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Ellison v. Department of Revenue

Supreme Court of Oregon

November 9, 2017

Barbara ELLISON, Plaintiff-Respondent,

          Argued and submitted June 14, 2017

         On appeal from a supplemental money judgment of the Oregon Tax Court 5177 Henry C. Breithaupt, Judge.

          Denise G. Fjordbeck, Assistant Attorney General, Salem, argued the cause and fled the brief for appellant Department of Revenue. Also on the brief were Ellen F. Rosenblum, Attorney General, Benjamin Gutman, Solicitor General, and Daniel Paul, Assistant Attorney General.

          Jack L. Orchard, Ball Janik, LLP, Portland, argued the cause for respondent Barbara Ellison. Bruce H. Cahn and Jack L. Orchard fled the brief.

          Before Balmer, Chief Justice, and Kistler, Walters, Landau, Nakamoto, and Flynn, Justices, and Brewer, Senior Justice pro tempore. [*]

         The supplemental money judgment of the Tax Court is vacated. The matter is remanded to the Tax Court for further proceedings.

         [362 Or. 149] Case Summary: In an underlying property tax appeal, the Tax Court rejected a request by the Department of Revenue (department) and the county assessor to increase the real market value of taxpayer's property, and the court later awarded taxpayer attorney fees against the department under ORS 305.490(4) (a) (authorizing discretionary award of attorney fees in ad valorem taxation cases if "the court fnds in favor of the taxpayer"). The department appealed the attorney fee award only. Held: (1) In ORS 305.490(4)(a), the words "in favor of the taxpayer" include the situation in which both parties request a change in valuation on appeal, and the taxpayer persuades the court to reject the department's request for an increase, even though the taxpayer was unsuccessful in her own request for a reduction in value; (2) the court here found "in favor of the taxpayer" and had discretion to award attorney fees under ORS 305.490(4)(a); and (3) in reviewing the Tax Court's exercise of that discretion, one of the factors was not supported by substantial evidence in the record.

         The supplemental money judgment of the Tax Court is vacated. The matter is remanded to the Tax Court for further proceedings.

         [362 Or. 150] BREWER, S. J.

         In the underlying property tax appeal, the Tax Court rejected a request by the Department of Revenue (department) and the county assessor to increase the real market value of taxpayer's property, and the court later awarded taxpayer attorney fees against the department under ORS 305.490(4)(a) (authorizing discretionary award of attorney fees in ad valorem taxation cases if "the court finds in favor of the taxpayer"). The department appeals the attorney fee award only. As we will explain, even though the Tax Court also rejected the taxpayer's request for a reduction in real market value, we conclude that the legal prerequisite for a discretionary attorney fee award under that statute-that the court found "in favor of the taxpayer"-was met. We also conclude that the Tax Court did not err in applying most of the factors on which it relied in making the fee award. However, we conclude that the court's use of one factor was erroneous, thus bringing into question the court's overall exercise of discretion. Accordingly, we vacate the attorney fee award and remand for the court to exercise its discretion without considering that factor.

         I. OVERVIEW

         A. The Underlying Appeal

         Even though this case involves only the propriety of a discretionary award of attorney fees, the Tax Court's decision on the merits in the underlying property tax appeal provides the necessary context for our analysis. At issue in that appeal was the real market value for tax year 2011-12 of two tax lots (the property) owned by taxpayer. The tax lots are part of a high-end horse breeding and training facility and an associated residence. Taxpayer substantially completed construction before January of 2011, and thus the value for that year would establish an exception value for the property.[1]

         The county assessor originally found a real market value for the two tax lots, both land and improvements, [362 Or. 151] of $9, 279, 571. Taxpayer appealed that value to the county Board of Property Tax Appeals (BOPTA). BOPTA affirmed without changing that value.

         Taxpayer next appealed to the Magistrate Division of the Oregon Tax Court. Before the magistrate, the department and assessor asserted a real market value of $18, 275, 412. Taxpayer, by contrast, appears to have asserted a much lower real market value than that affirmed by BOPTA (although the exact amount does not appear in the record). The magistrate accepted neither value, nor was she able to determine the correct real market value from the appraisals provided. She therefore affirmed BOPTA's determination of real market value.

         Taxpayer then appealed to the Regular Division of the Tax Court. Her complaint asserted a real market value of less than $4.8 million, [2] though by the time of trial she had revised that upward to $8.8 million. In contrast, in their answer to taxpayer's complaint in the Regular Division, the department and county assessor asserted a value of almost $20 million, which was slightly higher even than the amount they had originally asserted before the magistrate.[3]

         At trial, the parties offered appraisals to support their respective valuations. Both appraisers agreed that the cost approach was the best way to determine real market value. Their primary disagreement concerned the question of external obsolescence and its effect, if any, on the value of the property. In asserting a lower value, taxpayer's appraiser, Gilmore, concluded that there was significant external obsolescence. In support of the department's proposed [362 Or. 152] higher value, its appraiser, Healy, asserted that there was no external obsolescence at all.[4] Before turning to a more detailed review of the two appraisals, it is useful to provide an overview of several property valuation principles that were factors in the underlying appeal.

         B. Valuation Principles

         The starting point for calculating property taxes is the property's real market value. Dept. of Rev, v. River's Edge Investments. LLC. 359 Or. 822, 825, 377 P.3d 540 (2016). For that purpose, "real market value" is defined in essence to be what a buyer would pay a seller in an arm's length transaction on the assessment date. Or Const, Art XI, § ll(ll)(a)(A);[5] ORS 308.205(1).[6] To determine the real market value of property, appraisers use three approaches: the cost approach, the income approach, and the comparable sales approach. OAR 150-308.205-(A)(2)(a). The approaches are named for the types of indicators that the appraiser uses to estimate the value that a purchaser in the market would pay for the property. The cost approach considers "the cost of constructing a substitute property that provides the same utility as the subject property at its highest and best use"; the income approach relies on the income stream that the property generates; and the comparable sales approach examines the prices that buyers have paid for similar properties. See Hewlett-Packard Co. v. Benton County Assessor. 357 Or. 598, 603, 356 P.3d 70 (2015). Appraisers must consider each approach, but they need not use them all. See, e.g., River's Edge, 359 Or at 827. An appraiser may well conclude that one of the three approaches represents the best [362 Or. 153] approximation for the real market value. Appraisal Institute, The Appraisal of Real Estate 600 (12th ed 2001) (appraiser weighs approaches "and relies most heavily on the approach that is most appropriate to the nature of the appraisal problem"); see, e.g., Brooks Resources Corp. v. Dept. of Revenue, 286 Or. 499, 505-07, 595 P.2d 1358 (1979) (on facts of that case, court concluded that income approach provided better measure of value than cost approach).

         Another type of property value is use value (also known as "value in use"). Use value essentially looks to the economic value that the property has to its current owner, without regard to what price the property might draw in the market. Appraisal of Real Estate at 24-25; STC Submarine, Inc. v. Dept of Rev., 320 Or. 589, 595-96, 890 P.2d 1370 (1995) (to same effect). Use value often differs from market value, and it can be significantly higher than market value:

"Tor example, a property may be designed to produce a special product, the patent for which is held only by the owner of the property. Such a property would have little value to any other person but could be of great value to the owner of the patent.'"

STC Submarine, 320 Or at 596 (quoting Truitt Brothers, Inc. v. Dept. of Rev., 10 OTR 111, 114 (1985)).

         In some cases, a property has no immediate market value. In that circumstance, the "real market value" is the amount that would justly compensate the owner if the property were lost. ORS 308.205(2)(c).[7] Although this court does not appear to have directly addressed the issue, the Tax Court has held that the just compensation standard in ORS 308.205(2)(c) is not use value; it is still market value. Truitt Brothers, Inc. v. Dept. of Rev., 10 OTR 111, 113-15 (1985), affd on other grounds, 302 Or. 603, 732 P.2d 497 (1987) (discussing [362 Or. 154] concepts and explaining its conclusion). The department's rule implementing ORS 308.205(2)(c), the "especial property" rule, comports with that understanding. It states that, if comparable sales are not available for a property, then "real market value" will be determined using only the cost approach and/or the income approach. OAR 150-308.205-(A)(3).[8] In their briefing to the Tax Court, the department and county assessor both adopted that understanding of the statute and rule.

         In this case, both parties used the cost approach. In doing so, the major difference between the appraisers' opinions was whether and to what extent the property had external obsolescence (sometimes also called economic obsolescence). External obsolescence is

"a loss in value caused by factors outside a property. It is often incurable. External obsolescence can be either temporary (e.g., an oversupplied market) or permanent (e.g., proximity to an environmental disaster)."

Appraisal of Real Estate at 412; see J.R. Simplot Co. v. Dept. of Rev., 321 Or. 253, 260, 897 P.2d 316 (1995) (same). Because of its amorphous quality, external obsolescence has been called a "'ghostly apparition, '" a "'spirit whose presence may be discerned but whose intangible nature defies measurement'"; "'it confuses and chills the marketplace.'" Truitt Brothers, Inc. v. Dept. of Rev., 302 Or. 603, 611, 732 P.2d 497 (1987) (quoting Truitt Brothers, 10 OTR at 118).

         One final legal concept is relevant to the issues here. The Oregon Constitution creates a limit on the value at which real property may be assessed. Or Const, Art XI, § 11; see Gall v. Dept. of Rev.. 343 Or. 293, 295, 170 P.3d 558 [362 Or. 155] (2007) (explaining). That limit is known as the maximum assessed value. Or Const, Art XI, § ll(1)(a); Gall, 343 Or at 295. Ordinarily, a property's maximum assessed value can only increase by three percent per year. Or Const, Art XI, § ll(1)(b); ORS 308.146(1). In specified exceptional circumstances, however, the maximum assessed value is calculated differently, and it can increase by more than three percent in a particular year. See Or Const, Art XI, § ll(1)(c); ORS 308.146(3) (listing circumstances). When such an exception applies, the result is sometimes colloquially called the exception value. See Douglas County Assessor v. Crawford. 21 OTR 6, 7 (2012) (discussing term). One situation in which there is an exception value is for new improvements to property. Or Const, Art XI, § ll(1)(c)(A); ORS 308.146(3)(a). The exception value becomes the new maximum assessed value in future years and will otherwise be subject to the three percent limit. See Or Const, Art XI, § ll(1)(d). For that reason, the exception value has long-term implications for the tax that may be assessed against the property.

         With that preface, we turn to the parties' appraisals.

         C. Appraisal Evidence

         Taxpayer's appraiser, Gilmore, had valued hundreds of equine properties all over the nation. He concluded that there was a market for the property, but it was a national market. Based on a detailed analysis of sales of those properties, he testified that purchasers would not pay the cost that the owner of this property had incurred in adding the various improvements. Thus, while Gilmore used the cost approach, he concluded that the property suffered substantial external obsolescence of 50 percent. That led to his ultimate value for the property of $8, 800, 000.

         Healy-the department's appraiser-had no experience with valuing agricultural business properties generally (except a few hobby farms), or with equine properties, or with valuing especial properties; his experience was largely limited to residential properties. In searching for comparable sales, Healy referred to fewer sources than Gilmore, and his sources were more general than Gilmore's. Healy's analysis of the few sales that he did locate was limited to determining whether the property as a whole was comparable to [362 Or. 156] taxpayer's. Moreover, he did not break taxpayer's property down into component parts to determine if external obsolescence applied to such individual improvements as fencing or the horse arena.

         Based in part on a decision to limit the market to properties in Oregon, Healy concluded that the subject property had no immediate market value: in his view, it was an especial property under OAR 150-308.205(A)(3), and therefore it was subject to the just compensation standard of ORS 308.205(2)(c). Healy's testimony showed that he believed that the just compensation standard is different from real market value and more akin to use value.[9] Later, however, Healy testified that his value did not depend on whether the property was, in fact, especial.

         Because Healy had found no market data within the market as he defined it, he concluded that there was no external obsolescence at all. Accordingly, Healy opined that the just compensation value of the property would be the full cost that taxpayer had spent improving it, without deducting anything for depreciation or external obsolescence. His final value was $19, 815, 225.

         D. The Tax Court's Decision On The Merits

         The Tax Court ultimately rejected both appraisals, explaining in a written opinion that it found that neither one met the relevant burden of proof. Ellison v. Clackamas [362 Or. 157] County Assessor. 22 OTR 201 (2015). In so holding, however, the Tax Court gave some credit to Gilmore's testimony because (1) he was experienced in appraising farm properties in general and horse properties in particular; (2) he had correctly concluded that the relevant market was national, not local; and (3) he had correctly opined that there should be some substantial deductions for economic obsolescence. 22 OTR at 205. The Tax Court rejected taxpayer's appraisal, however, primarily because the court was not persuaded by Gilmore's opinion as to the amount of obsolescence. The court also critiqued some of Gilmore's other steps in the appraisal process. Id. at 204-05.

         The court more sharply rejected the department's appraisal. In doing so, the court raised broad questions about Healy's methodology[10] Accordingly, the court stated, it "place[d] no reliance upon the conclusions" of Healy. Id. Unpersuaded by either party's appraisal, the court then considered whether it could independently determine the true value of the property under ORS 305.412. It concluded that it could not do so. Accordingly, the court affirmed the BOPTA value. 22 OTR at 206.

         E. Attorney Fee Award

         In the wake of the tax court's decision, taxpayer sought an award of attorney fees under ORS 305.490(4)(a). As noted, that statute gives the Tax Court discretion to award attorney fees and expert witness fees incurred before a magistrate and in the Regular Division if the court "finds in favor of the taxpayer."[11] If that legal prerequisite is met, [362 Or. 158] in exercising its discretion whether to award fees, the Tax Court must consider the factors set out in ORS 20.075 (1).[12]If the court decides to make a discretionary award, then the court must consider the same factors, plus the additional factors found in subsection (2) of that statute, to determine the amount of the award. Taxpayer sought approximately $122, 000 in attorney fees incurred litigating the case, plus $44, 000 in expert witness fees.[13]

         The department objected. Among other arguments, it asserted that ORS 305.490(4)(a) did not permit a fee award, because the Tax Court had not found "in favor of the taxpayer."

         The Tax Court awarded the full amount of fees requested by taxpayer. The court initially held that its decision on the merits satisfied the legal prerequisite of being "in favor of the taxpayer" under ORS 305.490(4)(a). Although the court had ultimately rejected both appraisals and affirmed the BOPTA value, the court concluded that its rejection of the department's appraisal seeking a higher value higher amounted to a finding "in favor of the taxpayer."

         The Tax Court then concluded that it should exercise its discretion to award attorney fees. The court initially concluded that the department's valuation was not objectively reasonable. The court reiterated that the department's theory was based on a "fundamental" error of using "value in use" rather than market value. Although Healy had attempted to rely on the especial property definition, the court concluded that he "could not explain or justify" that reliance.

         The court also concluded that the department persistently had pursued its aggressive and unreasonable [362 Or. 159] valuation by repeatedly seeking a valuation of more than twice what BOPTA had found. Moreover, the court noted, in light of the constitutional requirements for determining maximum assessed value, the determination here would have affected taxpayer's property taxes for years to come, if not perpetually.

         The court added that the department's aggressive and unreasonable valuation had made it necessary for taxpayer to appeal to the Regular Division in the first place- "to protect against" the department's position "that the property had been grossly undervalued by BOPTA." In the court's view, the department's valuation also likely had made settlement impossible. Finally, the court concluded that an award of fees was needed to deter "the type of claims made by [the department and county] and then so inadequately supported."

         II. ANALYSIS

         As noted, we ultimately review the Tax Court's decision to award fees for abuse of discretion. ORS 20.075(3). However, such an exercise of discretion can involve predicate factual and legal determinations. See Oakmont. LLC v. Dept. of Rev..359 Or. 779, 789, 377 P.3d 523 (2016). For predicate legal questions, we review for errors of law. ORS 305.445. For predicate factual issues, we review for "lack of substantial evidence in the record to support the tax court's decision or order." Id. Because this appeal requires us to consider whether the Tax Court's underlying valuation decision supported the award of fees, and because neither party has challenged the ...

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