Opinion ID: 1362962
Heading Depth: 1
Heading Rank: 2

Heading: Income to be Capitalized.

Text: A basic requirement of the income method is fixing an annual income to capitalize. Plaintiff contends that the income approach should be based on a projection of income expected to flow from the property during the assessment year. Defendant, on the other hand, capitalized the income to be earned over the remaining life of the property then earning income, the property being built, and that being planned on the assessment date. At another point defendant described the income to be capitalized as the probable future average annual operating income to be derived from the plant during its life. Actually, defendant used the 1974 assessment year income to develop a performance ratio to be applied to the total year end plant, or cost of the plant at the end of 1974 to reach an income value to capitalize for January 1, 1975. The total year end plant, however, not only included property generating income as of the assessment date, but also property that would not generate income until years later. The tax court judge found defendant's estimation of future income to be too speculative for a knowledgeable buyer to consider in fixing a purchase price and too different from plaintiff's actual earnings during the assessment year and, therefore, rejected defendant's estimation. Defendant responded in its brief to this court that it is to be expected that a reasonable income projection method would substantially exceed plaintiff's actual earnings during the assessment year. Defendant also asserted, as discussed later, that the lower court failed to consider future income from construction work in progress (CWIP) and pending rate increases: It is clear here that the `assessment year' test is irrelevant since a portion of the property that is the subject of this proceeding is not earning income on the assessment date nor in the assessment year, nor do the assessment year earnings represent what will annually flow from the property, namely, there is an absence of full effect of the new rate increases and no effect on income from pending rate cases. Plaintiff's `assessment year income' is clearly an incorrect projection when compared with the Department's `annual cash flow projection.' Both parties cite the case of Mt. Bachelor v. Dept. of Rev., 273 Or. 86, 539 P.2d 653 (1975) as support for their positions as to what should be considered the income to be capitalized. In that case the tax court had established the true cash value as of January 1, 1970 and January 1, 1971 of plaintiff's ski resort by capitalizing the prior fiscal year's income. Defendant argued that that approach failed to take into consideration the growth factor involved in the property attributable to a rising trend in receipts, an additional ski lift installed in the summer of 1970, and a 20 percent increase in the price of ski lift tickets for the 1970-71 ski season. It was not explained in the opinion how defendant included those factors in its own assessment, but it appears that those factors were reflected by using the fiscal year income straddling the assessment date. This court decided that the flow of income to be determined is that which would be anticipated by reasonable, knowledgeable buyers and sellers as of the assessment date, and that the rate of change [6] of past income should be considered along with the past earning performance of the property. 273 Or. at 92, 539 P.2d at 656. Based on this decision, defendant contends here that CWIP should be included as well as new and pending rate increases in the income to be capitalized. Plaintiff contends in its brief to this court that the case stands only for the proposition that it is improper to capitalize prior year's income, unmodified to reflect conditions known at the assessment date which would affect future income and value during the assessment year. Defendant counters with the argument that the case mentions nothing with regard to limiting consideration to the assessment year. As for the Mt. Bachelor standard of a reasonable, knowledgeable buyer, to limit consideration to factors affecting income during the assessment year to some extent restricts the perspective of a reasonable, knowledgeable buyer in that the buyer would probably also consider more long-range factors. However, as between the choice of using a 1974 performance ratio applied to property that will not generate income until years in the future and using historical income data to determine income of the assessment year, we find the buyer would use the latter method to determine an annual income to capitalize. Future costs and other possible restrictions would make consideration of future income-generating property beyond the assessment year too speculative here. Not only are the costs of these non-income generating CWIP properties incomplete and their multiplication by a performance ratio in which there is no component for CWIP seemingly inconsistent, but by the time all these properties are generating income the 1974 performance ratio may be inapplicable. Accepting plaintiff's argument based on testimony in this record that it is income earned during the assessment year which should be capitalized in this case, we find the next question is how such income should be determined. As discussed with regard to the performance ratio, under heading # 4, plaintiff utilized the least squares method of projecting income. Plaintiff's Exhibit # 17 is a graph depicting the least squares method line projected from 1967 to the 1980's, based on actual net electric operating income from 1967 through 1975 and estimated income for 1976. The end of year income represented by the line was $100,000,000 for 1976 as opposed to the actual income for that year of $102,684,517 and an unspecified number but approximately $92,000,000 for 1975 as opposed to the actual income for that year of $88,310,033. Rather than use the 1975 income figure depicted by the least squares method, however, plaintiff used the actual income of the property for that year, and the tax court utilized the actual income of the property for both years. Plaintiff points out in its brief to this court that because its review appraisals were done for the tax court proceeding, it had available plaintiff's actual year-end 1975 earnings and accurate estimates of the company's 1976 earnings: Under these circumstances it was not inappropriate for the appraisers to use Pacific's actual income for 1975 as long as such income was reasonably close to an estimate based on past data adjusted for changes expected to take place during the assessment year. Plaintiff cites the Mt. Bachelor case as authority for this proposition. In that case this court accepted use of the actual income of the tax year in question, though apparently the figures were of the fiscal year straddling the assessment date. In doing so, this court stated that it was not holding that taking the actual income, inherently unknowable to the assessor on the assessment date, is the proper predictor of anticipated income. 273 Or. at 92, 539 P.2d at 656. Also, the court noted that defendant in using the actual income did so as a concession to the plaintiff and that the actual income was slightly less than that predicted. We do not accept the tax court's use of the actual income figures for the two assessment years as establishing a general rule, nor do we accept plaintiff's position that review appraisals before the tax court may always use the actual income figures of the company rather than that determined by an appraisal method. The determination of value should not be based on the delay of litigation which allows the actual income of a year to be known. However, in this case where the income values are so close to that achieved by the appraisal method and where the parties, other than defendant opposing the use of any measure of income of the assessment year, have not criticized the tax court's use of the actual income figures as opposed to figures determined by the least squares method, we accept the actual income figures.