property under Utah Code Ann. § 59-2-1101(2)(g) and has instead chosen to tax its income. Utah Code Ann. § 59-7-101(31)(b) provides that `Utah taxable income' includes income from tangible or intangible property located or having situs in this state, regardless of whether carried on in intrastate, interstate, or foreign commerce. ¶ 34 We observed in Thiokol Chemical Corp. v. Peterson, 15 Utah 2d 355, 358, 393 P.2d 391, 393 (1964), that the privilege tax was enacted to close any gaps in the tax laws by imposing a tax on any property possessed or used in connection with a business for profit which was otherwise exempt from taxation. However, intangible property is taxed on income and, therefore, while exempt from property tax, has not escaped taxation. There is no gap to close. Thus the application of the privilege tax to intangible property would constitute double taxation and defeat the intangible exemption. Because the State has chosen to tax the income from intangible property, it is prohibited from taxing the intangible property itself. The extension of the privilege tax to intangible property would violate this prohibition and would therefore be unconstitutional.
¶ 35 Article XIII, section 3(1) of the Utah Constitution states in relevant part that [t]he Legislature shall provide by law a uniform and equal rate of assessment on all tangible property in the state, according to its value in money. Utah Code Ann. § 59-2-201(1) embodies that requirement: assessment of all nonexempt property shall be at 100% of fair market value. We have discussed the tax-exempt status of intangibles above. However, even excluding intangibles, the network structure of WilTel's physical transmission facilities makes them worth far more on the open market than mere wires, trenches, and transformer stations could command. Unitary property cannot be regarded as merely land, buildings, and other assets. Rather, its value depends on the interrelation and operation of the entire utility as a unit. Many of the separate assets would be practically valueless without the rest of the system. Ten miles of telephone wire or one specially designed turbine would have a questionable value, other than as scrap, without the benefit of the rest of the system as a whole. Louis G. Bertane, The Assessment of Public Utility Property in California, 20 UCLA L.Rev. 419, 433 (1973), quoted in Salt Lake City Southern R.R., 987 P.2d at 600. ¶ 36 WilTel maintains that this enhanced unitary value is a tax-exempt intangible. The Counties and the Commission view the enhancement as a taxable attribute of tangible property. The Commission used as an example a hillside home with a value-enhancing view, and proposed that the view is an inherent feature of a tangible asset. Although the view is more ephemeral than bricks and mortar, it is part of the assessed value of the property for tax purposes. Location is another such element of value. Location is the time-distance relationships, or linkages, between a property or neighborhood and all possible origins and destinations of residents coming to or going from the property or neighborhood. The Appraisal of Real Estate 44 (Appraisal Institute 10th ed.1992). In other words, the augmentation in value results from property and market components, however incorporeal, that are not separately quantifiable as tax-exempt intangibles. ¶ 37 The physical and functional integration that allows WilTel's wires, cables, and transmission facilities to operate as a unit is analogous to real property location as a time-distance relationship, or linkage, although it deals with origins and destinations of information rather than residents. This location factor is part of the value of the property itself and can neither exist nor be valued separately. ¶ 38 The Counties agree with the Commission's concept of enhanced value, but interpret it to include nonproperty intangibles. In their brief to this court, the Counties arrive at a taxable unit value of $2,423,000,000 by adding to WilTel's cost estimate of $817,000,000, WilTel's proposed values for assembled work force, customer relations, and goodwill and other intangibles. We eschew this approach in light of the specific exclusion of goodwill and other intangibles from taxable property under Utah Code Ann. § 59-2-102(19) as discussed above. ¶ 39 WilTel argues that under the principle of substitution, simple replacement cost sets an upper limit on value because a purchaser would not pay more for an asset than the amount for which it could be built or bought elsewhere. The petitioner in Salt Lake City Southern Railroad made a similar argument, contending that instead of using the income approach to valuation, the Division should have added together the separate value of its property items as reflected by its own balance sheets. 987 P.2d at 598. We choose to follow the Commission's appraisal, noting: In using the income approach of assessment, the Division attempted to capture the fair market value of the Company's property operating together as a single unit. Id. at 599. ¶ 40 Likewise, in the instant case, fair market value reflects the benefit stream created by unitary operation of tangible property. If the legislature had desired to limit assessed value to the materials and installation costs of tangible assets, it could easily have done so. Since it did not do so, we conclude that the statutory and constitutional fair market value requirements recognize some element of value that is not attributable to either intangibles or simple cost and that this enhanced value is taxable. ¶ 41 Therefore we uphold the Commission's ruling that it is not required to assess WilTel's property solely on the basis of cost.
¶ 42 The Commission's amended final decision remanded the case to the parties with instructions to calculate yield capitalization value minus growth, to time-adjust the cost approach, and weigh each result 50% in the final appraisal. WilTel argues that this approach is imprecise and does not effectively exclude intangibles. ¶ 43 However, the Commission rejected the use of direct capitalization and the stock and debt method because of the tendency each has to impound intangibles at higher levels. Both yield capitalization and direct capitalization are commonly used, often in combination with cost and market evaluations, to estimate the market value of commercial property. See Salt Lake City Southern R.R., 987 P.2d at 598. In WilTel's case, the Commission employed the cost indicator from the Division's appraisal and adjusted it using a U.S. Department of Commerce inflation measure. The Commission then applied yield capitalization, which is a method used to convert future benefits into present value by discounting each future benefit at an appropriate yield rate. The Appraisal of Real Estate, supra ¶ 42, at 420 (emphasis omitted). ¶ 44 WilTel and the Counties disagree for different reasons with the assessment method that the Commission selected. However, before arriving at its present method, the Commission sought input from the parties. The Commission's decision on the motion for partial summary judgment directed WilTel and the Division to calculate and remove the value of intangibles. Following the decision on the motion, the Division submitted a WilTel system value of $1,375,000,000 with a Utah share of $37,249,110. WilTel calculated the system value at $817,000,000 with a Utah allocation value of $15,704,000, while the Counties requested a Utah assessed value of $66,286,894, based on a system value of $2,352,293,100. It was only after the parties proved the impracticality of determining and deducting the value of intangibles, category by category, that the Commission stepped in with the cost/yield capitalization method. ¶ 45 WilTel and the Counties complain that the Commission has selected a methodology that neither of them proposed. The Commission was not obligated to adopt either of the proposed methodologies. Article XIII, section 11 of the Utah Constitution provides: The State Tax Commission shall administer and supervise the tax laws of the State. Section 11 also gives the Commission powers of original assessment as provided by the legislature and power to equalize the assessment and valuation of property within the counties. State appraisers, acting under the general direction of the State Tax Commission or a Commissioner, have considerable discretion in determining which method should be utilized in assessing a particular property and the weight to be given to each indicator of value. Rio Algom, 681 P.2d at 189. ¶ 46 WilTel and the Counties also contend that the Commission's method was without an evidentiary basis. The Commission counters that it relied on the affidavit of Charles Peterson, the manager of the Division's utilities valuation section, to calculate WilTel's final assessed value. Mr. Peterson's affidavit, which was made under oath and circulated to the parties, details the Division's appraisal method and calculations. Neither WilTel nor the Counties objected to or rebutted Mr. Peterson's affidavit. We add that the substantial documentation of unitary tax appraisal practice contained in the record also bolsters the evidentiary basis for the Commission's methodology. ¶ 47 Moreover, neither WilTel nor the Counties have offered a workable alternative assessment methodology. WilTel argues for cost analysis alone, which ignores fair market value. The Counties erroneously subject intangibles to the privilege tax and undervalue tax-exempt intangibles. As we noted in Salt Lake City Southern Railroad, the unsupported assertion that a different methodology should have been used does not constitute a basis for reversal. 987 P.2d at 599. In that case, we upheld the Commission's determination that the Division's use of the income approach of appraisal was proper and that the resulting valuation did not unlawfully include the value of intangible property. Id. at 596. In the instant case, the Commission's equal weighting of time-adjusted cost and yield capitalization removed over $1,400,000,000 of intangible value from the original $2,500,000,000 fair market value established by the sale price. Therefore, we hold that the Commission's combination of the yield capitalization value with the cost assessment of the Division sufficiently captures the unitary value of the property while excluding intangibles.
¶ 48 Finally, WilTel challenges the Commission's use of a gross book value (cost) allocation percentage of 2.83% rather than a net book value (cost minus depreciation) of 1.9222%. The purpose of the allocation percentage is to determine Utah's taxable share of WilTel's system value. We need only determine which allocation basis most states use, since uniformity among states would foster fairness to each. WilTel hypothetically contrasts the present value of new and older assets with identical original costs in two different states and argues for net book value because assets depreciate. However, WilTel cites no specific data indicating that its assets are old in Utah and new elsewhere or the converse, and does not show, or even allege, that the majority of states employ net book value. To the contrary, according to the record testimony of Michael Goodwin, a multi-state certified appraiser, the Division's method, [gross book value] is used by most appraisers in most states. Expert testimony additionally cautioned that the use of net book value can give rise to negative numbers in some locations, making a rational allocation impossible. WilTel neither contests nor offers evidence against either of these statements. Instead WilTel argues, without supporting evidence, that use of gross book value is arbitrary and unconstitutional on the basis of the bald statement that it allocates more value to Utah than is Utah's fair share. WilTel has provided no basis for the use of net book value in the allocation calculation. Consequently, we affirm the Commission's use of gross book value in its allocation calculations. ¶ 49 In its final order, the Commission instructed the Division and WilTel to calculate the value of WilTel's taxable Utah property on the basis of equal weighting of time-adjusted cost and yield capitalization. The Commission ruled in favor of the Division's determination of value and set the system value of WilTel's property at $1,079,700,000. The Commission applied a Utah allocation percentage of 2.83%, yielding a Utah allocated value of $30,555,790. We find no error in the Commission's determination. ¶ 50 Affirmed. ¶ 51 Associate Chief Justice DURHAM, Justice ZIMMERMAN, Justice RUSSON, and Judge JACKSON concur in Chief Justice HOWE's opinion. ¶ 52 Having disqualified himself, Justice STEWART does not participate herein; Court of Appeals Judge NORMAN JACKSON sat.