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Recent Taxpayer Victories
October 18, 2004

 


by Maxwell A. Miller and Randy M. Grimshaw

Within the past two months, the Utah State Tax Commission and the Utah Tax Court have decided cases of monumental significance to Utah taxpayers in their favor. All taxpayers should be informed of these cases, which should stand as bulwark precedents against attempts to gouge taxpayers with flawed and/or unconstitutional methodologies that artificially and/or unlawfully inflate taxable values.

I. Holcim

The first of the three taxpayer wins is Holcim (US) Inc. v. Property Tax Division and Morgan County, a case that has significance for locally assessed businesses. Holcim is a world-wide cement company with a cement manufacturing operation located in Morgan County. Holcim's cement manufacturing plant is locally assessed, and a limestone feeder quarry is state-assessed. Limestone is one of several ingredients used for the manufacture of cement powder. For years, Holcim's plant has been assessed under a cost approach, whereby property values are determined using historical costs of an asset less depreciation, including any functional or economic obsolescence the property has suffered. Beginning in tax years 2001 and 2002, the Tax Commission's Property Tax Division and the Morgan County Assessor abandoned the traditional cost approach, and submitted a joint appraisal-assessment of Holcim's property using, for the first time ever, an "income approach." The assessment theory for this new approach was that the mine and the plant were functionally integrated, and hence should be valued and taxed as a unitary operation.

Under this income approach, the assessed value of both plant and the quarry was determined by calculating the present value of the entire operation's projected future income, based upon projected cement sales, which the Division and the County claimed would invariably inflate at a constant rate in perpetuity. Holcim argued before the Tax Commission (1) that the income approach, especially for locally assessed property, unlawfully impounded the "business enterprise value," in addition to the value of tangible property, which is the only property legally taxable under the Utah Constitution; (2) that the value of a limestone quarry cannot be determined using cement sales (a totally different product) from the plant; and (3) that Holcim's manufacturing plant cannot lawfully be valued using an income approach when all other manufacturers in Morgan County are assessed under a cost approach. The Tax Commission agreed with Holcim, expressly noting that an income approach was inappropriate for this type of property. Deriving the value of Holcim's real and personal tangible property from the sale of cement, said the Commission, would be akin to valuing a building that houses a grocery store from the income derived from the sale of groceries. This is wrong because an assessor's job is to value the physical building, not the business that operates inside the building. The Commission also rejected the County's argument that its need for money justified assessments higher than the "fair market value" standard. Such an argument, said the Commission, is "inappropriate." Morgan County chose not to appeal.

II. American Skiing Company

The second taxpayer victory is American Skiing Company dba The Canyons vs. Summit County. The significance of this case is not so much the "comparable sales" appraisal methodology, which opposing experts both used, but strongly disagreed over, in valuing the subject property. The importance of American Skiing is rather the gigantic disparity between the County assessed values, which the County insisted were presumptively correct, and the property's actual fair market value upon which the taxpayer should have been assessed. Initially, the County had assessed American Skiing's property at over $104 million. The taxpayer challenged the assessment, which was reduced to slightly over $77 Million by the Board of Equalization. Then, in a Tax Commission formal hearing, the County defended an assessment of $57 million, although the Tax Commission ultimately sided with the taxpayer's value of $20 million. Had the taxpayer not challenged the County's assessments, it would have been taxed on over $84 million in assessed value that, in truth, it did not owe. How is it possible that assessed values can be so horrifically beyond fair market value? Why would assessors fight to defend such grossly inflated values? Whatever the reasons, the Tax Commission's decision in American Skiing should at the very least give pause to the frequently flaunted "presumption of correctness" that County assessors hold dear, and the usually touted policy argument that Utah businesses are not paying their "fair share."

III. Alliant Techsystems, Inc.

The third taxpayer victory is Tax Court Judge Lynn W. Davis' decision in Alliant Techsystems, Inc. v. Salt Lake County, a case of potentially national significance having, in the Tax Court's words, "tremendous implications." Alliant is a manufacturer of rocket motors at its Bacchus plant in West Valley, Salt Lake County. Alliant also operates the Naval Industrial Reserve Ordnance Plant or "NIROP," a part of the Bacchus plant, under contract with and at the direction and control of the United States Navy. The Navy owns the property at NIROP and supervises Alliant's work in connection with its fleet ballistic missile program. Nonetheless, the County assessed Alliant a "privilege" tax "as if it were the [NIROP] owner," on the full assessed value of NIROP property. Citing decisions from the Ninth Circuit Court of Appeals, involving a government contractor in Nevada, and a Tenth Circuit Court of Appeals decision, involving a government contractor in Colorado, Alliant argued that Utah's privilege tax statute is unconstitutional. As in the Nevada and Colorado cases, Utah's statute does not apportion the privilege tax based upon the taxpayer's proportionate use of government property. Alliant thus argued Utah's privilege tax statute is unconstitutional because the tax is levied on the entire, unapportioned assessed value of NIROP, rather than Alliant's proportionate use in comparison with the Navy's use and the use of other contractors. This results in state taxation of federal government property, which the United States Constitution forbids, as Judge Davis held.

A trail-blazing difference between the Utah, Colorado and Nevada cases, however, is that in Utah, a private party, Alliant, sued the County, whereas in the other cases the government was the plaintiff. In a "case of first impression," Alliant invoked 42 U.S.C. § 1983 (a federal civil rights statute), which gives private parties the right to sue government entities "acting under color of state law" for deprivation of rights guaranteed under federal law and the United States Constitution. Noting that "history confirms that the County will continue to levy an unconstitutional privilege tax upon Alliant," unless enjoined, Judge Davis held the County's "assessment and levy of privilege taxes on Alliant for its use of NIROP property owned by the United States . . . is a violation of . . . Article VI of the United States Constitution." Judge Davis also reversed the Tax Commission's interpretation of state law, holding that Alliant's use of government property was not "exclusive," as is required under Utah statutes before a privilege tax can be properly levied.

Recognizing that the Tax Commission's decisions which upheld the privilege tax were "internally inconsistent," Judge Davis repeatedly affirmed that he was not bound by the Tax Commission's contrary rulings, and, in fact, stressed that the Tax Commission's "disregard" of the Court's prior rulings on the NIROP issue was "in error and is reversed." This procedural holding affirms the Tax Court's primacy in tax cases, which in and of itself, is vital to Utah taxpayers because Tax Commission lawyers have traditionally argued Utah's tax courts must give deference to Tax Commission decisions, despite statutory language that trials before the Tax Court on appeal from the Tax Commission are "original," "independent," and "de novo" proceedings.

Alliant is an astounding victory for all taxpayers.