Court Opinion

ID: 9754970
Source: CourtListenerOpinion
Date Created: 2023-08-28 20:19:52.47052+00
Date Added: 2024-06-11T09:56:00.688823
License: Public Domain

Handler, J.,
dissenting. Although I share the frustration of the majority in determining the fair market value of the underwater property of the Hackensack Water Company based upon the record in this -case, I would not, to the obvious detriment of the remaining taxpayers of the Borough of Old Tappan, ascribe as the true value of the reservoir land its remote original cost which has no relevance whatsoever to current market value. In doing precisely this, the majority fosters regressive and unsound valuation practices in the field of ad valorem taxation. I dissent.
Our statutory taxing scheme makes it quite clear that all real estate of a water utility must “be assessed and taxed at local rates in the manner provided by law for the taxation of similar property owned by other corporations or individuals * * N. J. S. A. 54:30A-52. It is also made clear that the lands constituting the base or basin of a reservoir constitute real estate for tax purposes. N. J. S. A. 54:30A-50(b). Thus, the realty beneath a reservoir by statute must be assessed for taxation as other similar real estate. This, as recognized by the majority, requires assessment at the “full and fair value * * * at such price as * * * [the property] would sell for at a fair and bona fide sale by private contract * * *. N. J. S. A. 54:4-23.
Both parties in this litigation shared the assumption that the highest and best use of the land was for residential development. The persuasive proofs disclosed, however, that the cost of preparing the reservoir land for such use would be truly prohibitive, that it would far exceed the fair market *219value of residential property in the area. The majority, therefore, soundly accepts the Division’s finding that it was not financially feasible to develop this property for residential use, a finding fully supported by the record. Ante at 213-214.
The Division of Tax Appeals believed, however, that the only use which it could consider in the assessment of the reservoir property was its hypothetical residential use, even though that use was fiscally totally unfeasible. Confronted by this apparent dilemma, its resolution was completely unsatisfactory: it simply assigned a nominal value, $500 per acre, to the underwater reservoir land.
Although the majority recognizes that the decision of the Division is flawed, it does not improve much upon the resolution or result. The Court’s reasoning process is twofold. It determines that for tax purposes the highest and best use of this land is as a reservoir. It observes, fairly enough, that “the reality of the matter is that the land is useful as a reservoir.” It then transmutes this simple usefulness into “the actual highest and best use of the land, namely, as a reservoir in conjunction with the operation of a utility water system.” Ante at 214. The majority concludes that conventional valuation precepts are inapplicable to such reservoir property and assigns a value to the land virtually as nominal and arbitrary as that employed by the Division, namely, its original historical cost of $670 per acre.
The complexity of assessing water reserve property for tax purposes cannot be glossed or finessed. But, it is not as though our courts have never before confronted the problem. It is entirely appropriate, indeed axiomatic, that the actual condition of land in the possession and use of the property owner should be considered in its valuation for ad valorem tax purposes. Trustees of Stevens Inst. of Technology v. State Board, 105 N. J. L. 99, 101 (Sup. Ct. 1928), aff’d 105 N. J. L. 655 (E. & A. 1929). This general principle is applicable to the lands of a water supply utility by virtue of the operative taxing statutes mandating that such realty *220be taxed in the same manner as other “similar property.” N. J. 8. A. 54:30A-52. It has been recognized, accordingly, that for ad valorem tax purposes such property should be categorized in terms of its actual condition and characteristics and that the representative component parts of the various classifications of the lands of the water utility be separately considered and valued. Newark v. West Milford Twp., 9 N. J. 295 (1952); see also, East Orange v. Twp. of Livingston, 102 N. J. Super. 512, 520-525 (Law Div.), aff’d 54 N. J. 96 (1968).
The majority, it seems, loses the distinction for tax purposes between considering the actual condition in which land is held by the owner and its highest and best use. In re Appeal of East Orange, 80 N. J. Super. 219 (App.Div. 1963), alluded to in the majority’s opinion to support its conclusion that here the highest and best use of -the land ,was as a reservoir, ante at 214 n. 1, simply observed that in a given case availability for reservoir use might be appropriate to consider as a highest and best use. It expressed the view, nevertheless, that although the actual physical condition of the realty held by East Orange as a municipally-owned water supply would naturally include its aquifer characteristic, the actual use of the property as a water supply project did not call for any special increment of value. The Court stressed that the critical factor in determining taxable value is the availability or fitness for a potential use, rather than an existing actual use for a particular purpose. Id. at 231; Clifton v. North Jersey District Water Supply Commission, 104 N. J. Super. 147 (App. Div. 1969).
The approach adopted by the majority was rejected by this Court in Newark v. West Milford Twp., supra. Assessing reservoir land “as a reservoir in conjunction with the operations of a utility water system”, ante at 214, is exactly what was proscribed in the West Milford Twp. case, viz:
The statute [N. J. S. A. 54:4-3.3] impliedly prohibits an assessment of such lands as part of an integrated utility with the re*221sultant increment to the value of such lands because of their integrated use.
[9 N. J. at 302],
It is asserted by the majority that the West Milford Twp. ease does not control us because it was concerned with the taxation of municipally-owned water supply lands located in other municipalities under N. J. S. A. 54:A-3.3 That statute imposes a tax on such water reserve lands “without regard to any * * * improvements thereon, in the same manner and to the same extent as the lands of private persons * * This statute is entirely concordant with the statutory standards applicable to this case, N. J. S. A. 54:30A-52, which enjoins the taxation of the real property of private water utilities, “in the manner provided by law for the taxation of similar property owned by other corporations or individuals * * Thus, the thrust of both statutes is to assure that the taxation of water supply land, whether owned and operated by a municipality or a private utility, is undertaken in accordance with the same standards applicable to other real property. In this design both statutes seek to avoid, inter alia, the exaggerated or inflated valuations which would likely result if water supply realty is not assessed apart from its functional use as an integrated component of an operating utility. Newark v. West Milford Twp., supra, 9 N. J. at 302.
I agree with the majority that on the record developed below it is not possible to arrive at the fair market value of the underwater property by any of the recognized valuation theories. The parties in this case used the comparable sales method of valuation, which is applicable to lands used for a water supply. E. g., Newark v. West Milford Twp., supra; In re Appeal of East Orange, supra. This approach did not suffice, however, to found fair market value because the cost of preparing the land for its assumed highest and best use for residential purposes exceeded its potential sales price therefor. The capitalization of income approach, see Aetna *222Life Ins. Co. v. City of Newark, 10 N. J. 99, 105-109 (1952); New Brunswick v. State Division of Tax Appeals, 39 N. J. 537, 543-544 (1963), is also mentioned by the majority and rejected as inappropriate to a regulated private water utility such as the Hackensack Water Company. Ante at 215.
I strongly disagree with the majority’s resort to historical original land costs as the sole basis for affixing the fair market value of this reservoir property. Remote acquisition costs of land is per se not a felicitous valuation tool. Nevertheless, original costs may be serviceable if in some realistic and substantial manner they reflect present value.
Such a nexus to true value may conceivably exist where the property to be valued consists of depreciable improvements, not land or real estate as such. E. g., State v. State Board of Tax Appeals, 134 N. J. L. 34 (Sup. Ct. 1946), aff’d 135 N. J. L. 481, 482 (E. & A. 1947) (railroad property) ; Jersey City v. Seaboard Terminal and Refrigeration Co., 19 N. J. Misc. 178, 17 A. 2d 577 (St. Bd. Tax App. 1941) (buildings); State ex rel. Mitchell Aero Inc. v. Board of Review of Milwaukee, 74 Wis. 2d 268, 246 N. W. 2d 521 (Sup. Ct. 1976) (buildings); Fairchild-Hiller Corp. v. Supervisor of Assessments, 267 Md. 519, 298 A. 2d 148 (Ct. App. 1973) (buildings); People ex rel. Bank for Savings in New York v. Miller, 84 App. Div. 168, 82 N. Y. S. 621 (1903) (building); Rego Properties Corp. v. Tax Commission of City of New York, 34 A. D. 2d 574, 309 N. Y. S. 2d 775 (1970) (buildings) (dictum). This fundamental difference between depreciable and nondepreciable property serves to distinguish the case relied upon by the majority for primary support, Assessors of Quincy v. Boston Consol. Gas. Co., 309 Mass. 60, 34 N. E. 2d 623 (Sup. Jud. Ct. 1941), which concerned the valuation of street mains, service connections, customers’ meters, street lighting, boiler plant and garage and yard equipment.
And even where original cost is regarded as possibly relevant in the. circumstances of given cases, it is only where *223original cost reflects present value. New England Power Co. v. Barnet, 134 Vt. 498, 505, 367 A. 2d 1363, 1368 (Sup. Ct. 1976) (“[ojriginal cost less depreciation may be a method of arriving at fair market value if it reflects present costs”); Jordan Marsh Co. v. Board of Assessors of Quincy, 368 Mass. 322, 331 N. E. 2d 61, 62 (Sup. Jud. Ct. 1975) (in valuing a new regional distribution center — depreciation was not a significant factor — “[ojriginal cost, recently incurred, was a legitimate factor to be considered in determining fair cash value”) (emphasis added).
Even if the reservoir land is considered specialty property,1 the usual theory employed to value such property is reproduction cost less depreciation and obsolescence. E. g., Sperry Rand Corp. v. Board of Assessors of Nassau County, 10 A. D. 2d 720, 199 N. Y. S. 2d 259 (1960) (buildings); New York Yankees v. Tax Commission of City of New York, 74 Misc. 2d 752, 345 N. Y. S. 2d 858 (Sup. Ct. Spec. Term 1973) (Yankee Stadium); Westbury Drive-In v. Board of Assessors, 70 Misc. 2d 1077, 335 N. Y. S. 2d 361 (Sup. Ct. 1972), aff’d 45 A. D. 2d 821, 356 N. Y. S. 2d 1017 (1974) (drive-in theatre); Delaware Racing Ass’n v. McMahon, 340 A. 2d 837 (Sup. Ct. 1975) (racetrack). As is true of cases valuing nonspecialty property, original cost is a factor in determining true value where it reflects present value and it is ostensibly fair to apply such cost as one indicator of value.
The majority does not bother itself with such distinctions. It reasons that the land constituting the base of the reservoir may be considered at its pure original cost because “[t]he land was adapted to a single use and its value depends upon continuance of that use.” Ante at 216. It goes on to state *224“[t]hat [the continued use of the reservoir] is the only element shown to have created value in this land” and that historical cost “becomes relevant” because the land contributes to the Company’s earning and the Company’s rates are fixed by the Board of Public Utility Commissioners which consistently includes the land at its original cost in the rate base. Id.
Erom the standpoint of sound ad valorem tax valuation practices, nothing could be further from the truth. Woodcliff Lake v. State Bd. of Tax Appeals, 14 N. J. Misc. 132 (Sup. Ct.), aff’d o.b. 117 N. J. L. 114 (E. & A. 1936). In instances where such original cost may be said to be “relevant” for purposes of ad valorem valuation of utility property, it is never accepted uncritically and without consideration of other pertinent factors. The majority recognizes this when it states “that it would have been proper to consider, even under the unusual circumstances of this case, other factors such as the trending of costs incurred in acquiring the land and in preparing for its use as a reservoir.” Ante at 217-218. However, inexplicably it fails to follow this approach in its application of original costs as the measure of current market value.
The basic assumption in the use of original costs in property tax valuation — that the original cost of the utility property is evidential of its current fair market value — is one which self-destructs with the passage of time. Eiteman, “Approaches to Utility Evaluation for Ad Valorem Taxation,” 71 Pub. Utilities Fortnightly 19, 20 (No. 11 May 23, 1963); see New England Power Co. v. Barnet, supra. Nevertheless, in this case the Court uses the original purchase price of $670 per acre because there is no other satisfactory evidence of the fair market value of this land. I cannot acquiesce in this passive, wrong and purely expedient result. It is grossly unjust to the municipality and its taxpayers to tilt the tax burden so sharply away from the utility. This counters the statutory design of requiring that all relevant factors be brought to bear upon the valuation of utility prop*225erty to the end that neither the utility taxpayer nor other municipal taxpayers are visited with the unbalanced consequences of the valuation of the utility’s property which is unrealistically high or low. Newark v. West Milford Twp., supra.
I would remand this matter to the Division of Tax Appeals for a redetermination of the fair market value of the underwater reservoir acreage. The parties should be instructed to marshall additional evidence bearing upon the market value of the land. To the extent there is expert evidence introduced with respect to historical acquisition cost, such evidence must include factors to show that such costs can be related meaningfully to present market value. Eiteman, supra, 71 Pub. Utilities Fortnightly at 20.
I would also instruct the Division of Tax Appeals and advise the parties that administrative notice is to be taken of two unreported cases of the Appellate Division, each dealing with tax appeals involving Hackensack Water Company with respect to its reservoir land. These are Hackensack Water Co. v. Township of River Vale (A-1716-72) and Hackensack Water Co. Borough of Woodcliff Lake (A-550-69). Since these decisions are binding upon the Division of Tax Appeals, administrative thereof is appropriate to the same extent and with the same effect as pertinent statutes and the rules and regulations of the agency. N. J. 8. A. 52: 14B — 10. In each case, the Appellate Division correctly and emphatically rejected the use of the recorded acquisition cost, the purchase price of the land, for rate-making purposes as having no probative value in calculating the tax assessment. In the River Vale case there was an appeal from the Division of Tax Appeals concerning the tax valuation of the same reservoir property, the bed of Lake Tappan, as is involved in this case but situate in the adjoining municipality. The court exercised its original jurisdiction and determined the taxable value of the underwater bed was $2,500 per acre. This, it may be noted, was approximately $2,000 less per acre than the value of $4,500 per acre given to the dry up*226land area in its natural state. The other case, Woodcliff Lalce, involved the valuation of reservoir land the bulk of which was under water. The court determined the true value of the reservoir acreage under water at $3,000 per acre in contrast to $4,400 per acre assigned to the upland. Administrative notice of these determinations is highly relevant in this case since the taxpayer’s expert here valued the upland property in its aggregate at $1,812,068 or an average of $4,273 per acre, which is fairly approximate to the upland valuations of $4,500 per acre and $4,400 per acre respectively in the River Vale and Woodcliff Lake decisions. A comparable reduction in those cases (between $1,400 and $2,000 respectively) to reflect the lesser value of the underwater land would produce a tax value of the property in this case ranging from $2,800 and $2,200 per acre. The parties should, of course, be given the opportunity to test the soundness of the valuations in these unreported cases and to contest their evidential use and applicability here. Nevertheless, the Division should give weight to the fact that in the River Vale case, Hackensack Water 'Company did not quarrel with the valuation and the court found evidential support in the record therefor.
For these reasons, I dissent. Justice Sullivan and Justice Pashman join in this dissent.
For affirmance as modified — Chief Justice Hughes and Justices Mountain, Clieeobd and Schbeibeb — 4.
For reversal — Justices Sullivan, Pashman and Handles —3.

A specialty is “a structure -which is uniquely adapted to the business conducted upon it or use made of it and cannot be converted to other uses without the expenditure of substantial sums of money” (citations omitted). Great Atlantic & Pacific Tea Co. v. Kiernan, 42 N. Y. 2d 236, 240, 397 N. E. S. 2d 718, 721, 366 N. E. 2d 808, 811 (Ct. App. 1977) (emphasis in original).