Northern Natural Gas Co. v. Williams

The opinion of the court was delivered by

Schroedeb, J.:

This is an appeal in an ad valorem tax action wherein Northern Natural Gas Company (plaintiff-appellant) sought to recover a portion of its 1969 taxes paid under protest in Rice County, Kansas, pursuant to the provisions of K. S. A. 79-2005. The district court of Rice County, Kansas, denied relief.

This case is a sequel to the one filed by Northern in the district court of Pawnee County wherein it challenged the order of the State Board of Tax Appeals determining the statewide 1969 ad valorem tax assessment of Northern’s interstate natural gas pipeline operating property located in Kansas.

Here Northern seeks to assert the same issues concerning the validity of the state-wide assessment determined in the Pawnee County case. (Northern Natural Gas Co. v. Dwyer, 208 Kan. 337, 492 P. 2d 147.)

Northern in this action also challenges the valuation and assessment of its property in Rice County at the local level, which it claims results in discrimination against it.

All issues were determined adversely to Northern by the trial court.

In Northern Natural Gas Co. v. Bender, 208 Kan. 135, 490 P. 2d 399, the court decreed that the validity of an assessment of property of an interstate public utility on a state-wide basis cannot be challenged in a protest action. The court held:

“Where the property of an interstate public utility is assessed by the State Director of Property Valuation, as authorized by K. S. A. 79-1404 Fifteenth, the procedure and method of judicial review provided in K. S. A. 1969 Supp. 74-2426 (now L. 1971, eh. 249, § 1) is exclusive and the assessment may not be challenged in an action to recover protested taxes under K. S. A. 79-2005 (now L. 1971, ch. 303, § 1.)” (Syl. f 1.)

As a result of Bender Northern is bound by our decision in Northern Natural Gas Co. v. Dwyer, supra, upholding the order of *410the State Board of Tax Appeals assessing Northern’s public utility property on a state-wide basis at 30% of justifiable value.

The trial court’s erroneous consideration of the issues asserted by Northern as to the state-wide assessment is a nullity. The trial court had no jurisdiction to consider it. Failure to cross-appeal the trial court’s denial of the Director’s motion to dismiss does not preclude the appellate court from raising the issue on its own motion. (Bammes v. Viking Manufacturing Co., 192 Kan. 616, 389 P. 2d 828.) The issue presented on this appeal, therefore, is limited to matters concerning the assessment of Northern’s property at the local level in Rice County.

In the pretrial order filed May 28, 1970, in Rice County Northern contended the ad valorem taxes were assessed to Northern on a state-wide level of 30% of justifiable value, whereas all other property in Rice County was assessed at a level of 21% resulting in an imbalance of assessment and a lack of equalization.

It is to be noted no challenge was made concerning the parties defendant in this action. They include, among others, Jean Williams, County Treasurer of Rice County; Arthur Harvey, County Clerk, ex officio County Assessor; the Board of County Commissioners of Rice County, Dale Evans, Carl Frederick and John Burge, members of the Board of County Commissioners of Rice County; and Ronald F. Dwyer, Director of the Property Valuation Department of the state of Kansas.

On the issue material to this appeal the trial court made what it denominated “Findings of Fact and Discussion of Testimony” (filed June 12, 1970) where it said in part:

“Dr. Francis O. Woodard is the economist who, along with Mrs. Bonnie Hiclde, prepared the real estate assessment ratio study for the State of Kansas. The data which is deemed pertinent for this study is evaluated by county clerks in accordance with directives for valuation as advanced by Mr. Dwyer. It would seem that any final determination of what data would be used for the study would be made by Mr. Dwyer or his employees. Under date of April 9, 1968, Mr. Dwyer advised all county commissioners that his department was attempting to improve the study.
“Against this background, it is difficult to understand the attempt made by witnesses for defendants to discredit the validity of this study. The mechanics of the study was fully explained by Dr. Woodard. His testimony in support of the reliability of the study was believable. Against this, there was the unsupported assertion by the county clerk that in his opinion all property in Rice County was assessed at 30% of true value. The adverse testimony of Robert Taggart does not stand up under the most elementary analysis. The adverse *411testimony of John Green was burdened by lack of any real qualification of familiarity with real estate values in Rice County.
“Accordingly, it is found that the 1968 ratio study provides a meaningful guide, and in this case, the best evidence as to the relationship between assessed values of Rice County real estate and justifiable or true values of Rice County real estate. It is noted that the Board of Tax Appeals in Docket # 2206-9, Item 5, made a contrary finding. This may have been made on evidence similar to that introduced in this case. In 1968, Rice County real estate as a whole was assessed at 21% of fair value. Rural realty was assessed at only 19% of fair value and urban realty was assessed at 30% of fair value.” (Emphasis added.)

The trial court in what is denominated “Conclusions of Law” stated in part:

“The equal protection clause of the Fourteenth Amendment to the Constitution of the United States and Section One of the Eleventh Article of the Kansas Constitution requires a uniform and equal rate of assessment and taxation. Even so, reasonable departures from uniformity and equality are excused as inevitable.
“Beardmore v. Ling, 203 Kan. 802, 457 P. 2d 117 (1969), does not control this case. That case is interpreted to mean that a difference in assessment ratios within a county of 14% of value for property generally as compared to 30% of value for a particular property is so disproportionate as to stongly suggest, and probably require a finding of, constructive fraud. There is nothing to tell a trial court how much closer the ratio of assessments must be before a finding of lack of constructive fraud should be made. In Beardmore, the variance was a little more than one to two. In this case now being decided, the variance is a little less than two to three. This difference between the two cases is weighed as being sufficient to warrant a finding that the variance between pertinent ratios in Rice County does not constitute constructive fraud. It is the judgment of the court that this is the proper finding based upon a full consideration of the case with its many complexities.
“A court is not empowered to grant a taxpayer relief in a tax protest action simply because it believes there are better methods to arrive at fair value than that employed by valuation officials if the value actually determined by the valuation officials appears to be within reason.
“The plaintiff has failed to meet his burden of proving by the most believable evidence that its 1969 Bice County valuation and assessment is illegal or excessive.” (Emphasis added.)

Northern contends its right to equal treatment under the Federal and State Constitutions was violated when the taxing officials knowingly assessed its property at 30% of justifiable value, while other property of the same class in Rice County was assessed at 21% of justifiable value. It points to the findings of the trial court which it says are clear except for the fact the trial judge did not grant the relief indicated to tíre taxpayer wronged by such discrimination.

*412It is clear that grossly excessive valuation of property for ad valorem tax purposes contravenes the due process clause of the Fourteenth Amendment to the United States Constitution and requires no showing of discrimination. (Great Northern Ry. v. Weeks, 297 U.S. 135, 80 L. Ed. 532, 56 S. Ct. 426.)

The right to equal treatment in matters of taxation is also a federal right. In Hillsborough v. Cromwell, 326 U. S. 620, 90 L. Ed. 358, 66 S. Ct. 445, relied upon by Northern, the court said:

“The equal protection clause of the Fourteenth Amendment protects the individual from state action which selects him out for discriminatory treatment by subjecting him to taxes not imposed on others of the same class. The right is the right to equal treatment. He may not complain if equality is achieved by increasing the same taxes of other members of the class to the level of his own. The constitutional requirement, however, is not satisfied if a state does not itself remove the discrimination, but imposes on him against whom the discrimination has been directed the burden of seeking an upward revision of the taxes of other members of the class. Sioux City Bridge Co. v. Dakota County, 260 U. S. 441, 445-447; Iowa-Des Moines National Bank v. Bennett, 284 U. S. 239, 247; Cumberland Coal Co. v. Board of Revision, 284 U. S. 23, 28-29. . . .” (pp. 623, 624.)

The right to equal treatment in matters of taxation is also a right protected by Article 11, Section 1 of the Constitution of the state of Kansas. The equal protection clause of the Federal Constitution and the state constitutional provisions pertaining to equality and uniformity of taxation are substantially similar, and in general what violates one will contravene the other. (Associated Rly. Equipment Owners v. Wilson, 167 Kan. 608, 208 P. 2d 604.)

This court has ample authority to grant complete relief to a taxpayer who feels aggrieved by reason of discrimination in a tax protest case under the provisions of K. S. A. 79-2005. Cases in which relief was granted are Beardmore v. Ling, 203 Kan. 802, 457 P. 2d 117; Addington v. Board of County Commissioners, 191 Kan. 528, 382 P. 2d 315; and Kansas City Southern Rly. Co. v. Board of County Comm'rs, 183 Kan. 675, 331 P. 2d 899.

It is Northern’s contention that the trial court’s findings leave no room for doubt that Northern was assessed knowingly at 30% of justifiable value while other taxpayers of the same class in Rice County were assessed at 21% of justifiable value; and that the Property Valuation Department in Rice County has clearly failed to carry out its statutory duty to equalize assessments.

The culprit in this case is the official state ratio study. On the *413record here presented its invalidity for valuation and assessment purposes in Rice County is demonstrated.

The 1968 Kansas Real Estate Assessment Ratio Study was compiled pursuant to K. S. A. 79-1435 to 79-1444, inclusive. The 1968 report in its foreword specifically states that it is “prepared for the purpose of reflecting the relationship of assessed value to sales price of real estate.” (Emphasis added.) Note this does not say it reflects the relationship of assessed value to the “justifiable value” (See K. S. A. 79-501 and K. S. A. 1968 Supp. 79-503).

In Sebits v. Jones, 202 Kan. 435, 449 P. 2d 551, the assessment ratio studies for several years were introduced in evidence to establish the real estate ratio assessment for 1965. There was no evidence offered in support of the studies, and the county assessor testified he had little faith in them. The trial court refused under those circumstances to find there was a deliberate assessment of real estate at 21% of justifiable value, as the studies purported to show, and a judgment entered for the defendants was affirmed on appeal.

In Beardmore v. Ling, supra, a different situation confronted the court. There the trial court found that the median assessment ratio of real estate in Hodgeman County for 1965 was 14%. The evidence of the county assessor himself, fully supported this finding, which was said to be binding on appeal, and the court granted relief requested by the plaintiffs to recover the taxes paid under protest.

A review of the foregoing cases, together with others touching upon the use of the Kansas Real Estate Assessment Ratio Study, where attempts are made to establish discrimination in the valuation and asssesment of property, does not indicate that the validity of an assessment depends on the judgment of the trial court on matters of valuation.

This court has consistently adhered to the principle that the assessment and valuation of property are administrative functions, not judicial ones, and that courts will not substitute their judgment for that of the assessing authority in the absence of fraud, corruption or conduct so oppressive, arbitrary or capricious as to amount to fraud. This principle has been based upon the considerations of constitutional law, on the nature of the assessment and valuation functions, and on an inherent lack of power in the courts. (Mobil Oil Corporation v. McHenry, 200 Kan. 211, 436 P. 2d 982.)

On the record here presented the Rice County clerk-assessor, Arthur Harvey, testified that in Rice County both personal property *414and real property were appraised at 30% of justifiable value, notwithstanding the ratio study. He said the ratio study was not accurate. According to his testimony he considered the items enumerated in the statutes (K. S. A. 79-501 and K. S. A. 1968 Supp. 79-503). Mr. Harvey testified:

“. . . he considered the items enumerated in the statutes in making an appraisal and assessment of real property and said these items were classification of land, size of land, location, depreciation including physical deterioration or functional or economic or social obsolescence, cost of reproducing improvements, productivity of land, earning capacity, capitalization of net income, rental value, sale value in the open market, comparable values, and the selling price. That he had over 8,000 parcels to assess each year and that he did not personally make a study of each but used township board members and realtors or former realtors to assist him. That he changed reports to him from these helpers with the advice of the County Commissioners. He testified he used capitalization of net income in some instances but that he wasn’t clear on it. He stated he also used selling price in arrival at fair and justifiable value, and that he determined the weight to give selling price by talking to the County Commissioners and getting their opinion because they are the members of the board which might eventually determine it.”

Mr. Harvey identified a letter addressed to the Rice County Board of County Commissioners dated April 9, 1968, signed by Ronald F. Dwyer, Director of the Property Valuation Department, requesting cooperation to improve the ratio study, urging county officials to take an interest in the study. The letter was introduced as plaintiff’s Exhibit No. 55.

The foregoing testimony of Mr. Harvey was dubbed by the trial court as “the unsupported assertion by the county clerk,” after the trial court found that the “data which is deemed pertinent for this study [the official state ratio study] is evaluated by county clerks in accordance with directives for valuation as advanced by Mr. Dwyer.”

Mr. Harvey, the official county assessor of Rice County, testified:

“. . . I do not know whether or not my office, or the Board of County Commissioners of Rice County, Kansas, made any objection to the property valuation department for the ratio study for Rice County for the year 1968, even though we are requested to do this if we feel it is inaccurate.
"Q. (By Mr. Bush) When you reviewed the ratio study then, and you were convinced that the level of assessment in Rice County was 30%, did you then advise the state property valuation department that you felt the ratio study was inaccurate?
“A. I doubt if we did. I doubt if we did.”

It is readily apparent Mr. Harvey made no evaluation of the data *415deemed pertinent for the ratio study in accordance with directives for valuation advanced by the State Director of Property Valuation.

Ronald, F. Dwyer, the State Director of Property Valuation, under whose direction the ratio study is conducted, as a party defendant in this action, and represented in the trial court by counsel of the Department of Property Valuation and also by an assistant attorney general, attacks the ratio study as being unreliable to establish justifiable value for real estate in Rice County. His letter to the county clerk of Rice County, written prior to the initiation of this litigation, indicated his lack of confidence in the reliability of the ratio study and the failure of the county officials to cooperate in making the ratio study for Rice County meaningful.

The State Board of Tax Appeals, when it heard Northern’s appeal from the order of the Director’s state-wide assessment of Northern’s property, found:

“. . . The Ratio Study relates assessment levels with limited sales, but does not afford direct comparison with all elements included in justifiable value in accordance with K. S. A. 79-501 and 79-503, as amended, . . .”

The foregoing finding of the Board was before the trial court in this action.

Our court has repeatedly said that the ratio study, standing alone, is not conclusive evidence of justifiable value in establishing a basis for comparison in determining uniformity of values for assessment purposes. (Cities Service Oil Co. v. Murphy, 202 Kan. 282, 447 P. 2d 791; Beardmore v. Ling, supra; Panhandle Eastern Pipe Line Co. v. Dwyer, 207 Kan. 417, 485 P. 2d 149; and Northern Natural Gas Co. v. Dwyer, 208 Kan. 337, 492 P. 2d 147.)

In the Panhandle case, above cited, the court said there are too many speculative elements involved and too few properties are subject to sale for the ratio study to be relied on for appraisal purposes.

The court in Panhandle recognized recent legislative enactment in 1969 (K.S.A. 79-503 [/], L. 1969, ch. 433, § 10) providing:

“. . . The ratio study shall not be used as an appraisal for appraisal purposes.”

The 1969 enactment was said at least to indicate that the legislature was not out of harmony with the decisions of this court.

Here the record made before the trial court establishes the urban real property assessment in Rice County was at 30% of justifiable value; the personal property assessment in Rice County was 30% of justifiable value; the oil and gas assessments in Rice County were *416at 30% of justifiable value; and public utilities in Rice County were assessed at 30% of justifiable value in accordance with the best judgment of the Director of Property Valuation. (See Northern Natural Gas Co. v. Dwyer, supra.)

As for “rural property” assessed in Rice County for the year 1968, the appellant must be content to rely only upon a median figure shown by the Kansas Real Estate Assessment Ratio Study for Rice County. This simply means that at least one-half of the property sold in Rice County and reported for the ratio study was assessed higher than the median ratio based upon sales.

In the year 1968 sales of “rural property” reported pursuant to statutory directives to the Director of Property Valuation were all inclusive. In 1969 the legislature changed the law. The change now appears as an amendment to 79-503 (L. 1969, ch. 433, § 10) wherein “rural property” is classified by dividing it into six catagories as follows: (1) Agricultural investment; (2) agricultural non-investment; (3) homesites; (4) planned subdivisions; (5) spot industrial and commercial; and (6) recreational. By this new enactment the legislature is undoubtedly attempting to clarify the confusion resulting from the sales ratio study reports made in prior years.

The record discloses the testimony of an expert real estate appraiser, Robert Taggart, employed by the Director of Property Valuation to analyze rural sales of real property which occurred in Rice County in 1968. An exhibit prepared under his supervision was put in evidence (Defendants’ Exhibit No. 57). The exhibit discloses some rural property was sold on long-term contracts at a relatively low rate of interest not commonly found in the market. Rural property sold to contiguous owners or to those seeking to enlarge their holdings or farming operations comprised twenty-five transactions. Transactions involving the sale of rural property within the family comprised fourteen transactions. These transactions accounted for the bulk of the fifty-seven rural property sales in Rice County in 1968.

The exhibit discloses a fluctuation in the relationship of assessed value to sales price for those tracts sold ranging from 1% to 65%.

Mr. Taggart testified his analysis showed these sales did not represent accurate market price and required adjustment. He made specific reference to instances of sales of adjoining landowners, within families, sales which changed property to higher and more *417profitable uses, trades, contract sales, and estate sales. He found fifty-two sales out of a total of fifty-seven, which in his opinion did not reflect fair market value. The total Rice County rural property sales used in the 1968 ratio study comprised only 1.33% of Rice County rural land. Of the 455,939 acres of taxable land in Rice County only 6,108 acres were sold in 1968 and reported in the ratio study.

A ratio study to be valid and meaningful as evidence in a case of this nature must begin with a sound premise. That is, the ratio study should reflect the relationship of assessed value of real property to the “justifiable value” of such real property, which is the statutory criterion upon which the assessment rate is to be applied.

The Kansas Real Estate Assessment Ratio Study for Rice County in 1968 reflected only the relationship of assessed value to sales price of real estate. Sales price is not “justifiable value,” which valuation and assessing officials of the state are required to determine after giving consideration to the mandatory statutory factors enumerated in K. S. A. 1968 Supp. 79-503, by applying administrative judgment. (See K. S. A. 1968 Supp. 79-1435, 79-1436 and 79-1437.)

In determining the validity of assessments of real property for taxation, the essential question is whether the standards prescribed by 79-503, supra, have been considered and applied by taxing officials, or intentionally and grossly disregarded. (Garvey Grain, Inc. v. MacDonald, 203 Kan. 1, 453 P. 2d 59.) Compliance with the provisions of the statute are mandatory upon assessing officials in assessing real property, but the factors or combinations thereof to be considered in determining justifiable value may not all be pertinent to a specific property. What factors apply depends on the individual type of property, after consideration has been given to all of the factors. (Northern Natural Gas Co. v. Dwyer, supra.)

K. S. A. 1968 Supp. 79-503 (i) reads: “sale value on open market with due allowance to abnormal and inflationary factors influencing such values;”

“Sales price” does not embrace completely the single factor (i) in 79-503, supra.

It is apparent the legislature by enacting 79-503, supra, intended to avoid the effect of abnormal and inflationary factors which influenced the values of real property subject to ad valorem taxation. Ry “due allowance” in 79-503 (i), supra, the legislature intended *418that valuation and assessing officials in the exercise of their administrative judgment should discount abnormal and inflationary factors affecting the sales value on the open market of real property being valued and assessed for ad valorem tax purposes. (Northern Natural Gas Co. v. Dwyer, supra.)

The foregoing discussion has been focused upon only one of the mandatory statutory factors in 79-503, supra. What becomes of the other ten factors enumerated? Under Garvey these must all be considered and those pertinent to a given class of property must be applied. The concluding paragraph in 79-503, supra, reads:

“It shall be unlawful to determine justifiable value of real property in any manner other than authorized and provided for in this section. Any person authorized to assess or equalize property shall consider class, location, productivity, rental values and capitalization."

By using the word “shall” the legislature requires assessing officials to specifically consider class, location, productivity, rental values and capitalization. These factors all apply to rural property which is now classified as “agricultural investment” (L. 1969, ch. 433, § 10). It is defined as including those properties presently used and operated as units with a source of economic life from the production of agricultural products that originate from land productivity. By the foregoing it is apparent the legislature intended to command assessing officials to use the income approach, as well as other approaches, in determining the justifiable value of real property. Of course, application of the statutory factors to determine justifiable value falls within the domain of administrative judgment and discretion.

Dr. Francis O. Woodard, an economist, who is chairman of the Department of Economics at Wichita State University and Director for the Center of Business and Economic Research at the University, testified that he had been serving as the statistical supervisor for the preparation of the sales ratio study for Kansas; that he was responsible for compiling such statistical report in 1968; that the data is original material collected by the registers of deeds and county assessors in each county; that the data cards are forwarded to the Property Valuation Department where they are edited, as to whether they should properly be included in the study; and after this has been determined, the cards are sent to him for calculation.

He testified if the local official in the county knows of some reason which would require the exclusion of the particular sale *419from the ratio study, this should be indicated on the card in the appropriate place; that if the various transactions involve factors such as family sales, trades, enlargement of present operations, etc., the card should have it on there — “If the county official is energetic enough, yes, that would be on there;” that if the card comes to him he should have all the information the Property Valuation Department had in evaluating the card; but the Property Valuation Department considers some of the things on the cards and discards certain ones which are not sent to him.

The substance of his testimony is that if the local officials know factors affecting sales of real property, and if they make an entry on the card concerning it; and if the Property Valuation Department under the direction of the Director edits the cards and performs its function with respect to each sale, the cards he receives for statistical compilation have been purified for the study.

Dr. Woodard testified he was not an appraiser, but an expert economist. In his opinion, the sales ratio study “if properly conducted is the best measure of the level of assessment that is available on a testing basis.” He said: “I doubt if everyone knows all the facts behind every sale, but in my opinion the sales alone denote market value.” (Emphasis added.)

Northern asserts Dr. Woodard’s testimony to sustain its burden of proof to show discrimination against it by the assessing officials, but on this point the extent to which Dr. Woodard may have ventured in his testimony beyond the statistical compilation of sales data reported to him on the cards represents an attempt to repeal K. S. A. 79-501 and K. S. A. 1968 Supp. 79-503, which commands valuation and assessing officials of the state to value real property at its justifiable value for ad valorem tax purposes in accordance with its provisions.

The testimony of Dr. Woodard, which the trial court characterized as believable, fully explaining the mechanics of the study, was said by the trial court to support the reliability of the study.

Roth the Director and the county clerk-assessor of Rice County, whose compliance with K. S. A. 1968 Supp. 79-1435, 79-1436 and 79-1437 is required to give the Kansas Real Estate Assessment Ratio Study in Rice County any substance, reflecting the level of assessment to the sales price of real property, challenge the validity of the study for 1968 in Rice County, because it is premised upon the sales price of real estate sold in Rice County in 1968, and does *420not reflect the assessment level of real property in relation to “justifiable value” (defined by 79-503, supra).

The trial court found Rice County real estate as a whole in the year 1968 was assessed at 21% of “fair value.” That finding based upon minimal sales of real estate in Rice County in 1968 has not been equated to “justifiable value” (as defined in K. S. A. 1968 Supp. 79-503) by any evidence in the record whatever. We need not burden this opinion with an attempt to construe the trial court’s finding, because the trial court has placed its own construction on the finding by concluding that Northern has failed to meet its '“burden of proving by the most believable evidence that its 1969 Rice County valuation and assessment is illegal or excessive.”

If the trial court meant by its finding that Rice County real estate as a whole in the year 1968 was assessed at 21% of “justifiable value” (as defined in K. S. A. 1968 Supp. 79-503), there is no evidence in the record whatever to support such finding. On the record here presented the 1968 sales ratio study for Rice County would not support such finding.

Sales price of real property alone, which is the evidence in this case, does not establish “justifiable value” (as defined by 79-503, supra) for ad valorem tax assessment purposes. Nowhere in the record does the Kansas Real Estate Assessment Ratio Study for the year 1968 purport to embrace consideration of the mandatory factors enumerated in 79-503, supra, to reflect the level of assessment in relation to the justifiable value of real estate. Justifiable value (as defined by 79-503, supra) is the only valid premise upon which a meaningful assessment ratio study could be predicated as applied to the facts in this case.

K. S. A. 79-1439 (L. 1963, ch. 460, § 1) requires that all real and tangible personal property, which is subject to general property taxes, shall be assessed uniformly and equally at 30% of justifiable value. To grant Northern relief by assessing its property at less than 30% of justifiable value would discriminate against all taxpayers in Rice County who are assessed at 30% of justifiable value. Discrimination, in our opinion, is not rectified by creating more discrimination, as the facts in this case would indicate should Northern be permitted to recover the taxes it paid under protest.

We conclude that Northern has failed in its burden of proof to establish conduct by the assessing officials so arbitrary, oppressive *421and grossly discriminatory as to constitute constructive fraud voiding the assessment. (Sebits v. Jones, supra.)

The judgment of the lower court is affirmed.

Prager, J., not participating.