State Tax Commission of Missouri

The issue in this appeal is the true value in money as of January 1, 2004, of Complainant’s machinery and equipment, specifically, what is the most probable price that could be commanded for the machinery and equipment in an open-market, competitive exchange with buyer and seller both acting knowledgeably and prudently?

SUMMARY

For tax year 2004, then Assessor Marsha Boeschen, valued Complainant’s business personal property at $8,074,200. On June 30, 2004, Complainant’s agent requested and was provided with a form to file an informal appeal of its tax assessment. Said form was returned to the Assessor’s office on July 12, 2004. Complainant received no response upon its request for an informal review. Although Complainant may have wished to appeal to the Pettis County Board of Equalization, it is unclear whether the request for an informal review directed to the then Assessor was sufficient to perfect such an appeal. Complainant received no hearing or decision from the Pettis County Board of Equalization and the Board, pursuant to its general powers to review and equalize assessments, affirmed the assessment made by the Assessor. Thereafter, Complainant filed its appeal with the State Tax Commission. After due consideration, we find that we have jurisdiction to hear and determine the issues presented in this case.

A hearing was held on March 28, 2006, at the Pettis County Courthouse, Sedalia, Missouri. At hearing, Complainant’s appraiser, Allen Bealmear, proposed a value for the subject personal property of $4,307,346. Respondent’s appraiser, J.S. Sutterfield, proposed a value for the subject personal property of $20,320,371.

Complainant’s Evidence

Complainant offered the following exhibits:

Exhibit A -- Appraisal Report of Mr. Bealmear

Exhibit B -- Written Direct Testimony of Mr. Bealmear

Exhibit C -- Affidavit – Excluded

Exhibit D -- Quarterly Cost Indexes

Exhibit E -- Solar Press Transcript - Excluded

Exhibit F -- Workfile of Mr. Sutterfield

Exhibit G -- Deposition of Mr. Dohrman

Exhibit H -- Deposition of Mr. Sutterfield

Exhibits A, B, D, F, G and H were admitted into the record.

Respondent’s Evidence

Respondent offered the following exhibits:

Exhibit 1 -- Appraisal Report of Mr. Sutterfield

Exhibit 2 -- Analysis of Mr. Dohrman

Exhibit 3 -- List of Assets

Exhibit 4 -- 2004 Business Assets List

Exhibit 5 -- Written Direct Testimony of Mr. Dohrman

Exhibit 6 -- Written Direct Testimony of Mr. Sutterfield

Exhibit 7 -- Corrected Spreadsheet/Sutterfield’s Appraisal

Exhibit 8 -- Bealmear work file

Exhibit 9 -- Page from Exhibit 8

Exhibit 10 -- Initial Research Printout

Exhibits 1 through 10 were admitted into the record.

FINDINGS OF FACT

1. Jurisdiction. We cannot determine, from the record or documents submitted after the hearing, that the taxpayer perfected an appeal to the Board of Equalization. Further, we find no action on the part of the county which prevented the taxpayer from appealing to the Board. The fact that a taxpayer seeks an informal review with the Assessor does not put the Board on notice that the taxpayer wishes to further prosecute its appeal. However, because the individual who was Assessor at the time is no longer available to discuss her understanding of the facts and circumstances surrounding the informal review, we determine to err on the side of caution and accept jurisdiction.

2. Complainant. Gardner Denver is a global producer of blowers, air compressors, petroleum pumps, water jetting pumps and accessories, fluid transfer equipment and liquid ring pumps. Complainant’s Exhibit F. The oil and gas drilling industry is one of the firm’s largest sources of sales. Gardner Denver enjoyed gross revenues in 2004 of 739.5 million dollars, an increase of 95% since the year 2000. About 80% of sales result from the compressor and blower products line. The Sedalia facility assembles both compressors and blowers including manufacture of some of the components and housings. A limited amount of rebuilding is also conducted. The facility includes provision for quality control testing of components manufactured to very high specifications. Respondent’s Exhibit 1, p. 8.

3. Subject Property. The personal property which is the subject of this appeal consists of some 2000+ items of machinery, equipment, and furniture including drill presses, welding equipment, grinders, vices, calibration equipment, work tables, racks, machining centers, milling machines, air compressors, saws, pumps, stands, hydraulic equipment, lathes, tool sets, cabinets, benches, stools, desks, chairs, fans, hand carts, fork lifts, cranes, shelving, pallet trucks, Dynometers, battery chargers, boring mills, dryers, pressure washers, coolant recovery systems, handling systems, particle separators, hoppers, conveyor systems, and other similar equipment as more completely set out in the parties’ appraisal reports.

Although the plant does very high precision work, the equipment itself is long-lived, durable, and “fairly low tech.” Tr. 93.

4. Values. The original acquisition cost of Complainant’s personal property was $44,000,000. Tr. 54. Complainant’s appraiser estimated a value of $4,307,346 based upon the market approach. Respondent’s appraiser estimated a value of $20,320,371 based upon the cost approach. The Assessor’s original value of $8,074,200 was based upon the sworn statement of one Daniel C. Rizzo, Jr., Vice President and Corporate Controller of Gardner Denver, Inc. Respondent’s Exhibit 4. Both the market approach and the cost approach are appropriate methods of valuing personal property. Daly v. P.D. George Co., 77 S.W.3d 645 (Mo. App. E.D. 2002), Snider v. Casino Aztar/Aztar Missouri Gaming Corp., 156 S.W.3d 341 (Mo. banc 2005).

5. Legislative Guidance. In 2005, the legislature enacted Section 137.112, RSMo 2005, indicating a preference for the use of the cost approach to determine value for business personal property. Under this section, the assessor is instructed to use “original cost” [the price the current owner paid for the property without freight, installation or sales or use tax], and to depreciate said original cost by the “class life” as set forth in the federal Modified Accelerated Cost Recovery System life tables under the Internal Revenue Code. Depending on class, recovery periods range between 3 and 20 years. Also under this Section, all property maintains a residual value between 10% and 20% and cannot be assigned a scrap value while still in use. This Section does not apply to business personal property placed in service before January 2, 2006, but it useful for ascertaining the Legislature’s position on issues such as historical cost vs. original cost; class life; and the appropriateness of residual values.

6. Respondent’s Cost Approach. Respondent’s appraiser prepared a cost approach to value. He determined the assets owned by Complainant by a review of Complainant’s 2004 fixed asset list. He divided those assets into classes according to their nature and economic life. Economic life was based upon recommendation from Marshall Valuation Service. Most durable equipment was assigned an economic life of 12 years. Electronic equipment was assigned an economic life of 5 years and tooling was assigned an economic life of 8 years. The appraiser utilized historic cost, adjusted for inflation, to determine current cost new. He then depreciated those assets according to their predetermined life. A substantial portion of the equipment was at or near the end of its economic life and was assigned a residual value of 20%.

7. Complainant’s Market Approach. Complainant’s appraiser and his assistant walked through the subject plant to attempt to identify assets. They recorded their findings. Most of the equipment was rated as in “average condition for age” but Complainant’s appraiser has failed to disclose the age of most of the equipment. Complainant’s appraiser testified that he drew upon many different sources to determine market value, and that the information contained in the workfile was merely what had been gathered by his researcher. Tr. 46. He further testified that he could not reconstruct his valuations from information provided. Tr. 46. Finally he states:

There is so much data to consider that it would be impractical on a line-item basis to do a complete written demonstration, for lack of a better word, that would give you or any other person who is not an appraiser enough information to lead you to the same conclusions. You would first have to be an appraiser, you would have to have seen the equipment, and you would have to have access to data. Plus you would have to have experience. Tr. 47.

Complainant’s Evidence is Not Substantial and Persuasive

8. Inconsistent Statements. Complainant has created its own credibility problem in its inconsistent sworn statements. Complainant’s actual acquisition costs were over $44,000,000. In 2004, in a sworn statement, Complainant indicated an acquisition cost for its business personal property of $8,074,200. Complainant failed to indicate the age or condition of the property, even though it was requested to do so.

Also in 2004, Complainant filed an appeal with this agency wherein it asserted, under oath, that the market value of its property was a mere $807,420. Finally, Complainant presents the sworn testimony of its appraiser at hearing now asserting a market value of a little more than $4,000,000. So much disagreement by so many individuals on the same side of a dispute necessarily impacts the level of confidence this hearing officer can assign to Complainant’s evidence.

Complainant explains its behavior as follows:

The practical issue faced by taxpayers who obtain professional appraisals is that most appraisals cannot be completed by the deadline for filing the State Tax Commission Complaint form. Although property owners may have a rough estimate of the true fair market value of their property, an exact value cannot be known until an appraisal is finalized.

Consequently, taxpayers are constrained to set forth a sufficiently low value so that a sufficient amount of the taxpayer’s protested taxes are held in escrow pending the conclusion of the appeal. Otherwise, taxes may be disbursed by the collector, leaving the taxpayer no remedy even upon successful completion of the appeal. See RSMo. Sec. 139.031.

Respondent moved for dismissal of Complainant’s case because of this practice. We did not find that we had grounds to dismiss. However, such an inconsistency of sworn statements limits credibility.

9. Failure to Produce Workfile. Pursuant to the Tax Commission order of

January 11, 2006, Respondent requested a copy of Complainant’s workfile for the purpose of conducting cross-examination. Complainant’s appraiser disclosed at hearing that he had produced an incomplete workfile. Tr. 42-46.[1]

The purpose of producing the complete workfile is so that the Commission and opposing party are able to reconstruct the value assigned to property. If a party fails to provide information that leads the Commission to the same conclusion reached by its appraiser, it will not prevail.

10. Failure to Adequately Describe and Adjust for Age and Condition. Complainant’s appraiser frequently referred to an item of property as being “average for its age,” without disclosing the age of the identified property in his appraisal report.[2] Thus, all of Complainant’s property was rated as average or below, even though some of the property was virtually new according to Complainant’s asset list. Complainant’s appraiser’s demonstrations of market approach show that he has made no adjustments for age or condition of his comparable sales as compared to the subject property. Indeed, many of the sales contained in the appraiser’s work file have no listed age or condition. And, while we are willing to concede to the appraiser’s assertion that the auctioneers would have disclosed defects, we are not willing to concede that every unit that is “average for its age” needs no condition and age adjustments to make it comparable to the property that is being appraised.

11. Failure to Support Economic Obsolescence Adjustment. Economic obsolescence is the loss in value of a property caused by factors external to the property. These may include such things as the economics of the industry; availability of financing; loss of material and/or labor sources; passage of new legislation; changes in ordinances; increased cost of raw materials; labor or utilities (without an offsetting increase in product price); reduced demand for the product; increased competition; inflation or higher interest rates; or similar factors. Valuing Machinery and Equipment: The Fundamentals of Appraising Machinery and Technical Assets, Second Edition, American Society of Appraisers, 2005, p. 67.

Complainant’s appraiser used the cost approach to value two items for which he had insufficient sales. After deducting physical and functional obsolescence, Complainant’s appraiser determined that the machinery suffered a 53% and 66% loss in value due to economic obsolescence. He used one sale to establish economic obsolescence for each machine.

One sale of anything is not persuasive. However, economic obsolescence necessarily requires a demonstration that there is something outside the property impacting the value of that property. Complainant’s appraiser has failed to establish that any economic obsolescence exists.

Respondent’s Evidence Not Substantial and Persuasive

12. Valuing Unknown Items. We find Mr. Sutterfield’s appraisal to be better reasoned and understandable that Mr. Bealmear’s appraisal, but we nevertheless find that Mr. Sutterfield has failed to prove value inasmuch as he has assigned value to certain items from the asset list which were not clearly tangible property. Tr. 89-91.

13. Valuing Installation: Mr. Sutterfield assigned a value of $2,513,775 for “tooling’ items listed on Complainant’s fixed asset list. Without more information, we cannot rule out the possibility that these are items of installation which should not considered a part of the market value of personal property in Missouri.

Board Value Affirmed

14. Neither party has presented substantial and persuasive evidence tending to demonstrate that the value approved by the Board of Equalization is incorrect. The Board value is only a little over 18% of original cost; well within the 10% to 20% residual values suggested by the Legislature in Section 137.112 for values after January 2, 2006.

CONCLUSIONS OF LAW

Jurisdiction

The Commission has jurisdiction to hear this appeal and correct any assessment which is shown to be unlawful, unfair, arbitrary or capricious. Article X, section 14, Mo. Const. of 1945; Sections 138.430, 138.431, RSMo.

Board of Equalization Presumption

[1] Record Keeping (ETHICS RULE)

An appraiser must prepare a workfile for each appraisal, appraisal review, or appraisal consulting assignment. The workfile must include:

the name of the client and the identity, by name or type, of any other intended users;

true copies of any written reports, documented on any type of media;

summaries of any oral reports or testimony, or a transcript of testimony, including the appraiser’s signed and dated certification; and

all other data, information, and documentation necessary to support the appraiser’s opinions and conclusions and to show compliance with this Rule and all other applicable Standards, or references to the location(s) of such other documentation.

An appraiser must retain the workfile for a period of at least five (5) years after preparation or at least two (2) years after final disposition of any judicial proceeding in which the appraiser provided testimony related to the assignment, whichever period expires last.

An appraiser must have custody of his or her workfile, or make appropriate workfile retention, access, and retrieval arrangements with the party having custody of the workfile.

Comment: A workfile preserves evidence of the appraiser’s consideration of all applicable data and statements required by USPAP and other information as may be required to support the appraiser’s opinions, conclusions, and recommendations.

A photocopy or an electronic copy of the entire actual written appraisal, appraisal review, or appraisal consulting report sent or delivered to a client satisfies the requirement of a true copy. As an example, a photocopy or electronic copy of the Self-Contained Appraisal Report, Summary Appraisal Report, or Restricted Use Appraisal Report actually issued by an appraiser for a real property appraisal assignment satisfies the true copy requirement for that assignment.

Care should be exercised in the selection of the form, style, and type of medium for written records, which may be handwritten and informal, to ensure that they are retrievable by the appraiser throughout the prescribed record retention period.

A workfile must be in existence prior to and contemporaneous with the issuance of a written or oral report. A written summary of an oral report must be added to the workfile within a reasonable time after the issuance of the oral report.

A workfile must be made available by the appraiser when required by state enforcement agencies or due process of law. In addition, a workfile in support of a Restricted Use Appraisal Report must be sufficient for the appraiser to produce a Summary Appraisal Report (for assignments under STANDARDS 2 and 8) or an Appraisal Report (for assignments under STANDARD 10), and must be available for inspection by the client in accordance with the Comment to Standards Rules 2-2(c)(viii), 8-2(c)(viii), and 10-2(b)(ix).

[2] Appraisers are given some leeway in describing the condition of the personal property. But, it is suggested that condition codes such as New, Excellent, Very Good, Good, Fair, Poor, Salvage and Scrap, are more descriptive and useful than “Average for Age.”

Comparison of Value in Exchange and Value in Use