ATTORNEY FOR PETITIONER:    ATTORNEYS FOR RESPONDENT:
DAVID L. PIPPEN    STEVE CARTER    
ATTORNEY AT LAW     ATTORNEY GENERAL OF INDIANA
Indianapolis, IN    Indianapolis, IN
    
     TED J. HOLADAY
    DEPUTY ATTORNEY GENERAL
    Indianapolis, IN
_____________________________________________________________________
     IN THE INDIANA TAX COURT _____________________________________________________________________ 

VITCO, INC.,                                                              )
                                                                               )
    Petitioner,                                                                )
                                                                               )
    v.                                                                         )   Cause No. 49T10-9701-TA-52
                                                                               )
DEPARTMENT OF LOCAL                                                            )
GOVERNMENT FINANCE,
See footnote         )
                )
    Respondent.            )    
_____________________________________________________________________

ON APPEAL FROM TWO FINAL DETERMINATIONS OF
THE STATE BOARD OF TAX COMMISSIONERS

NOT FOR PUBLICATION
June 15, 2004


FISHER, J.

    Vitco, Inc. (Vitco) appeals from the two final determinations of the State Board of Tax Commissioners (State Board) valuing its real property for the March 1, 1989, 1990, and 1992 assessment dates. The issues for the Court to decide are whether the State Board erred in calculating Vitco’s perimeter-to-area ratio (PAR), base rates, and the amount of obsolescence depreciation to which it is entitled.
FACTS AND PROCEDURAL HISTORY

    Vitco owns real property in Elkhart County, Indiana. More specifically, Vitco owns land and a manufacturing facility in Nappanee, Indiana.
    In July of 1991, Vitco filed two Petitions for Correction of An Error (Forms 133) – one challenging its 1989 assessment, the other challenging its 1990 assessment. On each of the Forms 133, Vitco alleged “[i]ncorrect perimeter area ratio used, incorrect base rates used.” (Cert. Admin. R. at 63, 69.) See footnote
    Later, in June of 1993, Vitco filed a Petition for Review of Assessment with the State Board of Tax Commissioners (Form 131) challenging its 1992 assessment. In its Form 131, Vitco alleged “[i]ncorrect amount of obsolescence depreciation applied[;] [i]ncorrect calculation of the PAR[;] [i]ncorrect grade.” (Cert. Admin. R. at 77.)
    On November 22, 1996, the State Board issued final determinations on all three assessment challenges. Specifically, the State Board issued two final determinations in which it denied any relief on Vitco’s Forms 133. The State Board also issued a final determination on Vitco’s Form 131, making several changes to Vitco’s 1992 assessment. These changes included an adjustment for PAR (“[a]fter inspecting the building . . . it is determined the [PAR] of the main building is in error. The [PAR] is one[]”) as well as the application of a 35% obsolescence depreciation adjustment to Vitco’s facility. (See Pet’r Pet. to Set Aside Final Determination of the State Bd. of Tax Comm’rs, filed Jan. 6, 1997, at Ex. C.)
    Vitco initiated an original tax appeal on January 6, 1997. On September 30, 1998, Vitco and the State Board filed a joint motion requesting a remand:
The major issue . . . for [the] March 1, 1992 [assessment] involves obsolescence depreciation. This Court’s recent decision in Clark v. State Board of Tax Commissioners[, 694 N.E.2d 1230 (Ind. Tax Ct. 1998),] necessitates remanding this case to the State Board for hearing and determination consistent with that case. See footnote

The remainder of the case involves allegations of error for base rate and perimeter area ratio . . . for years 1989 and 1990. Any determination on the base rates and perimeter area ratio that existed in or on the property must be verified by inspection of the property. The remaining portion of the case . . . should be remanded for such inspection.

(Status Report and Mot. for Remand, Vitco, Inc. v. State Bd. of Tax Comm’rs, Cause No. 49T10-9701-TA-52, filed Sept. 30, 1998 (footnote added).) The Court granted the motion on October 9, 1998.
    On February 11, 1999, the State Board conducted a remand hearing. See footnote The State Board did not, however, inspect Vitco’s property. On April 7, 1999, the State Board issued a final determination in which it denied Vitco the relief it sought for the 1989 and 1990 assessments, as well as a final determination in which it denied the relief Vitco sought for the 1992 assessment.
    Vitco filed another original tax appeal on May 21, 1999. In lieu of a trial, the parties agreed to argue the case based on the administrative record as well as on their written briefs submitted to the Court. The Court heard the parties’ oral arguments on April 4, 2001. Additional facts will be supplied as necessary.

STANDARD OF REVIEW

    This Court gives great deference to the final determinations of the State Board when it acts within the scope of its authority. Hamstra Builders, Inc. v. Dep’t of Local Gov’t Fin., 783 N.E.2d 387, 390 (Ind. Tax Ct. 2003). Thus, this Court will reverse a final determination of the State Board only when its findings are unsupported by substantial evidence, arbitrary, capricious, constitute an abuse of discretion, or exceed statutory authority. Id. When appealing to this Court from a State Board final determination, the taxpayer bears the burden of showing that the final determination is invalid. Id.


DISCUSSION & ANALYSIS
A. The 1989 and 1990 Appeals
1. PAR Calculation

    Under Indiana’s property tax assessment scheme, PAR is an element used to calculate the reproduction cost of a commercial improvement. PAR is defined as:
the total linear feet in the perimeter of a building divided by the corresponding square foot area and multiplied by 100 to convert to a whole number. The effective perimeter of the building is defined as the total linear feet of exterior walls that are part of[,] and therefore[] to be priced with[,] a particular building or building section. The area is defined as the total square foot surface of a building.

Ind. Admin. Code tit. 50, r. 2.1-4-1 (1992). See footnote Vitco contends that the State Board erred in calculating its PAR for the 1989 and 1990 assessments.
    At the remand hearing, Vitco’s property tax consultant, M. Drew Miller (Miller) of Landmark Appraisals, Inc., presented a document titled “Assessment Review and Analysis” (Analysis). The Analysis states:
The . . . total lineal feet of exterior walls on the main building of the subject [has been incorrectly calculated] at 2,786 LF. The correct calculation is 1,513 LF.

*****

The county has erred in calculating the number of exterior lineal feet at 940 SF. The correct lineal feet is 760. This would reduce the calculated PAR.

(Cert. Admin. R. at 76.) During the hearing, Miller “supplemented” the Analysis with the following testimony:
Okay, on the 133’s for ’89 and ’90, on the PAR issue, the County currently has on the main plant there in calculating the PAR they have a total exterior wall measurement of 2,786 lineal feet. The correct calculation which was done by the State [] Board’s ’92 determination which we agree with the total exterior lineal that should be used for the calculation is 1,513 lineal feet of exterior walls.

*****


Also on [] two [other] sections the County calculated the total exterior of lineal feet for the PAR calculation at 940. There is actually only 760 lineal feet of exterior walls, which should affect the PAR which would thus affect the base rate.

(Cert. Admin. R. at 130, 132.)
    The State Board denied Vitco’s claim that the PAR was incorrect, explaining that on remand the parties were required to “start over” with respect to calculating PAR. (See Cert. Admin. R. at 22-23.) Thus, the State Board concluded, Vitco was required to present probative evidence that the PAR calculation was incorrect before the State Board’s responsibility to inspect the property was even triggered. (See Cert. Admin. R. at 23.) The State Board determined that instead of presenting probative evidence as to the proper PAR calculation, Vitco presented a “seriously flawed” and “queer” argument that the PAR used for the 1992 assessment should be applied to the 1989 and 1990 assessments. (See Cert. Admin. R. at 22.)
    The State Board got sidetracked. Both Vitco and the State Board requested this Court to remand the PAR issue so that it could “be verified by inspection of the property.” (Status Report and Mot. for Remand, Vitco, Inc. v. State Bd. of Tax Comm’rs, Cause No. 49T10-9701-TA-52, filed Sept. 30, 1998.) This meant that representatives from Vitco and the State Board were required to meet at the property, armed with tape measures and calculators, so that - together - they could determine the improvement’s effective perimeter and square footage (measurements necessary to determine PAR). This should have been a fairly simple and quick calculation; instead, both parties wasted valuable time and resources in their stubbornness and failure to work with each other.
    As a result, the Court now REMANDS the issue (again) with the following instructions:
1) the Indiana Board of Tax Review (Indiana Board) See footnote will instruct both the local assessing officials and Vitco to each designate a representative to meet at the subject property;

2) those representatives will work together in calculating the appropriate PAR to be applied to the building, consistent with the provisions of 50 IAC 2.1-4-1; and

3) the representatives will preserve all appropriate measurements, drawings, calculations, etc.

2. Base Rate Adjustments

    During the years at issue, assessors used cost schedules to determine the base reproduction cost of a particular improvement. Whitley Prods., Inc. v. State Bd. of Tax Comm’rs, 704 N.E.2d 1113, 1116 (Ind. Tax Ct. 1998), review denied. See also Ind. Admin. Code tit. 50, r. 2.1-4-5 (1992). To help identify and define various classes of buildings, Indiana’s assessment regulations categorized improvements into numerous models based upon their physical characteristics. See Ind. Admin. Code tit. 50, r. 2.1-4-7 (1992). See also Herb v. State Bd. of Tax Comm’rs, 656 N.E.2d 890, 893 (Ind. Tax Ct. 1995) (stating that “while the model names are reflective of use, the model specifications actually reflect the physical features that are incorporated into the structure”). In other words, the improvement models replicated the reproduction costs of any given structure by assuming the presence of certain construction elements. See Ind. Admin. Code tit. 50, r. 2.1-4-3(a) (1992). The assessment regulations also provided that when an improvement varied from the model, adjustments were to be made to the base price to account for the variations. 50 IAC 2.1-4-3(c). These adjustments were generally accomplished via an application of the assessment regulations’ unit-in-place cost tables. See Ind. Admin. Code, tit. 50, r. 2.1-4-10 (1992).
    Vitco alleges that for the 1989 and 1990 assessments the State Board applied incorrect base rates to its facility. (Cert. Admin. R. at 63, 69.) More specifically, Vitco argues that its improvement’s base rate should have been adjusted to reflect the fact that the sprinkler system, flooring finish, heating system, and exterior wall types are different than those prescribed in the model used to assess it. (See Cert. Admin. R. at 76.) The State Board denied Vitco’s request for these various adjustments, claiming that Vitco did nothing more than merely “opin[e] that [the base rate adjustments] should be made.” (See Cert. Admin. R. at 24-29.)
    This issue, like the PAR issue, was remanded at the request of both parties so that it could “be verified by inspection of the property.” (Status Report and Mot. for Remand, Vitco, Inc. v. State Bd. of Tax Comm’rs, Cause No. 49T10-9701-TA-52, filed Sept. 30, 1998.) No such inspection was held. As a result, the Court now REMANDS the issue (again) with the following instructions:
1) the Indiana Board will instruct both the local assessing officials and Vitco to each designate a representative to meet at the subject property;

2) those representatives will walk the subject improvement together in order to determine whether Vitco is entitled to the base rate adjustments it seeks (i.e., adjustments for sprinklers, floor finish, heating system, and exterior wall types only);

3) however, to be entitled to any of the base rate adjustments it seeks, Vitco must (during the walk-through) physically point out where and how its building does not contain construction elements listed in the model used to assess it or that its building contains construction elements that are not listed in the models. See Barth, Inc. v. State Bd. of Tax Comm’rs, 756 N.E.2d 1124, 1129 (Ind. Tax Ct. 2001). Vitco then has the burden to ascertain the cost of each component (i.e., the amount of the requested adjustment) based on the assessment regulations. See id.

B. The 1992 Appeal

    With respect to its 1992 assessment, Vitco contends that the 35% obsolescence adjustment initially awarded by the State Board to its improvement is in error. More specifically, Vitco contends that it is entitled to a 75% obsolescence adjustment. (Cert. Admin. R. at 89.) The Court disagrees.
    “Obsolescence, which is a form of depreciation, is defined as a loss of value and classified as either functional or economic.” Freudenberg-NOK Gen. P’ship v. State Bd. of Tax Comm’rs, 715 N.E.2d 1026, 1029 (Ind. Tax Ct. 1999), review denied. See also Ind. Admin Code tit. 50, r. 2.1-5-1 (1992). Functional obsolescence is caused by factors internal to the property and is evidenced by conditions within the property itself. See 50 IAC 2.1-5-1. Economic obsolescence is caused by factors external to the property. Id.
    This Court has explained that when a taxpayer seeks an obsolescence adjustment, it must make a two-pronged showing: 1) it must identify the causes of the alleged obsolescence and 2) it must quantify the amount of obsolescence to be applied to its improvement. See Clark, 694 N.E.2d at 1238, 1241. It is important to recognize, however, that each of these prongs requires a connection to an actual loss in property value. See footnote For example, when identifying factors that cause obsolescence, a taxpayer must show through the use of probative evidence that those causes of obsolescence are causing an actual loss of value to its property. See Miller Structures, Inc. v. State Bd. of Tax Comm’rs, 748 N.E.2d 943, 954 (Ind. Tax Ct. 2001) (footnote added). In turn, when the taxpayer quantifies the amount of obsolescence to which it believes it is entitled, it is required to convert that actual loss of value (shown in the first prong) into a percentage reduction and apply it against the improvement’s overall value. See Clark, 694 N.E.2d at 1238.
    Because the State Board initially awarded Vitco an obsolescence adjustment of 35%, the parties agree that obsolescence is present in the subject improvement. Accordingly, the issue on remand was not the identification of the causes of obsolescence, but rather the quantification of obsolescence. See Phelps Dodge v. State Bd. of Tax Comm’rs, 705 N.E.2d 1099, 1102 (Ind. Tax Ct. 1999) (stating that “the fact that the parties agree on the causes of obsolescence obviates [the taxpayer’s] burden of offering probative evidence showing that the subject improvement[] experience[s] obsolescence”), review denied. In order to prevail on its claim, therefore, Vitco was necessarily required to translate its improvement’s loss in value (resulting from the causes of obsolescence) into a quantifiable amount of obsolescence depreciation. See id.
    At the remand hearing, Vitco submitted another “Assessment Review and Analysis” (prepared again by Miller) in which it claimed that its improvement suffered from both functional and economic forms of obsolescence because the improvement lacked thermal pane windows and insulation, its layout was inefficient, it had low ceilings, and it did not facilitate a network of computer and phone lines. (Cert. Admin. R. at 91.) As a result, Vitco claims the property “is at an economic disadvantage in the market place, incurring higher utility, maintenance, material handling costs and labor costs.” (Cert. Admin. R. at 91.)
    To translate this “loss of value” into a quantifiable amount of obsolescence, Vitco’s Analysis concluded that based on its application of the market extraction method for determining depreciation, its property was entitled to an obsolescence adjustment of 75%. More specifically, the Analysis identified four allegedly comparable properties in nearby Elkhart and Bristol, Indiana. The Analysis then estimated the amount of obsolescence present in those improvements and applied that range to Vitco’s improvement. (See Cert. Admin. R. at 92-107.) Vitco’s Analysis also contained documentation asserting that its facility’s fair market value was approximately $350,000. (See Cert. Admin. R. at 109-11, 114-17.)
    Vitco’s Analysis is fatally flawed for several reasons. First, although Vitco only had to meet the second prong – i.e., the quantification prong – to prove its entitlement to obsolescence, what it fails to recognize is that the quantification of obsolescence is intrinsically tied to the actual loss of value suffered by the improvement from the alleged causes of obsolescence. See Miller Structures, Inc., 748 N.E.2d at 954. See also Heart City Chrysler v. State Bd. of Tax Comm’rs, 714 N.E.2d 329, 334 (Ind. Tax Ct. 1999) (stating that attempts to quantify obsolescence must correlate to the causes of obsolescence). Because Vitco has not shown any actual loss in the first place, it is impossible to convert that loss into an obsolescence quantification. See footnote
    Furthermore, Vitco’s Analysis states that under the market extraction method, “comparable properties should have similar physical, functional, and external characteristics as the subject, and they should have incurred similar amounts and types of depreciation.” (Cert. Admin. R. at 95.) Neither Vitco’s Analysis, nor Miller’s testimony at the remand hearing, provided any explanation whatsoever as to what types of obsolescence the allegedly four comparable properties suffered from. (See Cert. Admin. R. at 82-134.) Without such an explanation, the State Board was simply unable to make any correlation between the obsolescence present in the allegedly comparable properties and its property. Cf. Blackbird Farms Apartments, LP v. Dep’t of Local Gov’t Fin., 765 N.E.2d 711, 715 (Ind. Tax Ct. 2002) (stating that without any comparison of lot sizes, shapes, topography, geographical features, lot accessibility, and uses, taxpayer’s assertion that certain parcel of land were comparable did not constitute probative evidence).
    Vitco has failed to substantiate how it was entitled to additional obsolescence. Thus, the State Board’s final determination relating to Vitco’s 1992 assessment is AFFIRMED.
CONCLUSION

For the aforementioned reasons, the Court REVERSES the State Board’s final determination relating to Vitco’s 1989 and 1990 assessment challenges (the PAR and base rate adjustment issues). That final determination is REMANDED to the Indiana Board for further proceedings consistent with the instructions provided by the Court in this opinion. The State Board’s final determination relating to Vitco’s 1992 assessment challenge (obsolescence depreciation), however, is AFFIRMED.

Footnote: The State Board of Tax Commissioners (State Board) was originally the Respondent in this appeal. However, the legislature abolished the State Board as of December 31, 2001. 2001 Ind. Acts 198 § 119(b)(2). Effective January 1, 2002, the legislature created the Department of Local Government Finance (DLGF), see Indiana Code Annotated § 6-1.1-30-1.1 (West Supp. 2003)(eff. 1-1-02); 2001 Ind. Acts 198 § 66, and the Indiana Board of Tax Review (Indiana Board). Ind. Code Ann. § 6-1.5-1-3 (West Supp. 2003)(eff. 1-1-02); 2001 Ind. Acts 198 § 95. Pursuant to Indiana Code § 6-1.5-5-8, the DLGF is substituted for the State Board in appeals from final determinations of the State Board that were issued before January 1, 2002. Ind. Code Ann. § 6-1.5-5-8 (West Supp. 2003)(eff. 1-1-02); 2001 Ind. Acts 198 § 95. Nevertheless, the law in effect prior to January 1, 2002 applies to these appeals. A.I.C. § 6-1.5-5-8. See also 2001 Ind. Acts 198 § 117. Although the DLGF has been substituted as the Respondent, this Court will still reference the State Board throughout this opinion.
Footnote: Vitco also alleged that “ [Indiana’s assessment manual] systematically creates excessive valuations for all properties similar to this subject property. This assessment is arbitrary, capricious, unreasonable and is not uniform nor based upon a just valuation.” (See Cert. Admin. R. at 63, 69.) (See also Pet’r Br./Findings of Fact and Conclusions of Law at 9-12.) Vitco’s allegation implicates various state and federal constitutional claims that this Court has declined to reach in previous cases. See, e.g., Barth, Inc. v. State Bd. of Tax Comm’rs, 756 N.E.2d 1124, 1127 n.1 (Ind. Tax Ct. 2001). Because Vitco’s claims and supporting arguments are identical to those previously rejected by the Court, the Court will not address them.
Footnote: On April 24, 1998, this Court issued an opinion in Clark v. State Board of Tax Commissioners, 694 N.E.2d 1230 (Ind. Tax Ct. 1998). Clark sets forth what this Court expects from taxpayers and the State Board in appeals involving issues of obsolescence. See Clark, 694 N.E.2d at 1241. As a result of that directive, many cases involving obsolescence that were pending before the Court were remanded to the State Board for further consideration in light of Clark.
Footnote: The State Board conducted one hearing on all three of Vitco’s challenges.
Footnote: Thus, PAR is a means of converting a per lineal foot price into easily measured square foot units. See Ind. Admin. Code tit. 50, r. 2.1-4-1 (1992). PAR essentially measures how efficiently the building space is used; indeed, “[a] rectangular building requires a larger amount of perimeter walls than a square building to encompass the same amount of floor area[.]” Id. The PAR calculation translates this reality to a measurable, and taxable, ratio.

Footnote: All cases that would have been remanded to the State Board are now remanded to the Indiana Board of Tax Review (Indiana Board). Ind. Code Ann.§ 6-1.1-15-8 (West Supp. 2003). Final determinations made by the Indiana Board are subject to review by this Court pursuant to Indiana Code § 6-1.1-15. Ind. Code Ann. §§ 6-1.5-5-7, 33-3-5-2 (West Supp. 2003).

Footnote: In the commercial context, this loss of value usually means a decrease in the property’s income generating ability. See Miller Structures, Inc. v. State Bd. of Tax Comm’rs, 748 N.E.2d 943, 953 (Ind. Tax Ct. 2001).

Footnote: For instance, Vitco did not submit any probative evidence indicating how its improvement’s alleged deficiencies/inefficiencies are causing an actual decrease in its ability to generate income. See Miller Structures, Inc., 748 N.E.2d at 953.