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Union Electric Co. v. Estes

Court of Appeals of Missouri, Western District, Third Division

September 26, 2017

UNION ELECTRIC COMPANY D/B/A AMEREN MISSOURI, Appellant,
v.
CHRISTOPHER ESTES, ASSESSOR, COLE COUNTY, MISSOURI, Respondent.

         Appeal from the Circuit Court of Cole County, Missouri The Honorable Jon E. Beetem, Judge

          Before Alok Ahuja, Presiding Judge, Thomas H. Newton, Judge and Cynthia L. Martin, Judge

          Cynthia L. Martin, Judge

         Union Electric Company, d/b/a Ameren Missouri ("Ameren") appeals from a circuit court judgment which upheld the Missouri State Tax Commission's ("Commission"), decision and order affirming the 2013 assessed valuation of Ameren's natural gas pipeline real property in Cole County, Missouri as determined by the Cole County Assessor ("Assessor"). Because the Assessor applied the reproduction cost valuation methodology without considering depreciation, we reverse the circuit court's judgment, and remand this matter for further proceedings as herein described.

         Factual and Procedural Background

         Ameren is a regulated public utility. Ameren transmits and distributes natural gas in various counties in eastern and central Missouri. The 2013 valuation and assessment of the components of Ameren's natural gas pipeline that qualify as real property located in Cole County is the subject of this appeal.

         Pursuant to section 137.010(4), [1] the term "real property" for purposes of the assessment of property taxes includes "stationary property used for transportation or storage of liquid and gaseous products, including, but not limited to, . . . natural gas . . . ." Ameren owns real property as so defined, as it maintains a natural gas pipeline transmission and distribution system through 25 counties in the State of Missouri, including Cole County. Ameren's real property in each of these counties is subject to assessment every two years for the purpose of calculating annual real property taxes owed to each county. Section 137.115.1.

         County assessors are authorized by section 137.115 to require those with a possessory interest in property subject to assessment to file property lists. The lists required by section 137.115 are required to contain, among other things, a list of all real estate in which one holds a possessory interest. Section 137.120.

         The Commission is statutorily authorized to require county assessors to determine the assessed value of all real property and tangible personal property subject to taxation by using forms prescribed by the Commission. Section 138.380(2) and (5). Section 138.320 provides that "suitable forms and instructions" prepared by the Commission and provided to county clerks and officers "shall be strictly complied with by the officers in the performance of their respective duties." Consistent with this authority, the Commission promulgated a three-page form for natural gas distribution companies to use in 2013 to report real property and tangible personal property in service as of January 1, 2013. (See Appendix A, attached).

         The first page of the Commission's form, titled "Natural Gas Distribution Company Statement of Taxable Property, " provided, in pertinent part:

PURPOSE: This information will be utilized by the assessor in determining the market value of the [taxpayer's] property in the county as of January 1 of the current year.
WHO MUST FILE: Any person, company or corporation that owns, controls or manages a gas distribution company must complete and file these schedules.
REPORTING PERIOD: All property owned, used or leased by the
[taxpayer] on the first day of January in each year.
TYPE OF COSTS: The [taxpayer] must file the original or historical costs as found in Annual Report of Natural Gas Companies to the Public Service Commission of the State of Missouri and/or the Federal Energy Regulatory Commission (FERC) Form No. 2, Annual Report of Major Natural Gas Companies.
DEPRECIATION/OBSOLESCENCE: It is recommended depreciation assignment follow the IRS guidelines found within IRS Publication 946. However, determination of value is the responsibility of the county assessor.

(Emphasis added.) The bottom of the first page of the form provided that "[a] separate real estate and personal property reporting form must be prepared for each taxing entity within a county to correctly allocate the market value." The second and third pages of the form were the referenced reporting forms, respectively, for real property and tangible personal property.

         The second page of the form required natural gas distribution companies to itemize the "original cost" of real property in service as of January 1, 2013. (See Appendix A). The original costs were to be subdivided in three vertical columns by asset type (367 Mains, 376 Mains, and 380 Services), and in eighteen horizontal lines representing the "year placed in service, " beginning with 2012, and continuing through a line for 1996 and earlier. A fourth vertical column, labeled "Yearly Total, " represented the sum of the original cost of the three asset types itemized in vertical columns one through three, with a "Yearly Total" calculated in each of the eighteen "year placed in service" lines. In the fifth vertical column, the form set forth a percentage to be multiplied by the "Yearly Total" in each "year placed in service" line, with the percentages declining from 100% for property placed in service in 2012, to 20% for property placed in service in 1996 and earlier. These percentages represented depreciation by describing the percentage of the original cost/"Yearly Total" that would be subject to taxation, and tracked the percentages recommended by IRS Publication 946. The final vertical column on the second page of the form was labeled "Market Value, " and reflected the product of the "Yearly Total" in each "year placed in service" line multiplied by the designated depreciation percentage for that year. The sum of the "Market Values" was to be reflected on the bottom of the form as the "Total Value." The "Assessed Value" was then calculated by multiplying the "Total Value" by the statutorily required percentage of thirty-two percent.[2] Section 137.115.5(3).

         The third page of the form required natural gas distribution companies to itemize the "original cost" of tangible personal property in service as of January 1, 2013. (See Appendix A). The third page of the form was identical in every respect to the second page of the form, except that vertical columns one through three identified personal property asset types instead of real property asset types.[3]

         Along with the 2013 form, the Commission provided an Assessor's Manual to afford guidance to county assessors. Section 7.4 of the Assessor's Manual addressed the "Assessment of Natural Gas Local Distribution Companies, " and provided in pertinent part that:

Natural gas local distribution companies are companies serving intrastate customers, namely residential and commercial/industrial customers. At this time, these companies are locally assessed. Originally, these companies were primarily located within the boundaries of one county. However, due to system expansions and company mergers, many companies now cross county and state boundaries. The companies supplying gas to the distribution companies (known as transmission companies) are typically interstate in nature. Some also supply industrial customers. These companies are centrally assessed by the State Tax Commission.
All companies rely on original costs as a starting point. It is important for the assessor to arrive at a reasonable level of depreciation.

[L.F. 1817][4] (Emphasis added.)

         The form promulgated by the Commission for use by natural gas distribution companies in 2013 was apparently different from reporting forms used in previous years.[5]The 2013 form was not made available to taxpayers or county assessors until early in 2013. It is uncontested that the 2013 form and the related portions of the Assessor's Manual required use of a "cost approach" valuation methodology based on original or historical costs.

         As a natural gas distribution company with real and tangible personal property in 25 counties, Ameren was required to use the Commission's 2013 form. However, Ameren's FERC Form No. 2, from which the Commission's form required original cost information to be drawn, did not subdivide original costs by county at all, let alone by the asset types identified in vertical columns one through three of the second and third pages of the form. To prepare its reporting forms, Ameren began with the original cost of its entire natural gas pipeline system as of January 1, 2012 as had been previously reported to all 25 county assessors, added the original cost of all additions to the system in 2012, subtracted the original cost of all assets retired from the system in 2012, and then allocated the balance (the original cost of the system in service as of January 1, 2013), to taxing units within each county, [6] based on miles of pipeline in service in each taxing unit.[7] Ameren then prepared a real property and tangible personal property reporting form for each taxing unit within each county. Ameren's form roughly approximated the second and third pages of the Commission's form, except that Ameren provided a "Yearly Total" (the original costs) of assets in service as of January 1, 2013 for each "year placed in service, " (the subject of vertical column four on the second and third pages of the Commission's form) without subdividing that "Yearly Total" into asset types (the subject of vertical columns one through three on the second and third pages of the Commission's form). Consistent with the Commission's form, Ameren's reporting form then multiplied the "Yearly Total" in each "year placed in service" line by the corresponding depreciation percentage shown on the Commission's form to calculate a "Market Value" for each "year placed in service." The sum of the "Market Values" yielded a "Total Value, " as contemplated by the 2013 form, with that number multiplied by the appropriate statutory percentage to achieve an "Assessed Value." Ameren filed its reporting forms by April 1, 2013.

         Several county assessors expressed concern about the "Total Values" and resulting "Assessed Values" Ameren calculated for its real property and tangible personal property in service as of January 1, 2013.[8] Some of the county assessors met with Ameren and expressed the belief that Ameren's "original costs" (which yielded the "Yearly Total" in each "year placed in service" line on Ameren's reporting form) already factored in depreciation, such that multiplying the "Yearly Totals" by the depreciation percentages shown on the Commission's form had resulted in double depreciation. Ameren assured the county assessors that no depreciation was reflected in its original cost ("Yearly Total") numbers. Notwithstanding this explanation, of the 25 counties in which Ameren filed reporting forms, 16 county assessors rejected Ameren's calculated "Market Values" and resulting "Assessed Values." The assessors in these 16 counties ascribed "Market Values" for Ameren's real property and/or tangible personal property that were very close, if not identical, to Ameren's reported "Yearly Totals." [L.F. 3268] In other words, the county assessors who challenged Ameren's valuations ascribed "Market Values" that roughly approximated Ameren's reported original costs/"Yearly Totals" without taking any reduction for depreciation.[9]

         Specific to Cole County, Ameren reported the "Yearly Total" (original cost) of its real property in service in Cole County as of January 1, 2013 as $53, 252, 364. After multiplying the components of the "Yearly Total" by the depreciation percentages designated on the Commission's form for each "year placed in service, " Ameren reported a "Market Value" in each "year placed in service" line, the sum of which produced a "Total Value" of $20, 498, 505. This "Total Value" was multiplied by the statutory assessment rate of thirty-two percent, to achieve an "Assessed Value" for real property in service in Cole County as of January 1, 2013 in the amount of $6, 559, 522.

         The Assessor did not accept Ameren's "Total [Market] Value" for real property, and instead assigned a "Market Value" to Ameren's real property in service in Cole County as of January 1, 2013 in the amount of $53, 252, 400, effectively adopting Ameren's pre-depreciation, original cost ("Yearly Total") amount.[10] The Assessor multiplied the assigned "Market Value" by the statutory assessment rate of thirty-two percent to yield an "Assessed Value" of $17, 040, 760, an amount that was $10, 481, 238 more than the "Assessed Value" Ameren calculated. The difference in the "Assessed Values" is exclusively attributable to depreciation which was factored into Ameren's valuation, but which was not factored into the Assessor's valuation.[11]

         Ameren appealed the Assessor's determination to the Cole County Board of Equalization ("BOE"). Ameren identified as the basis for its appeal that "[d]epreciation per MO State Tax Commission guidelines not allowed by assessor in determining the appraised value of the real and/or personal [property] components of the Commercial Local Gas Distribution System." On July 28, 2013, the BOE summarily sustained the Assessor's valuation.

         Ameren appealed the BOE's decision to the Commission. The Commission's appeal form requires a taxpayer to set forth the "True Value (Market)" and "Assessed Value" set by both the assessor and the board of equalization, and to set forth the taxpayer's proposed "True Value (Market)" and "Assessed Value." The appeal form then requires the taxpayer to identify the basis for the appeal.

         Ameren's Cole County appeal form reported the "True Value (Market)" and "Assessed Value" set by the Assessor and sustained by the BOE, and the "True Value (Market)" and "Assessed Value" that had been proposed by Ameren's reporting forms. In addition, as required by the appeal form, Ameren identified the basis for its appeal as follows:

         (Image Omitted)

         Ameren filed identical appeals with the Commission from the boards of equalization decisions sustaining county assessor valuations in the 15 other counties where assessors had not accepted Ameren's valuations. Ameren asserted the same basis for appeal in each appeal: that "[depreciation per MO State Tax Commission guidelines not allowed by assessor in determining market value of Local Gas Distribution System."

         Ameren's appeals were consolidated by the Commission. The 16 county assessors involved in the consolidated appeals were represented by the same attorney, and offered collective evidence to defend the appeals.

         During the evidentiary hearing before the Commission, Ameren reiterated the basis for its appeals:

Ameren [] is here challenging the market valuation and subsequent assessment of its natural gas distribution system as the counties that are here subject of this hearing and appeal failed to allow Ameren [] a deduction for depreciation in determining the market value of its natural gas distribution system. Ameren has appealed the valuations in 16 counties for real property components and 13 counties for the personal property components of the natural gas distribution system.

[L.F. 56] (Emphasis added.) The county assessors conceded during the hearing: that each had reacted to Ameren's 2013 reporting forms believing something was wrong;[12] that each had believed that Ameren's original costs/"Yearly Totals" already included depreciation; and that each now admitted this "was an incorrect conclusion." [L.F. 89]

         In fact, the uncontested evidence submitted during the Commission hearing confirmed that Ameren's original cost numbers ("Yearly Totals") did not already reflect a depreciation deduction. And the uncontested evidence submitted during the Commission hearing confirmed that the assessors effectively adopted Ameren's original costs/"Yearly Totals" (or amounts very close thereto) as the proper "Market Value" without calculating a deduction for depreciation.

         Though the assessors conceded the stated basis for Ameren's appeals to the Commission, the assessors nonetheless argued that their failure to calculate depreciation was irrelevant. The assessors argued that even though the assessors had not calculated any depreciation, Ameren could not establish that the "Market Value" set by each assessor was unlawful or unfair.

         The county assessors offered expert testimony from George Sansoucy ("Mr. Sansoucy"), an appraiser.[13] Mr. Sansoucy offered his own opinion about the value of Ameren's taxable real property and tangible personal property. Mr. Sansoucy used a different valuation methodology from that required by the Commission's 2013 form and Assessor's Manual.[14] Instead of calculating "Market Value" by reducing original costs by depreciation, Mr. Sansoucy calculated "Market Value" by reducing "reproduction costs new" by depreciation. "Reproduction costs new" represented Mr. Sansoucy's calculation of the cost of Ameren's pipeline property in today's dollars, starting with Ameren's reported original costs "trended to present day." [L.F. 1160] Mr. Sansoucy's depreciation deduction did not rely on "life of asset" IRS depreciation percentages as the Commission's form recommended, but instead used a "breakdown method, which seeks to study, analyze, and calculate the different -- the three primary forms of depreciation, physical, functional, and economic, for the cost approach." [L.F. 85] In fact, Mr. Sansoucy criticized the use of "life of asset" depreciation for real property, and the use of original costs to calculate market values, effectively criticizing the valuation methodology required by the Commission's 2013 form.[15] [L.F. 1160]

         The "reproduction costs new" that Mr. Sansoucy calculated happened to be roughly double Ameren's reported original costs/"Yearly Totals, " and thus roughly double the assessors' assigned "Market Values." After reducing "reproduction costs new" by depreciation calculated in the manner Mr. Sansoucy recommended, Mr. Sansoucy arrived at "Market Values" for Ameren's real property and tangible personal property in service as of January 1, 3013 that approximated the "Market Values" assigned by each assessor. [Exhibits 9 and 10; L.F. 1169-1170] Mr. Sansoucy acknowledged on cross-examination that his "reproduction costs new" valuation methodology had not been used by any of the county assessors, and was not consistent with the valuation methodology required by the Commission's 2013 form. Mr. Sansoucy also acknowledged that Ameren's reported "Yearly ...


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