Southern Minnesota Beet Sugar Coop, Relator, vs. County of Renville, Respondent.

Southern Minnesota Beet Sugar Coop, Relator, vs. County of Renville, Respondent. A07-394, Supreme Court, August 23, 2007.

STATE OF MINNESOTA

 

IN SUPREME COURT

 

A07-394

 

Tax Court

Gildea, J.

Took no part, Hanson, J.

 

Southern Minnesota Beet Sugar Coop,

 

                                    Relator,

 

vs.

Filed:  August 23, 2007

                                                                                                             Office of Appellate Courts

County of Renville,

 

                                    Respondent.

 

 

S Y L L A B U S

 

The tax court's determination that the exterior shells of the tanks, bins, and silos at issue in this case were taxable property was not clearly erroneous.     

The tax court's determination that the sugar beet processing plant was special purpose property was not clearly erroneous.    

Even when the property at issue is special purpose property, if the tax court is faced with evidence of comparable sales, the court must make findings as to whether such evidence is appropriately used to value the property. 

The tax court must determine whether the taxpayer has met its burden to show that the county's assessment does not reflect the true market value of the property. 

After the tax court determines the actual market value of the property or affirms the county's assessment of the estimated market value of the property, the court must address the merits of any unequal assessment claim or claim for sales ratio relief. 

            Affirmed in part, reversed in part and remanded.

            Heard, considered, and decided by the court en banc.

 

O P I N I O N

GILDEA, Justice.

Relator Southern Minnesota Beet Sugar Coop (SMBSC) contested the real property tax assessment of its sugar beet processing plant by respondent County of Renville (the county).  After a trial, the Minnesota Tax Court concluded that neither party provided enough evidence to allow the court to determine the market value of the property.  The court therefore affirmed the county assessor's estimated market value of the property.  SMBSC petitioned this court for a writ of certiorari.  We affirm in part, reverse in part, and remand to the tax court.

This dispute involves the sugar beet processing plant that SMBSC operates on approximately 621 acres of land in Renville County (the subject property).  The subject property includes 31 buildings (ranging in size from just over 200 square feet to approximately 120,000 square feet), 30 tanks, bins, and silos of various sizes (ranging from capacities of 100,000 gallons to just over 7.6 million gallons), and numerous improvements (including railroad track and rail switches, paved areas for piling sugar beets, and four ponds totaling 110 acres).  Many of the buildings, tanks, bins, and silos, and improvements were constructed in 1973 and 1974, so that the facility could begin operating in 1975.  Additional buildings were added sometime around 1990.  SMBSC invested approximately $14.5 million for buildings, tanks, bins, and silos on the property between 1999 and 2002.[1] 

The county assessed property taxes based on its conclusion that the subject property had an estimated market value of $20,168,500 on January 2, 2003, and $20,134,000 on January 2, 2004.  SMBSC petitioned the tax court for relief from the county's real property tax assessment, contending that the estimated market value used by the county was greater than the subject property's actual market value and that the subject property was unequally assessed as compared to other property. 

At trial, the parties disagreed about what property was subject to tax and about the market value of the subject property.  SMBSC's witnesses contended that only some of the 30 tanks, bins, and silos on the subject property are taxable as real property, and its expert valued the property at $7.5 million.  The county argued that all of the 30 tanks, bins, and silos are taxable as real property and that the market value of the property was $55 million. 

The tax court concluded that all 30 tanks, bins, and silos on the property are taxable as real property.  Specifically, the court concluded "[t]he thick juice storage tanks, concrete sugar storage silos, beet pellet storage bins, molasses storage tanks, fuel tanks, betaine tank, condenser tank, water tank, water clarifier, and ash tank, exclusive of equipment contained therein" and "[t]he two-layered shell, roof, floor, and interior column of the Weibull bin" are taxable real property.  S. Minn. Beet Sugar Coop v. County of Renville, Nos. C5-04-286 & CV-05-100, 2006 WL 3803470, at *3-4 (Minn. T.C. Dec. 22, 2006).  The court also concluded that the subject property is a special purpose property.  Id. at *4.  The court concluded, however, that it could not "reach a well supported and reasonable determination as to the market value of the Subject Property based on the experts' extrapolations and incomplete analyses" because SMBSC's expert had not included an analysis as to all the "taxable components, such as the tanks, bins and silos and land improvements," and the county's expert had analyzed only one building "and from this extrapolated the replacement cost for the rest of the buildings."  Id. at *13-14.  The court therefore affirmed the Renville County Assessor's estimated market value of the subject property as $20,168,500 on January 2, 2003, and $20,134,000 on January 2, 2004.  Id. at *3-4. 

SMBSC appeals to this court, claiming that the tax court committed several errors.  Specifically, SMBSC argues that the tax court erred when it (1) concluded that the tanks, bins, and silos on the subject property are taxable real property, (2) concluded that the subject property was special purpose property, (3) failed to make any findings with respect to the comparable sales evidence offered by SMBSC, (4) adopted the county assessor's valuation in the absence of "affirming evidence," and (5) failed to grant SMBSC relief on its unequal assessment claim. 

Our review of the final order of the tax court is limited.  Hutchinson Tech., Inc. v. Comm'r of Revenue, 698 N.W.2d 1, 6 (Minn. 2005).  We determine only whether the tax court lacked jurisdiction, whether the tax court's order is supported by the evidence and is in conformity with the law, and whether the tax court committed any other error of law.  Minn. Stat. § 271.10, subd. 1 (2006); Jefferson v. Comm'r of Revenue, 631 N.W.2d 391, 394 (Minn. 2001).  We review de novo the tax court's legal determinations.  Hutchinson Tech., 698 N.W.2d at 6.  But the tax court's factual findings are reviewed under a "clearly erroneous" standard.  200 Levee Drive Ass'n, v. County of Scott, 532 N.W.2d 574, 576 (Minn. 1995).  Finally, we will not defer to the tax court's valuation decision where the court has " ‘completely fail[ed] to explain its reasoning.' "  McNeilus Truck & Mfg., Inc. v. County of Dodge, 705 N.W.2d 410, 414 (Minn. 2005) (quoting Hanson v. County of Hennepin, 527 N.W.2d 89, 93 (Minn. 1995)).  If the tax court's reasoning is not explained in sufficient detail, we may remand to the tax court to reconsider the evidence and clarify its analysis.  See id.; see also Renneke v. County of Brown, 255 Minn. 244, 248, 97 N.W.2d 377, 380 (1959) (remanding when there was no indication how the tax court determined the true market value of the property). 

I.

This case is about the market value of the subject property.  But before determining the market value, we must address whether the tax court properly identified what property was subject to tax.  At trial, the parties agreed that the land and the buildings on the land were taxable real property, but the parties disagreed about whether the 30 tanks, bins, and silos, and the improvements on the land were taxable real property.[2]  The tax court concluded that the 30 disputed tanks, bins, and silos, "exclusive of equipment contained therein," are taxable real property.  S. Minn. Beet Sugar Coop, 2006 WL 3803470, at *3-4. 

            By statute, all real property and personal property in this state is taxable unless otherwise exempt.  See Minn. Stat. § 272.01 (2006).  Minnesota Statutes § 272.03, subd. 1(a) (2006) broadly defines "real property" for the purposes of taxation:  the term includes "the land itself, rails, ties, and other track materials annexed to the land, and all buildings, structures, and improvements or other fixtures on it."  Subdivision 1(c)(i) of the statute, however, limits the broad definition in subdivision 1(a) by excluding from the definition of real property "tools, implements, machinery, and equipment attached to or installed in real property for use in the business or production activity conducted thereon, regardless of size, weight or method of attachment." 

            But in 1985 the legislature limited the scope of the exclusion in subdivision 1(c)(i) through the adoption of subdivision 1(c)(iii).  This provision operates as an exception to the exclusion and provides: 

The exclusion provided in clause (i) does not apply to the exterior shell of a structure which constitutes walls, ceilings, roofs, or floors if the shell of the structure has structural, insulation, or temperature control functions or provides protection from the elements.  Such an exterior shell is included in the definition of real property even if it also has special functions distinct from that of a building.

 

Minn. Stat. § 272.03, subd. 1(c)(iii) (2006).  We have not had the opportunity to address subdivision 1(c)(iii).  We have, however, said that statutory provisions that exempt property from taxation should be strictly construed.  E.g., ILHC of Eagan, LLC v. County of Dakota, 693 N.W.2d 412, 419 (Minn. 2005).  A logical corollary to that general rule is that exceptions (such as subdivision 1(c)(iii)) to exclusion provisions (such as subdivision 1(c)(i)) should be broadly construed.

                Reading section 272.03, subdivision 1 in its entirety reveals that three steps are necessary to determine whether the 30 tanks, bins, and silos at issue in this case are taxable real property.  The first step is to determine if the property at issue falls within the broad definition of real property in subdivision 1(a).  The second step is to determine whether the exclusion in subdivision 1(c)(i) applies.  And the third step is to determine whether the exception to the exclusion, set forth in subdivision 1(c)(iii), applies. 

            Turning to the first step, we have previously noted that the definition of real property in subdivision 1(a) is broad enough to include some objects that resemble equipment.  See Barton Enters., Inc. v. County of Ramsey, 390 N.W.2d 776, 777 (Minn. 1986) (concluding that even though the oil tanks might be classified as "tools, implements, machinery, and equipment," the tanks are real property and subject to taxation because they provide shelter as well); KDAL, Inc. v. County of St. Louis, 308 Minn. 101, 103, 240 N.W.2d 560, 561 (1976) ("The terms ‘structure' and ‘equipment' are not mutually exclusive.").  We reach the same conclusion here and hold that the 30 disputed tanks, bins, and silos fall within the broad definition of subdivision 1(a). 

            But because "real property" and "equipment" are not mutually exclusive terms, the second step in the statutory analysis requires a determination of whether the tanks, bins, and silos fall within the definition of equipment under subdivision 1(c)(i).  In other words, are the tanks, bins, and silos "tools, implements, machinery, or equipment attached to or installed in real property for use in the business or production activity conducted thereon"?  Minn. Stat. § 272.03, subd. 1(c)(i).  SMBSC contends, and we agree, that the tanks, bins, and silos meet the definition of equipment under subdivision 1(c)(i). 

            If the tank, bin, or silo is both real property and equipment, then it is excluded from the definition of "real property" unless an exception to the exclusion in subdivision 1(c)(i) applies.  Accordingly, the third step in the statutory analysis is to determine whether the tank, bin, or silo that qualifies as equipment under the exclusion in subdivision 1(c)(i) is a structure that has an "exterior shell" and "which constitutes walls, ceilings, roofs, or floors" and, if so, whether "the shell of the structure has structural, insulation, or temperature control functions or provides protection from the elements."  Minn. Stat. § 272.03, subd. 1(c)(iii).  If the tank, bin, or silo is such a structure, then "[t]he exclusion provided in clause (i) does not apply to the exterior shell of [the] structure" and the exterior shell of the tank, bin, or silo is included in the definition of real property.   Id. 

The tax court found that each tank, bin, and silo at issue had walls, a roof or a ceiling, and floors, and that the exterior shell of each both performs a structural function and provides shelter from the elements.  S. Minn. Beet Sugar Coop, 2006 WL 3803470, at *2.  The tax court therefore concluded that the various tanks, bins, and silos, "exclusive of equipment contained therein," are taxable real property because they fell within the exception to the exclusion.  Id. at *3-4.

The tax court's factual findings that the 30 tanks, bins, and silos had walls, a roof or a ceiling, and floors, and that each performed a structural function of shelter are not clearly erroneous. Numerous witnesses testified about the sugar beet plant's business operations and the nature of the tanks, bins, and silos located on the subject property.  For instance, the former vice-president of operations for SMBSC testified that the sugar storage bins are used for storage and conditioning and they have "sides" or "walls," and "tops" or "ceilings" that provide both a structural function and protection from the elements.  He also testified that the Weibull bin has a "bottom" or "floor," a "roof," and "sides" or "walls" which provide a structural function by holding the sugar in a controlled environment and provide protection from the elements.  He further testified that the thick juice tanks have "tops," and are used for storing thick beet juice for variable periods of time (sometimes longer than a year).  The tax court also inspected the property and had the opportunity to observe the tanks, bins, and silos at issue.  Because the evidence in the record supports the tax court's findings that each of the tanks, bins, and silos at issue had walls, a roof or a ceiling, and floors, and that each performs a structural function and provides shelter from the elements, the tax court's findings are not clearly erroneous.[3]   

Because the evidence supports the tax court's factual determination that the tanks, bins, and silos fell within the exception of subdivision 1(c)(iii), the plain language of the statute leads us to conclude that the exterior shells of the tanks, bins, and silos are taxable.  The tax court's legal determination that these items were not excluded from taxation therefore was proper.[4]    

 

II. 

            Before turning to the valuation question, the tax court determined that the subject property is "special purpose property."[5]  SMBSC contends the court's determination that the subject property is special purpose property was error.  We will overturn the tax court's determination that the property is special purpose property only if it is clearly erroneous.  See Fed. Reserve Bank of Minneapolis v. State, 313 N.W.2d 619, 621 (Minn. 1981). 

We have said that special purpose property is " ‘property that is treated in the market as adapted to or designed and built for a special purpose,' " and we have noted that the definition of special purpose property " ‘combines both functional and structural aspects:  a special purpose property becomes such either by its use for unique functions or by its distinctive, specially-designed structural details.' "  Am. Express Fin.  Advisors v. County of Carver, 573 N.W.2d 651, 656 (Minn. 1998) (quoting Fed. Reserve Bank of Minneapolis, 313 N.W.2d at 621-22).  We have also said that "a special purpose property is one that, due to its unique function or design, is not likely to be sold on the market and cannot readily be converted to other uses without a large capital investment or a substantial loss in the investment value of the property's special features."  Id.   

The tax court's determination that the subject property is special purpose property is not clearly erroneous.[6]  The court considered the factors set forth in American Express Financial Advisors, 573 N.W.2d at 656.  Specifically, the court concluded that the subject property is special purpose property because the subject property (1) has "unique designs" including structures designed specifically for processing sugar beets, (2) is unlikely to be sold on the market because there is a "limited market due to [the property's] unique function and design," and (3) is unlikely to be converted to another use without "a large capital investment" and a "massive loss in the investment value of the Subject Property's special features."  S. Minn. Beet Sugar Coop, 2006 WL 3803470, at *12-13.

The record evidence supports the court's conclusions.  First, the testimony of SMBSC's former vice president indicates that many of the buildings and structures on the subject property were designed solely for processing sugar beets.  Additionally, the improvements on the land, including 120 acres of ponds, 9 beet piling strips, and railroad track, together with a specialized building for loading sugar into railroad cars, are all uniquely designed for processing sugar beets.  Second, both SMBSC's and the county's experts concluded that the property was limited market property, meaning that only a limited number of potential buyers would be interested in purchasing the property.  Third, the evidence indicates that converting the property to another use would require a large investment and would result in a loss of value related to the special features in the property.  For instance, the county's expert testified that if the subject property were used for another purpose, the significant investment made in the ponds, piling strips, and tanks, bins, and silos would be lost.  We hold that the tax court did not err in finding that the subject property was special purpose property. [7] 

III. 

SMBSC next claims that the tax court erred when it decided to "rely solely on the cost approach" when valuing the subject property.  S. Minn. Beet Sugar Coop, 2006 WL 3803470, at *13.   There are three basic approaches to determining the value of real estate: 

(1) the market comparison approach, which is based on prices paid in actual market transactions involving comparable properties; (2) the cost approach, which is founded on the proposition that an informed buyer would pay no more for the property than the cost of constructing new property having the same utility as the subject property; and (3) the income approach, which is predicated on the capitalization of the income the property is expected to generate. 

 

Equitable Life Assurance Soc'y v. County of Ramsey, 530 N.W.2d 544, 552 (Minn. 1995).  We have said that "[w]henever possible, appraisers should apply at least two approaches to market value because the alternative value indications derived can serve as useful checks on each other."  Id. at 553. 

SMBSC's expert appraiser relied on both the market comparison approach and the cost approach when he appraised the subject property.  In the market comparison approach, 20 comparable sales were identified:  3 sales of beet sugar plants (the plants were in Hereford, TX, Moses Lake, WA, and Hamilton City, CA), 9 sales of "a range of agri- or food-processing facilities from the general region of the subject property," 3 general industrial sales from outstate Minnesota, and 5 sales of operating beet sugar plants which were sold at the same time that the entire business as a "going concern" was sold.[8]  Under the market comparison approach, SMBSC's expert concluded the market value of the subject property was $7.5 million. 

SMBSC's expert also conducted a cost approach appraisal.  Of the 30 tanks, bins, and silos on the subject property, SMBSC's cost approach appraisal included the entire value of two beet pellet silos, the "outer skin" of the Weibull bin, and one-half the value of the four sugar silos.  SMBSC's cost approach appraisal did not include the 14 thick juice tanks because the appraiser concluded they "are strictly process related and therefore not taxable as real estate."  The appraisal also did not include any of the remaining nine tanks, bins, and silos on the subject property.  After accounting for depreciation, SMBSC's expert concluded that based on a cost approach the market value of the subject property is $7.625 million.[9] 

The county's expert used only a cost approach when valuing the property.  He included all of the 31 buildings, the 30 disputed tanks, bins, and silos, and numerous improvements on the subject property in his appraisal, and, after subtracting for depreciation, he concluded the value of the subject property was $55 million. 

As noted above, the tax court concluded that only the cost approach was appropriate in this case.  In previous cases, we have held that it is not error for a court to rely exclusively on the cost approach when valuing special purpose property.  Fed. Reserve Bank of Minneapolis,