COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD
KIMBERLY-CLARK CORPORATION & v. COMMISSIONER OF REVENUE
KIMBERLY-CLARK GLOBAL SALES, INC.
Docket Nos.: C282754 Promulgated:
C295077 January 31, 2011
C299008
These are appeals under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 62C, § 39 from the refusal of the appellee, the Commissioner of Revenue (“Commissioner”), to grant an abatement of corporate excise sought by the appellants for the tax years ended December 31, 2001, December 31, 2002, and December 31, 2003 (“tax years at issue”).
Chairman Hammond heard these appeals. Commissioners Egan, Rose and Mulhern joined him in the decision for the appellee. Commissioner Scharaffa issued a separate opinion concurring in part and dissenting in part, disagreeing with the standard of proof applied by the majority for the tax years ended December 31, 2002, and December 31, 2003.
These findings of fact and report are made at the requests of the appellants and the appellee pursuant to G.L. c. 58A, § 13 and 831 CMR 1.32.
Philip S. Olsen, Esq. and Natasha Varyani, Esq. for the appellants.
John DeLosa, Esq. and Christopher M. Glionna, Esq. for the appellee.
FINDINGS OF FACT AND REPORT
Based on a “Stipulation of Facts and Admissibility of Exhibits,” as well as testimony and exhibits entered into evidence at the hearing of these appeals, the Appellate Tax Board (“Board”) made the following findings of fact.
Procedural History
During the tax years at issue, Kimberly-Clark Corporation (“Kimberly-Clark”), a Delaware corporation headquartered in Dallas, Texas, maintained corporate locations in Wisconsin, Georgia and Tennessee. Kimberly-Clark Global Sales, Inc. (“Global”), also a Delaware corporation, was incorporated in May, 2002, and was a wholly owned subsidiary of Kimberly-Clark.
On November 18, 2002, Kimberly-Clark filed a Massachusetts corporate excise return for the tax year ended December 31, 2001. Based on the results of an audit initiated by the Massachusetts Department of Revenue, the Commissioner issued a Notice of Intention to Assess Corporate Excise to Kimberly-Clark on August 19, 2007, for the 2001 tax year. On October 2, 2007, the Commissioner issued a Notice of Assessment in the amount of $817,797.25, inclusive of interest. The assessment related to the Commissioner’s disallowance of claimed interest expense associated with Kimberly-Clark’s cash-management system. On February 5, 2008, Kimberly-Clark filed an Application for Abatement, seeking abatement of the additionally assessed corporate excise. The Commissioner issued a Notice of Abatement Determination on April 15, 2008, denying Kimberly-Clark’s abatement application, and on May 29, 2008, Kimberly-Clark filed a Petition Under Formal Procedure with the Board with respect to tax year 2001.
On September 19, 2003, Kimberly-Clark filed a Massachusetts corporate excise return for the tax year ended December 31, 2002.[1] Based on an audit, the Commissioner issued a Notice of Intention to Assess Corporate Excise to Kimberly-Clark on September 11, 2005, for the 2002 tax year. On October 25, 2005, the Commissioner issued a Notice of Assessment in the amount of $1,089,700, inclusive of interest and penalties. The assessment related to the Commissioner’s disallowance of royalty expenses paid by Kimberly-Clark to an affiliated corporation, as well as interest expenses associated with its cash-management system. On December 6, 2005, Kimberly-Clark filed an Application for Abatement, seeking abatement of the additionally assessed corporate excise. The Commissioner issued a Notice of Abatement Determination on December 16, 2005, denying the abatement application, and on January 20, 2006, Kimberly-Clark filed a Petition Under Formal Procedure with the Board with respect to tax year 2002.
On September 13, 2004, Global filed a Massachusetts corporate excise return for the tax year ended December 31, 2003.[2] Based on an audit, the Commissioner issued a Notice of Intention to Assess Corporate Excise to Global on August 19, 2007, for the 2003 tax year. On October 2, 2007, the Commissioner issued a Notice of Assessment in the amount of $1,113,418, inclusive of interest. The assessment related to certain payments among affiliated entities which the appellants had characterized as “rebate” payments, as well as interest expense incurred by Global resulting from Global’s participation in Kimberly-Clark’s cash-management system.[3] On February 5, 2008, Global filed an Application for Abatement, seeking abatement of the additionally assessed corporate excise. The Commissioner issued a Notice of Abatement Determination on April 15, 2008 denying Global’s abatement application and on May 29, 2008, Global filed a Petition Under Formal Procedure with the Board with respect to tax year 2003.
On the basis of the foregoing, the Board found that it had jurisdiction to hear and decide these appeals.
Factual Background
Kimberly-Clark began doing business in the 1870s, making newsprint from garments. Soon after World War I, it introduced a line of feminine products and later a facial tissue line. Kimberly-Clark became a publicly traded company in 1928 and, during the ensuing decades, substantially expanded its business through investment and acquisitions, leading to operations in more than thirty countries and sales in more than one hundred countries.
By 1995, Kimberly-Clark was a leading manufacturer of facial tissues, diapers, and adult incontinence products. Although it maintained a substantial market presence in these product segments, Kimberly-Clark had not made significant headway in the “away from home” business, which consisted of paper and tissue products that were not typically used by their purchasers, but by customers of businesses that purchased the products, such as restaurants and hotels. By this time, Kimberly-Clark had developed a significant presence in North America and Northern Europe, but had not realized similar success in Southern Europe.
To complement its market strengths and mitigate its weaknesses, Kimberly-Clark sought potential merger partners. Ultimately, the company entered into negotiations with Scott Paper Company (“Scott”), an unrelated business that produced paper towel products, facial tissue and value-priced bath tissue. Scott, which had been in business since 1922, had a substantial “away from home” business, and held a significant market share in certain European markets which had not been successfully exploited by Kimberly-Clark.
On July 16, 1995, Kimberly-Clark and Scott entered into an “Agreement and Plan of Merger” that reflected Kimberly-Clark’s agreement to acquire all of the outstanding shares of Scott. Scott became a wholly owned subsidiary of Kimberly-Clark on December 12, 1995, upon consummation of the Plan of Merger effected among Kimberly-Clark, Rifle Merger Co., a wholly owned subsidiary of Kimberly-Clark, and Scott. On February 14, 1996, Scott’s name was changed to Kimberly-Clark Tissue Company (“KCTC”).
Cash-management System
For each of the tax years at issue, the appellants utilized a centralized cash-management system. The system had been in place since the mid-1990s and according to Kimberly-Clark was established to manage cash deposits centrally and to minimize costs among multiple legal entities. In the alternative, these entities would have managed cash deposits and borrowed independently, incurring greater expenses than within the context of a cash-management system. Thus, according to the appellants’ witness, by eliminating individual company bank loans and consolidating banking arrangements, Kimberly-Clark was able to enhance efficiency and increase profitability.
Within Kimberly-Clark’s cash-management system, all subsidiaries’ cash receipts were deposited into a lock box maintained by Kimberly-Clark Financial Services, Inc. (“Financial”) on a daily basis. The cash was swept up to Kimberly-Clark and made available to the subsidiaries from a single pool from which the subsidiaries’ various expenses were paid.[4] To the extent that the cash collected from a given subsidiary exceeded the subsidiary’s expenses, a net payable was recorded from Kimberly-Clark on Kimberly-Clark’s general ledger. Because the cash was swept to Kimberly-Clark through Financial, Financial recorded a receivable from Kimberly-Clark and Kimberly-Clark recorded a payable to Financial.
The movement of cash was documented with daily ledger entries, resulting in a net payable to or net receivable from each entity. Interest on the net payable or receivable was calculated on the last day of each calendar month. The interest rate was typically 130% of the monthly Applicable Federal Short Term Rate as determined under § 1274(d) of the Internal Revenue Code (“I.R.C.”).[5]
No evidence presented indicated that any subsidiary requested or received a return of advances to Kimberly-Clark which exceeded disbursements made to pay the subsidiaries’ expenses (“excess advances”) at any time prior to or during the tax years at issue. In fact, Kimberly-Clark was in a net borrowing position at the end of each of the tax years at issue. Thus, the Board found that the appellants failed to prove that Kimberly-Clark had any intention of repaying the excess advances received from the subsidiaries.
Mr. Michael Todd Azbell, Kimberly-Clark’s Vice President and Corporate controller, who testified regarding the appellants’ cash-management system, discussed an “Amended and Restated Loan Agreement” (“Loan Agreement”) between Kimberly-Clark and Kimberly-Clark Worldwide, Inc. (“Worldwide”) to which promissory notes were attached, all dated December 31, 1998.[6] Mr. Azbell indicated that these agreements were representative of agreements within the cash-management system between Kimberly-Clark and its subsidiaries, except that the amount of the promissory notes varied from entity to entity. The Loan Agreement states the parties’ intention and agreement to make “loans” to each other on an ongoing basis, essentially in the form of a credit line, not to exceed two billion dollars at any one time if made to Worldwide by Kimberly-Clark and three billion dollars if to Kimberly-Clark by Worldwide. Two of the promissory notes, appended to the Loan Agreement as Exhibits A and B, reflect promises to pay, on demand, the amounts agreed to in the Loan Agreement. The notes provide for interest, as discussed above, at 130% of the monthly Applicable Federal Short Term Rate.
Also appended to the Loan Agreement as Exhibit C is a promissory note in the principal sum of five hundred million dollars payable by Kimberly-Clark to Worldwide on December 31, 2003. This note provides for interest at 130% of the monthly Applicable Federal Short Term Rate. Exhibit D is a promissory note identical to Exhibit C in all material respects except that it is payable by Kimberly-Clark on December 31, 2008.
Neither the Loan Agreement nor the promissory notes contained collateral provisions, default provisions or any other security provisions. Having examined the Loan Agreement and the promissory notes, Mr. Azbell made no comment regarding the two fixed maturity date five hundred million dollar promissory notes (“Notes”). In particular, there was no testimony or other evidence presented to explain how the Notes fit within the operation of the cash-management system. Moreover, the appellants offered no evidence that the Notes were repaid by Kimberly-Clark.
Further, the Board found that the appellants failed to establish that the interest rate charged to the subsidiaries was arm’s-length in each instance. No testimony was offered indicating that the various subsidiaries were equally creditworthy or that in a third-party lending transaction each would have been able to negotiate a loan at 130% of the monthly Applicable Federal Short Term Rate. In fact, Mr. Azbell testified that the company uniformly charged “the rate that would be published by the IRS as what is representative of an arm’s-length transactional rate as opposed to going into individual negotiations . . . .”
Based on the evidence presented, and with substantial emphasis placed on the factors indicating the excess cash advances made within the appellants’ cash-management system were not intended to be repaid, including the absence of requests for or effort toward repayment, or actual repayment in whole or in part, the Board found that the advances did not constitute bona-fide debt. This conclusion was reinforced by other factors such as the absence of security, default or collateral provisions attendant to the purported debt, as well as the appellants’ failure to establish that the promissory notes represented arm’s-length transactions. Accordingly, the Board upheld the Commissioner’s disallowance of the claimed interest expenses associated with the appellants’ cash-management system for each of the tax years at issue.
The 1996 Reorganization and Tax Year 2002 Royalty Expenses
Mr. Paul McGuire, Kimberly-Clark’s assistant controller for tax accounting, testified that once the merger of Scott and Kimberly-Clark was complete, the company faced the challenge of integrating the operations of two previously large and distinct entities into a single efficient organization. Toward this end, Kimberly-Clark began to consolidate and centralize several operational functions including management, sales, distribution, and research and development.
Mr. McGuire noted that after the merger, intangible assets, including trademarks, patents, and proprietary know-how, were owned and managed by more than one entity in the Kimberly-Clark family. According to Mr. McGuire, there was an imminent need to centralize ownership and control of these assets, absent which significant inefficiencies would remain and intellectual property could be unprotected.[7] Kimberly-Clark developed “Project Partners” to achieve the desired centralization, a plan that would result in contribution of intellectual property and certain other assets to a newly formed Delaware corporation, Worldwide, a wholly owned subsidiary of KCTC.[8]
On December 3, 1996, Kimberly-Clark issued an internal document entitled “Project Partners Communication Guide” with a cover memo explaining that the document was an “announcement for those teams affected by the creation of [Worldwide].” The Guide, which explained in simple and direct terms the purpose of Project Partners and the structure of Worldwide, began with an overview of Project Partners. Answering the question “What is Project Partners and why are we creating it?,” the Guide states, in part:
Project Partners combines our intangible assets into one company called Kimberly-Clark Worldwide. Up until now, as a result of the merger with Scott Paper, intangible assets were owned and/or managed by several different companies in the Kimberly-Clark Family. This change centralizes the ownership of intangible assets of three companies – Kimberly-Clark, Kimberly Clark Tissue Company and Kimberly-Clark Worldwide . . . into one company. . . .
This project is another example of our continuing effort to improve our financial returns. It will produce better asset management and operational, administrative and financial efficiencies, including significant tax savings. (Emphasis added).
Pursuant to the Project Partners plan, effective November 30, 1996, Kimberly-Clark and KCTC each executed substantially similar agreements with Worldwide as follows:[9] 1) an “Agreement for Conveyance of Assets and Appointment of Trademark Agent,” by which each company contributed substantially all of its patents and proprietary know-how that it had developed and owned (collectively, the Patents”) to Worldwide. The agreements also provided for appointment of Worldwide as the exclusive agent with respect to all of Kimberly-Clark’s and KCTC’s “trademarks,” which included, inter-alia, trademarks, tradenames, service marks, and logos (collectively, the “Trademarks”) ownership of which was retained by Kimberly-Clark and KCTC; 2) a “Trademark License and Assistance Agreement” granting Worldwide a non-exclusive license to the Trademarks to use in manufacturing operations. The agreement also granted an exclusive license to sublicense the Trademarks owned by Kimberly-Clark to KCTC and those owned by KCTC to Kimberly-Clark and to sublicense the Trademarks worldwide. The license grants made under these agreements were royalty-free; 3) an “Asset Contribution Agreement” by which certain real property and operations
were transferred to Worldwide; and 4) a “License and Technical Assistance Agreement” whereby Worldwide granted to Kimberly-Clark and KCTC licenses to the Patents that had been contributed to Worldwide and a sublicense to the Trademarks which had been licensed to Worldwide and for which Worldwide had been appointed exclusive agent by Kimberly-Clark and KCTC. In consideration of the patent license and trademark sublicense, Kimberly–Clark was to pay Worldwide a royalty of three percent of “sales,” as defined in each agreement, and KCTC a royalty increasing from 3.1% of “sales” for the month of December, 1996, to 3.3% for the periods commencing January 1, 1999.[10] The royalty difference reflected the conclusion that Kimberly-Clark’s trademarks were more valuable than those belonging to KCTC, and thus KCTC should pay more for Kimberly Clark’s trademarks under the licensing arrangement.[11]
Following these transactions, Worldwide had numerous employees, substantially all of whom had previously been employees of affiliates of Kimberly-Clark. The employees were involved in manufacturing, research and development, and patent and legal protection services. As reflected in the cited agreements, Worldwide owned and managed the Patents that had previously belonged to Kimberly-Clark and KCTC and managed Kimberly-Clark’s and KCTC’s Trademarks.
Notably, the appellants explained in great detail the need to consolidate the Patents and Trademarks within one newly created entity, Worldwide. Yet despite the articulated “reasons” for consolidation, there was no explanation offered for the rationale underlying the retention of the Trademarks by Kimberly-Clark and KCTC. Presumably, the appellants could have achieved their stated goals of increasing efficiencies and enhancing protection of the intellectual property by employing similar arrangements for both the Trademarks and the Patents. Yet for no apparent reason, the Patents were transferred to Worldwide, thereby generating substantial royalty payments and consequent expense deductions for Kimberly-Clark, while the Trademarks were not. The Board thus found that Kimberly-Clark’s unexplained inconsistent treatment of the Patents and the Trademarks undermined its assertion that tax reduction was not a principal purpose underlying the 1996 reorganization. The Project Partners Communication Guide, which explicitly references “significant tax savings” as an “efficiency” that will be realized as part of the reorganization further reinforces other facts supporting the inference that tax reduction was inextricably tied to the reorganization.
The Board also found significant the extent to which those involved in company tax matters were responsible for development, implementation and oversight of the reorganization. For example, not only did Mr. McGuire sign the cover memorandum of a draft of the “Project Partners Communication Guide,” but he was the signatory to an inter-office document entitled “Project Partners Work Plan,” which delineates some 348 tasks associated with implementation of Project Partners. Many of these tasks relate directly to tax considerations and were to be completed by company tax personnel and representatives of Ernst & Young. Further, in his testimony, Mr. McGuire confirmed Ernst & Young’s ongoing involvement with Project Partners as it related to the multiplicity of tax issues intertwined with the reorganization. In contrast, the record does not reflect any level of planning or oversight of the reorganization by operational personnel, corporate managers or even employees responsible for addressing intellectual property issues, the very issues the appellants claim were the driving force for the reorganization. Moreover, just as tax personnel played the principal role in the development and execution of Project Partners, the only witnesses presented in support of the appellants’ case in these appeals held positions within Kimberly-Clark as director of tax defense, assistant controller for tax accounting, and controller; no witness responsible for the appellants’ business operations or intellectual property management was offered by the appellants.
Next, despite statements by the appellants to the contrary, the record does not indicate that Worldwide negotiated or entered into third-party licensing agreements with respect to the Patents or the Trademarks. While the license agreements relating to this property purported to be non-exclusive, there was no evidence to suggest that Worldwide sought out or entered into agreements with third-party licensees. Absent such licensing activity, the Board found that the license agreements among Kimberly-Clark, Worldwide and various affiliated entities were de facto exclusive licenses. The Board thus found that these licenses were not arm’s-length transactions.
Finally, although Kimberly-Clark and KCTC ostensibly paid a royalty to Worldwide for the use of intellectual property they had transferred to Worldwide, as well as for the licensed trademarks, these payments were immediately returned to Kimberly-Clark by virtue of the operation of the company’s cash-management system. The Board found that such a circular flow of funds undermined the appellants’ assertion that the 1996 reorganization was supported by economic substance.
On the basis of the foregoing, the Board found that the appellants did not provide clear and convincing evidence to demonstrate that reduction of tax was not a principal purpose underlying the 1996 reorganization; neither did the appellants sustain their burden of demonstrating that the add back of royalty expenses associated with the transfer and license-back transactions at issue for tax year 2002 was unreasonable within the meaning of G.L. c. 63, § 31I. Accordingly, the Board found that the Commissioner properly disallowed these royalty expenses.
Tax Year 2003 – Purported Rebate Payments
Mr. Richard Beauvais, Kimberly-Clark’s director of tax defense and assistant treasurer, testified that as part of the corporate consolidation and streamlining process following the merger with Scott, Kimberly-Clark undertook to examine and improve its “supply-chain management,” the process of purchasing raw materials, manufacturing product, maintaining inventory, and selling and distributing product. According to Mr. Beauvais, following the merger, individual entities bought their own raw materials, attempted to determine their own production needs, to match those needs with customer demand, and controlled the sale and distribution of the product. This arrangement resulted in several inefficiencies including overproduction, excess inventory, and inefficient shipping. Beginning in Europe in 2000, and subsequently in the United States, Kimberly-Clark sought to centralize and increase efficiencies associated with its supply-chain management. The Company purchased and put in place an “SAP information system,” a software system that provided Kimberly-Clark with a central information source for the entire supply-chain management process that replaced thirty loosely connected systems.
Mr. Beauvais testified that the SAP system would only work if the entire process, from procurement to ultimate sale, was coordinated from within a single entity. To accomplish this in the United States, Global was formed in May of 2002, and a series of agreements, effective January 1, 2003, was executed by and among Kimberly-Clark,
Worldwide and Global.[12] Ultimately, during 2003, Global was responsible for controlling Kimberly-Clark’s entire supply-chain management process and had several thousand employees. Global sold, marketed and distributed Worldwide branded products, provided centralized administration services, and operated national distribution centers. Global also owned raw materials, work in progress and finished goods.
Within the new operating structure, manufacture was performed on a contract basis, primarily by Kimberly-Clark, but also by Worldwide and other affiliated entities qualified by Worldwide as “certified suppliers.”[13] Each of the certified suppliers was guaranteed a return for the manufacturing services performed equal to the costs of manufacturing plus a mark-up on assets of approximately 11%. Global was also guaranteed a return of approximately 3.9% on its distribution costs, 6% on its costs of carrying inventory and 4% on any incurred engineering costs. The rates of return were initially determined by Kimberly-Clark and were adjusted somewhat based on a Transfer Pricing Analysis performed by KPMG in December of 2003.
Under the various agreements relating to the 2003 reorganization, neither Kimberly-Clark nor any other certified supplier paid a royalty, defined or described as such, for the use of the Patents for which Worldwide had previously been compensated. Rather, the sole identified royalty within this new structure was paid by Global to Worldwide in the annual sum of approximately one million dollars. Global, in turn, sublicensed the technology to the certified suppliers without specified charge.
Unlike the prior royalty arrangement, no evidence was submitted regarding how the royalty paid by Global, which represented a tiny fraction of the royalty payments made by Kimberly-Clark for use of the same property during 2002, was derived or why it represented an arm’s-length payment for the technology.
Pursuant to First Amended and Restated Supply and Service Agreements, each certified supplier, having received its guaranteed return, was to remit payment to Global in the amount of any “cost savings.” These savings were realized by the suppliers through use of the Patents. The First Amended and Restated Supply and Services Agreements define “cost savings” as “any cost efficiencies obtained by [a certified supplier] in manufacturing, producing, converting, packaging, supplying or delivering [][p]roducts to [Global] including, but not limited to reduced input costs, increased volume, and increased efficiency” derived from the use of the Patents. At the end of each month, the cost savings were paid by the suppliers to Global, which accounted for the savings as part of its cost of goods sold and remitted them to Worldwide in the form of “rebate” payments.
By way of example, payments relating to sales of goods under the “rebate program” flowed as follows. Kimberly-Clark or another certified supplier produced a product for Global. Global sold the product to a customer for ten dollars and then, using the agreed-upon mark-up, calculated its rate of return to be two dollars. The remaining eight dollars was remitted to the certified supplier, and the supplier’s guaranteed return was calculated to be five dollars based on the pre-determined mark-up. The remaining balance of three dollars was characterized by the appellants as “cost savings” and was returned by the supplier to Global, which paid the sum to Worldwide as a “rebate” payment.[14]
Throughout 2003, Worldwide continued to own and manage the Patents.[15] Worldwide also had ongoing manufacturing operations and funded research and development. Worldwide was the only entity in the 2003 reorganization that was not guaranteed a rate of return. According to the appellants, this structure was designed to remove business risk from Kimberly-Clark, other contract manufacturers, and Global. In turn, Worldwide was intended to and did assume all of the risk associated with product sales.
The appellants assert that the “rebate” payments were not related to the certified suppliers’ use of Worldwide’s Patents, and therefore cannot be characterized as a royalty or intangible expense within the meaning of G.L. c. 63, § 31I. Rather, according to the appellants, the “rebate” payments represent compensation paid to Worldwide for its assumption of business risk. The Board found that these assertions lacked credibility.
The Board found untenable the appellants’ claim that Worldwide bore all the business risk associated with the sale of products, or lack thereof, within the appellants’ multi-faceted operational structure. Kimberly-Clark is a publicly traded corporation, and the risks and rewards of its business activities and those of its affiliates, which are almost exclusively derived from the manufacture and sale of its products, flow directly to Kimberly-Clark and are periodically reported in various public documents. The Board therefore found implausible the appellants’ assertion that Kimberly-Clark and other affiliated entities were isolated from these risks, which as of 2003 were purportedly borne by a single subsidiary with significant albeit limited activity.
Moreover, beginning with the 1996 reorganization and continuing throughout 2002, Worldwide was compensated at a rate of between 3% and 3.3% of billions of dollars of sales for use of the Patents, a sum which the appellants characterized as reflecting fair value. During 2003, that property was used by substantially the same entities to perform the same tasks – produce Worldwide’s branded products. In his testimony, Mr. Beauvais stated not only that the “manufacturing know-how” owned by Worldwide allowed the certified suppliers to “produce a product at a cost that should be less absent having the availability of [the] technology,” but that the certified suppliers’ production was not possible without this “know-how.” Indeed, the “cost savings” and consequent “rebate” payments made to Worldwide were made possible only through use of the Patents sublicensed by Global to the certified suppliers. These facts notwithstanding, the sole declared royalty payment for 2003, made by Global to Worldwide, amounted to a tiny fraction of royalties paid to Worldwide during 2002. Further, Worldwide continued to perform much the same functions it had prior to the 2003 reorganization.
The Board found that the “rebate” payments represented payment for use of the Patents, and this use constituted an embedded royalty. These findings were based on: the effective discontinuance of substantial royalty payments during tax year 2003, which the appellants’ had previously characterized as fair compensation for use of Worldwide’s Patents; the certified suppliers’ continued use of the Patents, without which production would not have been possible; and the appellants’ untenable assertion that the “rebate” payments represented compensation to Worldwide for its full assumption of risk associated with the sale of products.
Based on the Board’s finding that the nature of the “rebate” payments was fundamentally mischaracterized by the appellants, and that the payments also constituted embedded royalties, the Board also found that the add-back provisions of G.L. c. 63, § 31I applied to the payments. The appellants, having unequivocally denied that the “rebate” payments represented royalties paid for use of the Patents, presented no evidence to support the assertion that the payments qualified for an exception from add back under § 31I. Absent such evidence, the Board found that the Commissioner’s add back of the sums associated with the purported rebate payments was proper.
OPINION
Appellants’ Burden of Proof
With the exception of interest expenses associated with Kimberly-Clark’s cash-management system incurred during tax year 2001, the disposition of the contested issues in these appeals is dependent upon application of G.L. c. 63, §§ 31I, and 31J (collectively, the ”Add Back statutes”).[16] Generally, and as discussed in greater detail below, the Add Back statutes, subject to certain exceptions, require a taxpayer to add back to net income deductions for related member interest and intangible expenses and costs. Id. The exceptions, in pertinent part, apply if a taxpayer “establishes by clear and convincing evidence, as determined by the commissioner, that the disallowance of the deduction is unreasonable. . .” G.L. c. 63, §§ 31I(c)(i)(A) and 31J(a)(1).
Citing the well-settled principle that courts are generally constrained to follow the plain language of a statute, see, e.g., White v. Boston, 428 Mass. 250 (1998), the appellants assert that the plain language of the Add Back statutes inevitably leads to the inference that the “clear and convincing” standard is confined to decisions made by the Commissioner and does not extend to appeals of those decisions to the Board. In support of this conclusion, the appellants note that in each instance in which the statutes reference “clear and convincing evidence,” the language is followed by the qualifying phrase, “as determined by the commissioner.” The appellants next contend that had the Legislature intended to extend the clear and convincing standard of proof to appeals before the Board, the qualifying phrase, which the appellants characterize as “limiting language,” would not have been made part of the statute. Thus, the appellants conclude that the plain language of the statutes mandate application of the clear and convincing standard only to the Commissioner’s decisions, and that the standard of proof at the Board is the “preponderance of the evidence” standard.
Unlike the appellants, the Commissioner reads the phrase “as determined by the Commissioner” as an instruction to the Commissioner to provide guidance regarding the meaning of “clear and convincing evidence” within the Add Back statutes. The Commissioner essentially argues that she is generally to determine the quality and type of evidence that will constitute “clear and convincing” evidence, and will decide whether a particular taxpayer has met that standard in the context of an abatement application. On appeal, the Board will then make an independent determination of whether the taxpayer has met the clear and convincing standard based on evidence offered at a de novo hearing.
Where, as here, a statute is “capable of being understood by reasonably well-informed persons in two or more different senses,” it is ambiguous. Fred Cohen v. Liberty Mutual Insurance Company, 41 Mass. App. Ct. 748, 753 (1996). Long settled principles of statutory construction require that ambiguous statutory language be construed so as to avoid absurd or unreasonable results and to give effect to the Legislature’s intent. See, e.g., EMC Corp. v. Commissioner of Revenue, 433 Mass. 568, 570 (2001); Manning v. Boston Redevelopment Authority, 400 Mass. 444, 453 (1987).
Applying these principles of construction to the relevant language of the Add Back statutes, the Board rejected the appellant’s interpretation of the meaning and import of the phrase “as determined by the commissioner.” First, the appellants’ interpretation leads to the anomalous result that a taxpayer would bear two different standards of proof in challenging the disallowance of a deduction under the Add Back statutes, with a more demanding “clear and convincing” standard applicable during the Commissioner’s review and a less onerous “preponderance” standard applicable to the appeal of the Commissioner’s abatement determination to the Board. In fact, the appellants’ view would effectively nullify the Commissioner’s review of add-back transactions for any taxpayer willing to appeal to the Board: a taxpayer could produce scant or no evidence before the Commissioner and later receive a de novo hearing at the Board under the less burdensome preponderance of the evidence standard. This result plainly contravenes the intent of the statute and renders the “clear and convincing” language in the Add Back statutes meaningless for any taxpayer that prosecutes an appeal before the Board.
In contrast, the Commissioner’s interpretation that the phrase “as determined by the Commissioner” directs her to provide guidance regarding the meaning of clear and convincing evidence is a sensible construction. The Commissioner has in fact provided such guidance, both in Technical Information Release (“TIR”) 03-19 and 830 C.M.R. 63.31.1, each of which states that clear and convincing evidence is “evidence that is so clear, direct and weighty that it will permit the Commissioner to come to a clear conviction without hesitancy of the validity of the taxpayer’s claim.” The Commissioner’s regulation adds that “[t]his evidentiary standard requires a strong showing of proof that instills a degree of belief greater than is required under the preponderance of evidence standard.” 830 C.M.R. 63.31.1(2).
Because the appellants’ interpretation of the phrase “as determined by the Commissioner” leads to an absurd result, while the Commissioner’s interpretation is reasonable and sensible, the Board determined that the Commissioner’s interpretation is correct. See Manning, 400 Mass. at 453 (“A statute or ordinance should not be construed in a way that produces absurd or unreasonable results when a sensible construction is readily available”); see also Flemings v. Contributory Retirement Appeal Board, 431 Mass. 374, 376 (2000) (“If a sensible construction is available, [courts] shall not construe a statute to make a nullity of pertinent provisions”).
Moreover, “[a] statute ‘must be interpreted according to the intent of the Legislature ascertained from all its words construed by the ordinary and approved usage of the language, considered in connection with the cause of its enactment, the mischief or imperfection to be remedied and the main object to be accomplished, to the end that the purpose of its framers may be effectuated.’” Wheatley v. Massachusetts Insurers Insolvency Fund, 456 Mass. 594, 601 (2010)(quoting Hanlon v. Rollins, 286 Mass. 444, 447 (1934)). The Add Back statutes were enacted in part in response to the Supreme Judicial Court’s decision in The Sherwin-Williams Co. v. Commissioner of Revenue, 438 Mass. 71 (2002). See 830 C.M.R. 63.31.1. In Sherwin-Williams, discussed in greater detail below, the Court upheld the transfer and license-back of intangible property to a related corporate member, focusing on whether the disputed transactions “had any practical economic effects beyond the creation of . . . tax benefits.” Sherwin-Williams, 438 Mass. at 85. Approximately five months after the Court’s decision in Sherwin-Williams, the Legislature strengthened the judicially sanctioned inquiry, presumptively disallowing deductions for expenses paid to related parties, including those considered by the Court in Sherwin-Williams. The Add Back statutes require a taxpayer to demonstrate by clear and convincing evidence that add-back adjustments are unreasonable, and the Legislature explicitly “clarif[ied] its original intention that the taxpayer is required to possess for a transaction, both: (1) a valid, good-faith business purpose, other than tax avoidance; and (2) economic substance apart from the asserted tax benefit in order to claim a deduction, exemption or other tax benefit.” St. 2003, c. 4, § 84; G.L. c. 63 §§ 31I(c) and 31J(b).
Against this backdrop, the notion that the Legislature would have intended that appeals relating to disputed add-back transactions be considered under a standard of proof more favorable to a taxpayer than upon review by the Commissioner is without logical support. In passing the Add Back statutes, the Legislature explicitly incorporated a heightened standard of proof into the review of transactions involving related member interest and intangible expenses and costs. Inclusion of the heightened standard of proof evinces an unmistakable intent to subject the transactions to closer scrutiny and provides a mechanism to effectuate this purpose. Yet, if the appellants’ view were to prevail, a taxpayer could easily frustrate the Legislature’s intent simply by offering the Commissioner nothing and then appealing an adverse decision from the Commissioner to meet a preponderance of the evidence standard at the Board. Further, as tax deductions are a matter of legislative grace, see, e.g., South Boston Savings Bank v. Commissioner of Revenue, 418 Mass. 695 (1994), the Legislature could have repealed the deductions affected by the Add Back statutes in their entirety. Instead, the Legislature chose to impose a higher standard in an area marked by significant abuse and litigation. See, The TJX Companies, Inc. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2007-790, 881, aff’d in part, remanded in part, Mass. App. Ct., No. 07-P-1570, Memorandum and Order under Rule 1:28 (April 3, 2009), aff’d, Mass. App. Ct., No. 09-P-1841, Memorandum and Order under Rule 1:28 (July 23, 2010); Cambridge Brands, Inc. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports, 2003-358, aff’d, 62 Mass. App. Ct. 1118 (2005); The Sherwin-Williams Co. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2000-468, rev’d 438 Mass. 71 (2002); Syms Corp. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2000-711, aff’d 436 Mass. 505 (2002).
The appellants also emphasize that when the Legislature passed the Add Back statutes, it left unchanged the Board’s enabling statute, G.L. c. 58A, § 8, which allows the Board to determine its own rules of practice and procedure. The appellants then conclude that the Commissioner has asked the Board “to introduce a higher standard of proof to proceedings before the Board that the Legislature saw fit to leave unchanged.”
General Laws, chapter 58A, section 8 provides, in relevant part, that proceedings before the Board “shall be conducted in accordance with such rules of practice and procedure as the board may make and promulgate.” G.L. c. 58A, § 8. It does not dictate a standard of proof to be applied in proceedings before the Board. Rule 1.37 of the Board’s Rules of Practice and Procedure is instructive in this regard and provides, in pertinent part:
Except as herein otherwise provided, the practice and procedure before the Board shall conform to that heretofore prevailing in equity causes in the courts of the Commonwealth prior to the adoption of the Massachusetts Rules of Civil Procedure; but the Board reserves the right to make hearings and proceedings as informal as possible, to the end that substance and not form shall govern . . . .
830 CMR 1:37. Practice and procedure in equity causes prosecuted in Massachusetts prior to adoption of the Massachusetts Rules of Civil Procedure in 1973 generally required that the party with the burden of proof establish that the relevant facts were more likely true than not. See Sullivan v. Hammacher, 339 Mass. 190, 194 (1959); Black v. Boston Consolidated Gas Co., 325 Mass. 505, 508 (1950). Thus, pursuant to Rule 1.37, a taxpayer appearing before the Board typically bears the burden of proving its case by a “preponderance of the evidence.” See, e.g., Bayer Corp. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports, 2005-491. However, general equity practice and procedure do not control in the presence of a specific legislative mandate regardless of whether the statute requires a result contrary to the rule generally used before the statute was enacted. See Hurley v. Flanagan, 313 Mass. 567, 572 (1943) (noting that the burden of proof on a particular issue was traditionally on the plaintiff, but adopting a statutory rule that placed the burden on the defendant); see also Keith Mengel v. Justices of the Superior Court, 313 Mass. 238, 244 (1943) (adopting a statute’s accelerated appeals process for injunctions in labor cases because the statute created a new procedure superseding the prevailing practice in equity).
In the instant appeals, the Add Back statutes provide an explicit statutory mandate requiring that a taxpayer who disputes the add back of related member interest or intangible expenses provide clear and convincing evidence to sustain its burden of proof. This specific statutory mandate controls notwithstanding the general application of the preponderance standard under equity practice.
Further, the Board has previously applied a heightened standard of proof without modifying its rules. Under U.S. Supreme Court and Supreme Judicial Court precedent, when disputing application of Massachusetts apportionment law, “the taxpayer has the ‘distinct burden of showing by “clear and cogent evidence” that [the state tax] results in extraterritorial values being taxed.’” The Gillette Company v. Commissioner of Revenue, 425 Mass. 670, 680 (1997)(quoting Container Corporation of America v. Franchise Tax Board., 463 U.S. 159, 164 (1983)). The Board has applied this heightened standard on many occasions. See, e.g., W.R. Grace & Co.-Conn. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports, 2009-261; Advance Logic Research, Inc v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2008-19; NES Group, Inc. & Robert J. Tomsich v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports, 2008-1242; The Gillette Company v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports, 1996-362. It cannot be reasonably suggested that the Board should have ignored a clear judicial mandate and refused to apply a heightened standard of proof in those appeals by declaring that its rules only allowed it to apply the preponderance standard applicable in equity cases. It would be equally unreasonable for the Board to ignore the clear legislative mandate in these appeals.
In sum, neither G.L. c. 58A, §8, the Board’s enabling statute, nor Rule 1.37 prevents the Board from applying the clear and convincing standard of proof prescribed by the Add Back statutes. Moreover, there is ample precedent to show that the Board has not hesitated to apply a heightened standard of proof pursuant to applicable judicial precedent.
Finally, the appellants argue that by seeking application of the clear and convincing standard at the Board, the Commissioner seeks to limit the discretion granted the Board by the Legislature. Noting that a proceeding before the Board is a de novo hearing of the facts and issues in dispute, see Commissioner of Corporations and Taxation v. J.G. McCrory Company, 280 Mass. 273 (1932), the appellants claim that, contrary to the Board’s obligation to conduct a de novo hearing in the present appeals, the Commissioner “would have the Board confine its examination to a review of her determination that the appellants did not sustain their burden of proof by ‘clear and convincing’ evidence.”
The Board found that its obligation to conduct a de novo hearing is entirely consistent with application of the clear and convincing standard. In J.G. McCrory Company, the Court considered the Commissioner’s contention that the function of the Board was limited to a review of the Commissioner’s action, and that the Board was not entitled to try a matter anew. Id. at 277. The Court disagreed, finding that a taxpayer’s appeal to the Board meant “a full new trial or an entire rehearing upon all matters of fact and questions of law.” Id. The Court made no mention of the standard applicable to proceedings before the Board. Indeed, there is no precedent to support the conclusion that application of the clear and convincing standard by the Board to the evidence presented by the appellants in these appeals would in any way impair “a full new trial or an entire rehearing upon all matters of fact and questions of law.” The Board in fact conducted a de novo hearing in the present appeals and did not merely review the propriety of the Commissioner’s action. Rather, having considered all the testimony and exhibits presented at the hearing of these appeals, together with the parties’ stipulation of facts, the Board ruled that the appellants failed to produce clear and convincing evidence in support of their claims for abatement.
Based on the foregoing, the Board found and ruled that the “clear and convincing” standard applies to appeals involving application of the Add Back statutes.
Cash-management System
Pursuant to G.L. c. 63, § 30(4), a corporation’s net income generally consists of gross income less the deductions, but not credits, allowed under the I.R.C. Pursuant to I.R.C. § 163(a), a corporation may deduct “all interest paid or accrued within the taxable year on indebtedness.” For each of the tax years at issue in these appeals, the parties dispute whether claimed interest expenses associated with the appellants’ cash-management system should be allowed.
There is no dispute that G.L. c. 63, § 31J, (“§ 31J”) which presumptively disallows interest expense “paid, accrued or incurred to a related member,” is applicable to claimed interest deductions relating to tax years 2002 and 2003. The deductions for tax year 2001, which precedes the effective date of the Add Back statutes, must be considered under prior law.
Tax Year 2001
For a transaction to give rise to a valid interest deduction, the transaction must constitute true indebtedness. Knetsch v. United States, 364 U.S. 361, 364-365 (1960). “Related but separate entities can freely enter into contracts including debt transactions, like any corporations or individuals.” Overnite Transportation Company v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 1999-353, 370 (citing Bordo Products Co. v. United States, 476 F.2d 1312, 1323 (Ct. Cl. 1973)). However, courts examine these transactions with greater scrutiny because the transactions “do not result from arm’s length bargaining.” Overnite Transportation Company, Mass. ATB Findings of Fact and Reports at 1999-370 (citing Kraft Foods Co. v. Commissioner, 232 F.2d 118, 123-124 (2nd Cir. 1956)); see also, Overnite Transportation Company v. Commissioner of Revenue, 54 Mass. App. Ct. 180, 186 (2002) (“When ‘the same persons occupy both sides of the bargaining table, form does not necessarily correspond to the intrinsic economic nature of the transaction, for the parties may mold it at their will with no countervailing pull’”)(quoting Fin Hay Realty Co v. United States, 398 F.2d 694, 697 (3d Cir. 1968)). Under these circumstances, which are present in the current appeal, less emphasis is placed on the formal indicia of a debt instrument, which can be “meticulously made to appear” at the sole discretion of the parent. Id. at 697. Furthermore, the parties’ characterization of the debt instrument in their books and records is not a controlling factor because the records are a product of the parties and are therefore not necessarily “a reliable reflection of the true nature of the transaction.” New York Times Sales, Inc. v. Commissioner of Revenue, 40 Mass. App. Ct. 749, 753 (1996). “Rather, ‘the indebtedness must be indebtedness in substance and not merely form.’” Overnite Transportation Company, Mass. ATB Findings of Fact and Reports at 1999-371 (quoting Midkiff v. Commissioner, 96 T.C. 724, 735 (1991)).
While “the issue of whether transfers between a subsidiary and its parent constitute debt has been extensively litigated, courts have not established a bright-line rule for making such a determination but have instead employed a case-by-case analysis based on the specific facts and circumstances of a particular case.” The TJX Companies, Mass. ATB Findings of Fact and Reports at 2007-881. “The Board must review the facts and circumstances surrounding a purported inter-company loan to determine whether a true debt obligation exists.” Id. at 882. Within the context of this review, “[i]t is well settled that a distribution by a subsidiary corporation to its parent is a loan and not a dividend if, at the time of its payment, the parties intended it to be repaid. Whether the parties actually intended the transaction to be a loan or dividend is an issue of fact. To resolve the issue, the courts apply a multi-factor analysis. No single factor is determinative; rather, all the factors must be considered to determine whether repayment or indefinite retention is intended.” New York Times Sales, 40 Mass. App. Ct. at 752. (internal citations omitted).
In New York Times Sales, the Massachusetts Appeals Court upheld the Board’s decision that sums transferred from a subsidiary to its parent were dividends and not loans. The Board had determined that the parties did not intend the transaction to be a loan in light of factors previously set forth in Alterman Foods, Inc. v. U.S., 505 F.2d 873 (5th Cir. 1974), and Alterman Foods, Inc. v. U.S., 611 F.2d 866 (Ct. Cl. 1979), and on appeal, the court sanctioned the Board’s reasoning involving:
[S]everal factors [which] demonstrated that the parties intended that the cash transactions be dividends and not loans. They included (1) the amounts transferred were not limited in any manner; (2) there was no repayment schedule and no fixed dates of maturity; (3) the amounts ‘upstreamed’ to Times Company were intended to remain with the Times Company for use in fulfilling its various corporate purposes; (4) no interest was charged; (5) no notes or other evidences of indebtedness existed; (6) the transferred cash was not secured in any manner; (7) at no time did Times Sales request repayment; (8) there was no evidence that Times Sales had any expectations of repayment; and (9) at no time did Times Company make any effort to repay the amounts transferred to it by Times Sales.
New York Times Sales, 40 Mass. App. Ct. at 752. In the present matters, the appellants argue that the transactions within the cash-management system reflected bona-fide debt, citing loan agreements and associated promissory notes executed by Kimberly-Clark and participating subsidiaries that contained fixed ceilings on the loan amounts and set forth terms for borrowing over a period of time similar to a credit line. The appellants also emphasize that an “arm’s-length” interest rate was charged, which was tied to a federal rate that under the I.R.C. qualified as an “adequate arm’s-length interest rate” for federal tax purposes. Finally, the appellants note that the transactions at issue were treated as debt on the books of Kimberly-Clark via detailed ledger entries documenting the movement of cash among Kimberly-Clark and its subsidiaries.
Observing that the Loan Agreements and associated promissory notes make no mention of the appellants’ cash-management system, the Commissioner disputes their relevance to the present analysis. The Board, however, accepted the appellants’ testimony that the provided documentation reflected elements of the arrangement among Kimberly-Clark and its subsidiaries within the cash-management system. This conclusion notwithstanding, the Board found and ruled that the purported intercompany loans did not constitute bona-fide debt.
In The TJX Companies, having examined the facts and circumstances surrounding certain intercompany advances, “the Board found and ruled that . . . inter-company loans were not true debt because the advances were permanent in nature, were intended to remain indefinitely with TJX, and were unsecured. Additionally, TJX never made any effort to repay the loan princip[al] and the subsidiaries never requested repayment.” The TJX Companies, Mass. ATB Findings of Fact and Reports at 2007-890. These same features characterized the appellants’ cash-management system and were central to the Board’s finding that the claimed loans did not constitute true debt.
All cash received by the participating subsidiaries was swept up to Kimberly-Clark on a daily basis. Having issued disbursements to the subsidiaries only to satisfy their operating needs, excess balances remained with Kimberly-Clark indefinitely. Notwithstanding the appellants’ assertion that on any given day a participating entity could be in a net borrowing or lending position, at the end of each of the tax years at issue, Kimberly-Clark was in a net borrowing position.
No evidence presented indicated that any entity expected or received return of excess advances made to Kimberly-Clark during the tax years at issue. Similarly, there was no evidence to support a finding that Kimberly-Clark made any effort to repay those advances. Instead, interest simply continued to accrue on outstanding payable positions. The fact that excess balances remained with Kimberly-Clark indefinitely, coupled with the subsidiaries’ failure to request or receive repayment of principal, led the Board to find that the advances were permanent. Thus, the Board could not conclude on the present record that the parties intended repayment of the excess advances.
As with the taxpayer’s cash transfer agreements in The TJX Companies, the Loan Agreement and associated promissory notes made no provision for security, and contained no default or collateral provisions. Thus, the repayment provisions of the notes lacked substance because the subsidiaries did not have specified recourse to compel Kimberly-Clark to repay the claimed loans. Further, “[a]lthough some loans are made ‘on signature,’ the absence of a provision for security in a loan of [six hundred million dollars] is telltale that a ‘loan’ is not real, and so, also for the absence of meaningful enforcement mechanisms.” Overnite Transportation Company, 54 Mass. App. Ct. at 189-90 (internal citations omitted). Under this precedent, the demand notes between Kimberly-Clark and Worldwide, valid for sums up to three billion dollars, and the Notes representing fixed sums of five hundred million dollars each, none of which provided for security or contained enforcement mechanisms, were certainly of sufficient magnitude to justify doubt regarding their substance.
Further, although Kimberly-Clark and its affiliates executed notes that provided for interest at a rate that may have passed muster for federal tax purposes, the appellants did not provide evidence to demonstrate that an independent third party lender would have extended loans at the same interest rate and on the same terms as the rate employed among Kimberly-Clark and its subsidiaries. These facts bolstered the conclusion that the various promissory notes did not represent arm’s-length transactions. See, e.g. Overnite Transportation Company, Mass. ATB Findings of Fact and Reports at 1999-371.
The Board also found the appellants’ failure to offer any explanation regarding the Notes telling. The Notes, which were ostensibly part of the appellants’ cash-management system, represented obligations totaling one billion dollars and had specified repayment dates that preceded the hearing of these appeals. Yet the appellants offered no evidence as to whether or when the outstanding debt was retired, and if payment was not made, why the lack of payment does not undermine the appellants’ assertion that all of the purported loans made under their cash-management system constituted bona-fide debt. The Board, therefore, found that the appellants’ failure to submit such evidence further reinforced the finding that the purported loan arrangements that comprised the appellants’ cash-management system did not constitute bona-fide debt.
Finally, although the appellants treated the cash-management transactions as debt on their books, as noted above, “the method by which two related businesses account for cash transfers on their internal financial records is not deemed to be a controlling factor in determining the nature of the transaction . . . such records, being the product of the parties, do not necessarily constitute a reliable reflection of the true nature of the transaction.” New York Times Sales, 40 Mass. App. Ct. at 753.
In sum, with primary focus on the factors which indicated the permanent nature of the excess cash advances made within the appellants’ cash-management system, including the absence of requests for, effort toward, or expectation of repayment or actual repayment, the Board found and ruled that the advances did not constitute bona-fide debt. This conclusion was reinforced by other factors such as the absence of security, default or collateral provisions attendant to the purported debt, as well as the appellants’ failure to establish that the promissory notes represented arm’s-length transactions. Accordingly, the Board upheld the Commissioner’s disallowance of the interest expenses associated with the appellants’ cash-management system for the tax year 2001.
Tax years 2002 and 2003
Having concluded that the interest expenses for tax year 2001 relating to the appellants’ cash-management system should be disallowed, the same result is compelled for tax years 2002 and 2003. As previously noted, the nature of the transactions within the cash-management system did not change during the tax years at issue. The only potentially dispositive change for the latter tax years, therefore, is the application of § 31J. Section 31J requires add back of “otherwise deductible interest paid, accrued or incurred to a related member,” unless, as relevant to these appeals, “the taxpayer establishes by clear and convincing evidence, as determined by the commissioner, that the disallowance of the deduction is unreasonable.” G.L. c. 63, §§ 31J(a) and 31J(a)(1). There is no dispute that the interest at issue was “paid, accrued or incurred to a related member” within the meaning of § 31J, and is therefore subject to add back. Neither do the parties dispute that an obligation underlying a claimed interest expense must be bona-fide debt. See, e.g., 830 C.M.R. 63.31.1(2). Here, the only additional disputed issue is the heightened standard of proof to be borne by a taxpayer under the Add Back statutes. Having ruled that the “clear and convincing” standard should apply, and given that the appellants did not prevail under the less burdensome “preponderance of the evidence” standard for tax year 2001, the Board found and ruled that the appellants’ case for tax years 2002 and 2003 must also fail. Accordingly, the Board upheld the Commissioner’s disallowance of the claimed interest expenses associated with the appellants’ cash-management system for tax years 2002 and 2003.
Royalty Expense – Tax Year 2002
The I.R.C. allows a deduction for “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” I.R.C. § 162(a). For tax year 2002, the Commissioner disallowed expenses claimed by Kimberly-Clark for royalties paid to Worldwide, its wholly owned subsidiary.
The Board and Massachusetts courts have on several occasions, and with differing results, addressed whether royalty payments paid to an affiliated entity were deductible. See The TJX Companies, Inc. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2007-790, 881, aff’d in part, remanded in part, Mass. App. Ct., No. 07-P-1570, Memorandum and Order under Rule 1:28 (April 3, 2009), aff’d, Mass. App. Ct., No. 09-P-1841, Memorandum and Order under Rule 1:28 (July 23, 2010); Cambridge Brands, Inc. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports, 2003-358, aff’d, 62 Mass. App. Ct. 1118 (2005); The Sherwin-Williams Co. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2000-468, rev’d 438 Mass. 71 (2002); Syms Corp. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2000-711, aff’d 436 Mass. 505 (2002). The analysis in each of these cases centered upon application of the “sham transaction doctrine,” which the Supreme Judicial Court has affirmed “gives the commissioner the authority ‘to disregard, for taxing purposes, transactions that have no economic substance or business purpose other than tax avoidance.’” Sherwin-Williams, 438 Mass. at 79 (quoting Syms Corp., 436 Mass. at 509-10). This doctrine has for decades been applied to matters in which abusive tax avoidance mechanisms have been employed and “prevents taxpayers from claiming the tax benefits of transactions that, although within the language of the tax code, are not the type of transaction the law intended to favor with the benefit.” Syms Corp., 436 Mass. at 510. “[T]he application of the doctrine is, of necessity, primarily a factual one, on which the taxpayer bears the burden of proof in the abatement process.” Id. at 511. “Analyzing these decisions, and applying them to subsequent appeals, thus requires careful attention to the specific facts in each appeal.” Fleet Funding, Inc. & Fleet Funding II, Inc. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2008-117, 163-64.
In Sherwin-Williams, the Supreme Judicial Court applied the sham transaction doctrine to the transfer and license-back of trademarks among a parent and its wholly-owned subsidiaries and traced the history of the doctrine, beginning with Helvering v. Gregory, 69 F.2d 809 (2d Cir. 1934), “the seminal case establishing the sham transaction doctrine.” Sherwin-Williams, 438 Mass. at 81. The Court discussed varying judicial approaches to the doctrine, noting that “a number of Federal courts have adopted a ‘two prong’ sham transaction inquiry. The first prong of the inquiry examines whether the transaction has economic substance other than the creation of a tax benefit. . . . The second prong examines whether the transaction was motivated by any business purpose other than the creation of a tax benefit. . . .” Id. at 84.(citations omitted).[17] Declining to adopt such “a rigid two step process,” the Court favored a line of cases in which courts “opt[ed] instead to treat economic substance and business purpose as ‘more precise factors to consider in the application of [the] traditional sham analysis; that is whether the transaction had any practical economic effects other than the creation of income tax losses.” Id. at 85 (quoting Sochin v. Commissioner of Internal Revenue, 843 F.2d 351, 354 (9th Cir.), cert denied 488 U.S. 824 (1988)). In this regard, the court stated:
We agree with those courts that have concluded that whether a transaction that results in tax benefits is real, such that it ought to be respected for tax purposes, depends on whether it has had practical economic effects beyond the creation of those tax benefits. In the context of a business reorganization resulting in new corporate entities owning or carrying on a portion of the business previously held or conducted by the taxpayer, this requires inquiry into whether the new entities are “viable,” that is, “formed for a substantial business purpose or actually engaging in substantive business activity.” In making this inquiry, consideration of the often interrelated factors of economic substance and business purpose, is appropriate.
Sherwin-Williams, 438 Mass. at 85-86 (internal citations omitted). Applying these standards to the facts of Sherwin-Williams, the Court found that transfer and license-back arrangements among a parent and its subsidiaries “[were] a product and intended part of a business reorganization, and their economic substance and business purpose must be assessed not in the narrow confines of the specific transactions between the parent and the subsidiaries, but in the broader context of the operation of the resultant business.” Id. at 86 (citing Northern Ind. Pub. Serv. v. Commissioner of Internal Revenue, 115 F.3d 506, 512 (7th Cir. 1997)). The court then held that “the reorganization, including the transfer and licensing back of the marks, had economic substance in that it resulted in the creation of viable business entities engaging in substantive business activity.” Id.
As previously noted, in March of 2003, approximately five months after the Court’s decision in Sherwin-Williams, the Legislature enacted the Add Back statutes, which presumptively disallow certain transactions among related members, including the type considered in Sherwin-Williams. In so doing, the Legislature also drew an explicit contrast with the analytic approach taken by the Court in Sherwin-Williams “clarif[ying] its original intention that the taxpayer is required to possess for a transaction, both: (1) a valid, good-faith business purpose, other than tax avoidance; and (2) economic substance apart from the asserted tax benefit in order to claim a deduction, exemption or other tax benefit.” St. 2003, c. 4, § 84.
General Laws chapter 63, § 31I, (“§ 31I”), which addresses the add back of intangible expenses and is relevant to the contested royalty expenses relating to tax year 2002, provides in pertinent part:
(b) For purposes of computing its net income under this chapter, a taxpayer shall add back otherwise deductible interest expenses and costs and intangible expenses and costs directly or indirectly paid, accrued or incurred to, or in connection directly or indirectly with one or more direct or indirect transactions with, one or more related members.
(c) (i) The adjustments required in subsection (b) shall not apply if: (A) the taxpayer establishes by clear and convincing evidence, as determined by the commissioner, that the adjustments are unreasonable; or (B) the taxpayer and the commissioner agree in writing to the application or use of an alternative method of apportionment under section 42.
The present appeals represent the first instance in which a taxpayer appeal relating to intercompany expense deductions has been considered under § 31I. As such, the Board, while mindful of the judicial application of the sham transaction doctrine in Massachusetts, analyzed the facts and issues presented in these appeals in the context of the explicit provisions of § 31I, with consideration given to relevant public written statements issued by the Commissioner.
Kimberly-Clark did not agree in writing to the application of an alternative method of apportionment under Section 42. Thus, to assert an exception under § 31I, the appellants must “establish[] by clear and convincing evidence, as determined by the commissioner, that the adjustments are unreasonable.” G.L. c. 63, § 31I(c)(i)(A). In 830 CMR 63.31.1 (the “Regulation”), the Commissioner has provided substantive guidance regarding the applicable exception to add back as follows:[18]
The add back will . . . be considered unreasonable where the taxpayer establishes by clear and convincing evidence that it incurred the interest or intangible expense as a result of a transaction (1) that was primarily entered into for a valid business purpose and (2) that is supported by economic substance. However, a taxpayer will not carry its burden of demonstrating by clear and convincing evidence that a disallowance is unreasonable unless the taxpayer demonstrates that reduction of tax was not a principal purpose for the transaction. . . .
830 C.M.R. 63.31.1(4)(b). In the abstract, the appellants’ proffered reasons for contributing intangible property to Worldwide and executing the various agreements attendant to the 1996 reorganization could evince both economic substance and business purpose, notwithstanding that a tax benefit may have accrued to the appellants. See Sherwin-Williams, 438 Mass. at 81 (quoting Gregory v. Helvering, 293 U.S. 465, 469 (1935))(“The legal right of a taxpayer to decrease the amount of what would otherwise be his tax . . . by means which the law permits, cannot be doubted.”). Regardless, when the various elements of the reorganization were scrutinized and viewed as a whole, the Board found that the disputed royalty expenses were subject to add back under § 31I.
Although Kimberly-Clark and KCTC ostensibly paid a royalty for use of the Patents which they had transferred to Worldwide, as well as for the licensed Trademarks, these payments were immediately returned to Kimberly-Clark by virtue of the operation of the company’s cash-management system. The Board in The Talbots Inc. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2009-786, noted its previous finding, and the Supreme Judicial Court’s affirmation that “[s]uch a circular flow of funds among related entities does not indicate a substantive economic transaction for tax purposes.” Id. at 2009-815 (quoting Syms Corp., Mass. ATB Findings of Fact and Reports at 2000-760)(additional citations omitted); see also The TJX Companies, Memorandum and Order Under Rule 1:28 (April 3, 2009) at 12 (affirming the Board’s finding that the circular flow of funds between TJX and its subsidiary, which “allow[ed] TJX to claim royalty-expense deductions while receiving back the funds used to pay the royalties on a tax-free basis,” indicated that the transfer and license-back transaction lacked economic substance).
The Court in Sherwin-Williams focused on the absence of a circular flow of funds and placed considerable weight on the subsidiaries’ ability to invest royalties received from Sherwin Williams as an indication that the reorganization had economic substance:
Sherwin-Williams relinquished control over monies it previously retained but now paid to the subsidiaries as royalties. These monies were not returned to it as dividends. They were invested (and therefore placed at risk) by the subsidiaries, under their own investment guidelines and with third parties outside of Sherwin-Williams’ control.
Sherwin-Williams, 438 Mass. at 87. Worldwide, of course, had no such discretion, as royalties were immediately returned to Kimberly-Clark under the cash-management system. Moreover, to the extent that this return of capital exceeded operational disbursements from Kimberly-Clark, interest expense deductions indefinitely accrued to Kimberly-Clark.
Also central to the Court’s holding that the reorganization in Sherwin-Williams had economic substance was that the subsidiaries to which the trademarks had been transferred “entered into genuine obligations with unrelated third parties for use of the marks.” Id. Such is not the case in the present appeals. Despite statements by the appellants to the contrary, the record does not reflect that Worldwide negotiated or entered into third party licensing agreements with respect to the intellectual property it owned or managed. Absent such third party license agreements, licensing agreements among Kimberly-Clark, Worldwide and various affiliated entities were de facto exclusive licenses. As the Board found in The TJX Companies, “a transfer and license-back transaction between a parent and its wholly-owned subsidiary which results in a de facto exclusive license arrangement is not an arm’s-length transaction.” The TJX Companies, Mass. ATB Findings of Fact and Reports at 2007-854. See also Syms Corp., Mass. ATB Findings of Fact and Reports at 2000-767 (“If the subsidiary was truly independent, it could have licensed the Marks to whomever would pay it the highest royalty rates.”).
A substantial part of the appellants’ argument relating to the disputed royalties is dedicated to their assertion that the facts of the present appeal compare favorably with those in Sherwin-Williams. In particular, the appellants emphasize the following: as did the marks in Sherwin-Williams, legal title to and possession of the Patents passed to Kimberly-Clark’s subsidiary; Sherwin-Williams had two part-time employees, whereas Worldwide had many; and the activities of the subsidiaries in Sherwin-Williams to which the marks had been transferred were confined to maintenance and management of intangibles by a single employee while Worldwide had several functional operating groups. The appellants assert that these comparisons indicate that the facts and circumstances of the present matter far exceed the threshold for economic substance established in Sherwin-Williams. This assertion, coupled with what the appellants characterize as sound business purposes underlying the formation of Worldwide and the transfer and licensing of the Patents and Trademarks, lead the appellants to conclude that the royalty expenses incurred by Kimberly-Clark for tax year 2002 were improperly disallowed.
Despite the appellants’ attempts to draw favorable comparisons between the present case and Sherwin-Williams, they disregard countervailing considerations relevant to the analysis in Sherwin-Williams and virtually ignore the impact of § 31I.
While discussing Sherwin-Williams, the appellants make no reference to either the circular flow of funds evident between Kimberly-Clark and Worldwide during 2002 or the lack of licenses negotiated by Worldwide with independent third parties. In Sherwin-Williams, the absence of a circular flow of funds and the presence of third-party licenses were two of the three factors that the Court found supported a finding of economic substance underlying Sherwin-Williams’ reorganization.[19] This distinction is important not only because it argues strongly against a finding for the appellants under the tests articulated in Sherwin-Williams, but because those tests have been modified and strengthened by the Add Back statutes. More specifically, since passage of § 31I, to avoid add back of the royalty expenses at issue here, a taxpayer must demonstrate, by clear and convincing evidence, the presence of both economic substance and valid business purpose as well as that tax reduction was not a principal purpose of the transaction.
After the 1996 reorganization, the appellants’ business structure evinced a circular flow of funds and the absence of third party license agreements entered into by Worldwide. The Board found that, taken together, these factors substantially undermine the appellants’ assertion of economic substance supporting the 1996 reorganization as required by § 31I.
The Board was also influenced by the appellants’ inconsistent treatment of the Patents and the Trademarks within the 1996 reorganization. The appellants provided great detail regarding their claimed need to consolidate Kimberly-Clark’s and KCTC’s intellectual property within one entity, as well as the need to contribute the Patents to Worldwide as part of that consolidation. Yet the record offers no explanation as to why Kimberly-Clark and KCTC contributed the Patents to Worldwide but retained ownership of the Trademarks. Had Kimberly-Clark and KCTC retained ownership of the Patents as they did with the Trademarks, the substantial royalty payments and consequent expense deductions currently at issue would not have accrued to Kimberly-Clark. The Board thus found that Kimberly-Clark’s unexplained inconsistent treatment of Patents and the Trademarks undermined its assertion that a principal purpose of the 1996 reorganization was not tax reduction. This finding is buttressed by Kimberly-Clark’s explicit statement in the Project Partners Communication Guide that the reorganization would result in “significant tax savings,” as well as the dominant role played by company tax personnel and Ernst & Young in the development, implementation and oversight of the reorganization.
The heightened standard of proof also weighs upon the appellants. The Regulation defines “clear and convincing evidence” as “evidence that is so clear, direct and weighty that it will permit the Commissioner to come to a clear conviction without hesitancy of the validity of the taxpayer’s claim. This evidentiary standard requires a strong showing of proof that instills a degree of belief greater than is required under the preponderance of evidence standard.” 830 C.M.R. 63.31.1(2).
As discussed above, the present appeal is characterized by: a circular flow of funds surrounding the transfer and license back arrangement; the absence of third party license agreements negotiated by Worldwide; unexplained inconsistent treatment of the Patents and the Trademarks; and specific acknowledgement of significant tax savings attendant to the 1996 reorganization. The Board found that, cumulatively, these factors substantially impaired the appellants’ assertions that the reorganization which gave rise to the disputed royalties was supported by economic substance, was motivated primarily by a valid business purpose, and lacked tax reduction as one of its principal purposes. Particularly when viewed in light of the requirement that the appellants present “clear and convincing” evidence supporting their assertions, the various and significant facts bearing negatively upon the appellants’ case lead the Board to rule that the appellants failed to sustain their burden of demonstrating that the add back of the disputed royalty expense was unreasonable within the meaning of § 31I.
Purported Rebate Payments – Tax Year 2003
For tax year 2003, the appellants undertook to reduce inefficiences in their “supply-chain management” process. Toward this end, Kimberly-Clark purchased and put in place an “SAP information system” that provided the company with a central information source for the entire supply-chain management process. The SAP system was coordinated from within a single newly formed entity, Global. For tax year 2003, Global controlled Kimberly-Clark’s supply-chain management process. Within the new operating structure, “certified suppliers” including Kimberly-Clark, Worldwide and other affiliated entities manufactured products on a contract basis.
Each of the certified suppliers and Global were guaranteed a specified rate of return. Worldwide alone was not guaranteed a rate of return, but received compensation based on “cost savings.” These savings were designed to approximate the savings realized by the certified suppliers through use of the Patents. The purported cost savings were remitted monthly to Worldwide by Global in the form of “rebate” payments after Global and the certified suppliers had received their guaranteed returns from sales proceeds. Worldwide received this compensation, according to the appellants, for bearing the entire business risk associated with sale, or lack thereof, of products.
Not one of the certified suppliers paid a royalty, defined or described as such, for the use of the Patents. Rather, the sole identified royalty within this structure was paid by Global to Worldwide in the annual sum of approximately one million dollars. No evidence was submitted regarding how this sum was derived or why it represented an arm’s-length payment for the Patents. Global sublicensed the Patents to the certified suppliers without specified charge.
The Board found the appellants’ assertion that Worldwide bore the business risks associated with product sales untenable. Kimberly-Clark is a publicly traded corporation, and the risks and rewards of its business activities and those of its affiliates, which are almost exclusively derived from the manufacture and sale of its products, flow directly to Kimberly-Clark. The Board therefore found unpersuasive the argument that Kimberly-Clark and other affiliated entities were isolated from business risks, and that as of 2003 those risks were borne by Worldwide.
The Board was similarly not persuaded by the appellants’ unequivocal assertion that “rebate” payments for “cost savings” were not related to use of Worldwide’s Patents. Beginning with the 1996 reorganization and continuing throughout 2002, Worldwide was compensated at a rate of between 3% and 3.3% of billions of dollars of sales for use of the Patents, sums which the appellants characterized as reflecting fair value. During 2003, the Patents were used by substantially the same entities to perform the same tasks – produce Worldwide’s branded products. In his testimony, Mr. Beauvais stated that the certified suppliers’ production was not possible without the Patents. Similarly, the “cost savings” and consequent “rebate” payments made to Worldwide were made possible only through use of the Patents sublicensed by Global to the certified suppliers who were all affiliates of Kimberly-Clark. These facts notwithstanding, the sole declared royalty payment for 2003, made by Global to Worldwide, amounted to a tiny fraction of royalties paid to Worldwide during 2002. Further, Worldwide continued to perform much the same functions it had prior to the 2003 reorganization.
The Board found that the “rebate” payments in fact represented payment for use of the Patents based on: the effective discontinuance of royalty payments during tax year 2003, which the appellants had previously characterized as fair compensation for use of Worldwide’s Patents; the certified suppliers’ continued use of the Patents, without which production would not have been possible; and the appellants’ untenable assertion that the “rebate” payments represented compensation to Worldwide for its full assumption of business risk associated with the sale of products.
Having concluded that the “rebate” payments were made for the use of the Patents, the Board also found and ruled that the payments were subject to add back under § 31I. Section 31I defines “intangible property” as patents, patent applications, trade names, trademarks, service marks, copyrights, mask works, know-how, trade secrets, and similar types of intangible assets.” See also 830 C.M.R. 63.31.1(2). The rebate payments, which were made for use of “intangible property” as the term is defined in § 31I and the Regulation, were not identified as royalty payments by the appellants. The Regulation, however, defines an “embedded royalty” as a “portion of a cost or expense paid, accrued or incurred by a taxpayer for property received from or services rendered by a related member that relates to intangible property owned by such related member or to an intangible expense paid, accrued or incurred by said related member in a direct or indirect transaction with one or more other related members.” 830 C.M.R. 63.31.1(2) and (3). Having concluded that the “rebate” payments represented payment for use of the Patents, the Board found that the “rebate” payments were embedded royalties, to which the intangible expense add back applies. See 830 C.M.R. 63.31.1(3).
The appellants, having unequivocally denied that the “rebate” payments represented sums associated with use of the Patents, presented no evidence to support the conclusion that the payments qualified for an exception from add back under § 31I. Absent such evidence, the Board found and ruled that the Commissioner’s add back of the sums associated with the purported rebate payments was proper.
Conclusion
On the basis of the foregoing, the Board found and ruled as follows: for those issues involving application of the Add Back statutes, the appellants bore the burden of proving their case by “clear and convincing evidence”; interest deductions associated with the appellants’ cash-management system were properly disallowed by the Commissioner under § 31J and prior law; the appellants failed to establish that royalties paid by Kimberly-Clark to Worldwide were not subject to add back under § 31I; and purported rebate payments, which the Board found were in fact embedded royalties, were properly subject to add back under § 31I.
Accordingly, the Board issued a decision in favor of the appellee in these appeals.
THE APPELLATE TAX BOARD
By: ________________________________
Thomas W. Hammond, Jr., Chairman
Commissioner Scharaffa issued the following Opinion,concurring in part and dissenting in part:
I. Introduction
I concur in part and dissent in part, and I write separately to express my reasons because of the significant issue involved and its potential impact on numerous future tax appeals. I concur in the decision as it relates to tax year 2001 because, in making its findings and rulings for tax year 2001, the majority applied the correct standard of proof, the preponderance of the evidence standard (“preponderance standard”). However, with respect to tax years 2002 and 2003, which involve additional issues and evidence not considered for tax year 2001, I dissent from the decision because it was reached using an incorrect standard of proof. For those tax years, the majority, purporting to follow the mandate of G.L. c. 63, §§ 31I and 31J (together, “Add Back Statutes”) applied a clear and convincing standard of proof (“clear and convincing standard”) in making its decision. I decline to join the majority in its statutory construction as I am guided by the plain language of the Add Back Statutes, the Board’s enabling statute, its own rules, and vast precedent in tax law and administrative law, which require the Board to apply the preponderance standard.
Because the majority applied the wrong standard of proof in reaching its decision with respect to the tax year 2002 and 2003 appeals, those appeals should be remanded to the Board for determination using the preponderance standard, which is the proper standard of proof.
II. The Majority’s Interpretation Ignores the Plain Language of the Add Back Statutes
General Laws c. 63, § 31I (“§ 31I”) provides, in relevant part: “[f]or purposes of computing its net income under this chapter, a taxpayer shall add back otherwise deductible interest expenses and costs and intangible expenses and costs directly or indirectly paid, accrued or incurred to, or in connection directly or indirectly with one or more direct or indirect transactions with, one or more related members.” Section 31I further states that these adjustments shall not apply if:
(A) the taxpayer establishes by clear and convincing evidence, as determined by the commissioner, that the adjustments are unreasonable; or (B) the taxpayer and the commissioner agree in writing to the application or use of an alternative method of apportionment under section 42. Nothing in this subsection shall be construed to limit or negate the commissioner’s authority to otherwise enter into agreements and compromises otherwise allowed by law. (emphasis added).
Similarly, G.L. c. 63, § 31J (“§ 31J”) provides “[f]or purposes of computing its net income under this chapter, a taxpayer shall add back otherwise deductible interest paid, accrued or incurred to a related member.” Section 31J further provides that a deduction shall be permitted when either:
(1) the taxpayer establishes by clear and convincing evidence, as determined by the commissioner, that the disallowance of the deduction is unreasonable, or (2) the taxpayer and the commissioner agree in writing to the application of an alternative method of apportionment under Section 42. Nothing in this subsection shall be construed to limit or negate the commissioner’s authority to otherwise enter into agreements and compromises otherwise allowed by law. (emphasis added).
Section 31J also provides that the adjustments shall not apply if the taxpayer establishes several factors “by clear and convincing evidence, as determined by the commissioner,” including that a principal purpose of the transaction giving rise to the payment of interest was not to avoid payment of taxes and that the interest was the result of an arm’s-length transaction.
Thus, the Add Back Statutes provide that the adjustments will not apply if the taxpayer proves “by clear and convincing evidence, as determined by the commissioner” that they are “unreasonable,” and both statutes provide that the adjustments will not apply if the taxpayer and the Commissioner agree in writing to an alternate method of apportionment under G.L. c. 63, § 42. In addition, the Add Back Statutes expressly state that they do not “limit or negate the commissioner’s authority to make adjustments under [G.L. c. 63] sections 33 and 39A.”
Likewise, G.L. c. 62C, § 3A (“§ 3A”), which the Legislature enacted along with the Add Back Statutes, provides that:
the commissioner may, in his discretion, disallow the asserted tax consequences of a transaction by asserting the application of the sham transaction doctrine or any other related tax doctrine, in which case the taxpayer shall have the burden of demonstrating by clear and convincing evidence as determined by the commissioner that the transaction possessed both: (i) a valid, good-faith business purpose other than tax avoidance; and (ii) economic substance apart from the asserted tax benefit. . . . [T]he taxpayer shall also have the burden of demonstrating by clear and convincing evidence as determined by the commissioner that the asserted nontax business purpose is commensurate with the tax benefit claimed. Nothing in this statute shall be construed to limit or negate the commissioner’s authority to make tax adjustments as otherwise permitted by law. (emphasis added).
As is evident from the statutory language, the focus of the Add Back Statutes and of § 3A is on administrative stages prior to review by the Board, namely, the tax return filing stage and the Commissioner’s review during the examination and abatement stages. Nothing in the language of the Add Back Statutes or in § 3A indicates an intent to raise the standard of proof in proceedings before the Board. Rather, the plain language of the statutes confines the clear and convincing standard to determinations made by the Commissioner, and the statutes must be so interpreted and applied. See White v. City of Boston, 428 Mass. 250, 253 (1998) (“The statutory language is plain and unambiguous, and we are constrained to follow it.”)
The majority’s use of legislative intent to buttress its interpretation is unavailing. Where, as here, the statutory language is plain and unambiguous, an inquiry into the legislative intent behind it is inappropriate. It is “[a] salient principle of statutory construction . . . that where the language of a statute is plain and unambiguous, legislative history is not ordinarily a proper source of construction.” New England Medical Center Hospital, Inc. v. Commissioner of Revenue, 381 Mass. 748, 750 (1980) (citing Hoffman v. Howmedica, Inc., 373 Mass. 32, 37 (1977)).
Further, the authority cited by the majority, St. 2003, c. 4, § 84, does not support its contention. Following the Supreme Judicial Court’s decision in Sherwin-Williams Co. v. Commissioner of Revenue, 438 Mass. 71 (2002), the Legislature enacted the Add Back Statutes together with § 3A, which codified the sham transaction doctrine, purportedly to “clarif[y] its original intention that the taxpayer is required to possess for a transaction, both: (1) a valid, good-faith business purpose, other than tax avoidance; and (2) economic substance apart from the asserted tax benefit in order to claim a deduction, exemption or other tax benefit.” St. 2003, c. 4, § 84. That language reflects the Legislature’s intent to expressly require taxpayers to demonstrate that transactions possess both economic substance and a valid business purpose, not just one or the other, a requirement which may have changed the result in Sherwin-Williams.
Although the sham transaction doctrine was developed by federal and state courts and is often referred to as part of the common law of tax, see IDC Research, Inc. et al. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2009-404, 502, aff’d, 2010 Mass. App. LEXIS 1530 (Mass. App. Ct. Nov. 30, 2010), legislative bodies may enact statutes to heighten the requirements necessary to avoid the imposition of the sham transaction doctrine. For instance, statutes may specify additional factors that must exist or be proven by the taxpayer, as in § 3A and the Add Back Statutes, and in Internal Revenue Code (“I.R.C.”) § 7710(o), which Congress recently enacted to codify the sham transaction doctrine.
However, nowhere in St. 2003, c. 4, § 84, in § 3A, or in the Add Back Statutes does the Legislature express an intent to raise the Board’s standard of proof in reviewing such matters from the preponderance standard to a clear and convincing standard. Assuming arguendo that the language contained in St. 2003, c. 4, § 84 reflected an intent to have a clear and convincing standard apply to the Board, the statutory language did not give effect to that intent. “Where, as here, the language of the statute is clear, it is the function of the judiciary to apply it, not amend it.” Commissioner of Revenue v. Cargill, Inc., 429 Mass. 79, 82 (1999), (citing King v. Viscoloid, Co., 219 Mass. 420, 425, (1914) (“[W]e have no right to . . . read into the statute a provision which the Legislature did not see fit to put there, whether the omission came from inadvertence or of set purpose.”)). If the Add Back Statutes and § 3A embody the Legislature’s attempt to raise the standard of proof in certain proceedings before the Board, that attempt was botched. The plain language of the Add Back Statutes and § 3A limits the application of a clear and convincing standard to determinations made by the Commissioner, and, absent express statutory authority, it is not the place of the Courts or this Board to use a clear and convincing standard when it was not made the applicable standard of proof.
Further, the view shared by the appellee and the majority, that the language “as determined by the commissioner” is merely an instruction to the Commissioner to provide “guidance,” is both novel and strained. When the Legislature intends to instruct the Commissioner to provide “guidance,” it knows exactly how to do so. See G.L. c. 62C, § 37C(c) (“The commissioner shall promulgate rules and regulations to carry out the provisions of this section, which rules and regulations shall include procedures for determining and approving of all settlements.”); G.L. c. 63, § 32E(d) (“The commissioner shall promulgate regulations or other guidelines as he deems necessary to implement this section.”); G.L. c. 63, § 31L(d) (“The commissioner shall promulgate rules and regulations relative to the administration and enforcement of this section.”). The Legislature knows how to direct the Commissioner to issue regulations or other guidance, and, contrary to the majority’s view, it did not do so in the Add Back Statutes or in § 3A.
Moreover, had the Legislature intended for a clear and convincing standard to be applied in determinations other than those made by the Commissioner, it could have used less restrictive language by omitting the words “as determined by the commissioner.” For example, G.L. c. 62C, § 33(f) (“§ 33(f)”) allows for the abatement of tax penalties “[i]f it is shown that any failure to file a return or to pay a tax in a timely manner is due to reasonable cause and not due to willful neglect.” Unlike the Add Back Statutes and § 3A, § 33(f) does not say reasonable cause “as determined by the commissioner,” nor does it specify to whom reasonable cause must be shown. The absence of specific or limiting language in § 33(f) indicates that reasonable cause must be shown at each and every level of review, and the Board has in fact made determinations as to reasonable cause in numerous penalty cases. See Commissioner of Revenue v. Wells Yachts South, Inc., 406 Mass. 661, 663 (1990); Sign of the Surf, Inc. v. Commissioner of Revenue, 47 Mass. App. Ct. 830 (1999), rev. denied, 430 Mass. 1111 (1999); Littlefield Management, Inc. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2008-1160, 1166. The specific and restrictive language used by the Legislature in the Add Back Statutes and in § 3A evidences its intent to limit a clear and convincing standard to determinations made by the Commissioner. See Anderson Street Associates v. City of Boston & another, 442 Mass. 812, 817 (2004) (“Had the Legislature intended G.L. c. 121A to guarantee tax concessions to be permanent, it could have included statutory language to that effect. It has done so elsewhere.”); Cargill, Inc., 429 Mass. at 82 (“Had the Legislature intended to limit the credit in the manner advocated by the commissioner, it easily could have done so.”). The statutory construction employed by the majority is not supported by the language used in the Add Back Statutes or in § 3A.
III. The Majority’s Interpretation Ignores The Board’s Statutory Authority, its Own Rules, and Well- Established Legal Precedent
The majority’s application of a clear and convincing standard in these appeals is erroneous because, among other reasons, it ignores the Board’s statutory authority and its own rules. The Board is authorized by its enabling statute, G.L. c. 58A, § 8, to promulgate its own “rules of practice and procedure.” 831 CMR 1.37 of the Board’s Rules provides that “practice and procedure before the Board shall conform to that heretofore prevailing in equity causes in the courts of the Commonwealth prior to the adoption of the Massachusetts Rules of Civil Procedure.” The standard rule in equity cases prior to the adoption of the Massachusetts Rules of Civil Procedure was that the party bearing the burden of proof was required to meet its burden by a preponderance of the evidence, which means that the party must show that the facts necessary to prevail in its claim were more likely true than not. See Gates v. Boston and Maine Railroad, 255 Mass. 297, 301 (1926); Black v. Boston Consol. Gas Co., 325 Mass. 505, 508 (1950); Sullivan v. Hammacher, 339 Mass. 190, 194 (1959). The Board’s decisions are, in turn, reviewed for substantial evidence, that is, such evidence as a reasonable mind would accept as adequate to support a conclusion. New Bedford Gas & Edison Light Co. v. Assessors of Dartmouth, 368 Mass. 745, 749 (1975); Tenneco, Inc. v. Commissioner of Revenue, 401 Mass. 380, 383 (1987).
Further, the majority’s use of a clear and convincing standard ignores both the Board’s history and abundant legal precedent which clearly establish that the preponderance standard is the proper standard of proof. Created by the Legislature in 1930 as the Board of Tax Appeals, the Board was modeled on the federal Board of Tax Appeals, which was established in 1924 and is now the United States Tax Court. The preponderance standard adopted by the Board is the same standard employed by its federal counterpart, on which it was modeled, as well as the other federal courts in which tax appeals may be brought, the United States Court of Claims and the United States District Court. See Gerald A. Kafka & Rita A. Cavanaugh, Litigation of Federal Civil Tax Controversies, § 8.01 (2nd ed. 1997); U.S. Tax Court Rule 142(a); Danville Plywood Corp. v. United States, 16 Cl. Ct. 584, 601 (Cl. Ct. 1989).
Moreover, the preponderance standard is the standard of proof generally applicable in administrative proceedings in Massachusetts. Administrative decisions, like the Board’s, are in turn reviewed for substantial evidence. See Craven v. State Ethics Commissioner, 390 Mass. 191, 200, 202 (1983); City of Gloucester v. Civil Service Commission, 408 Mass. 282, 297 (1990). Although the Board is exempted from the provisions of Massachusetts’ Administrative Procedures Act, G.L. c. 30A, it is nonetheless “bound by ‘general principles affecting administrative decisions and judicial review of them.’” New Bedford Gas & Edison Light Co., 368 Mass. at 749 (quoting Assessors of New Braintree v. Pioneer Valley Academy, Inc., 355 Mass. 610, 612, n. 1 (1969)). Consistent with these principles, and in accordance with its own rules, the Board conducts independent, de novo hearings and uses the preponderance standard in making its decisions to ensure procedural due process. Assessors of New Braintree, 355 Mass. at 612; Space Building Corporation v. Commissioner of Revenue, 413 Mass. 445, 450 (1992).
Courts have been reluctant to apply a standard of proof greater than the preponderance standard in civil proceedings. See Department of Public Health v. Cumberland Cattle Co., 361 Mass. 817, 830 (1972); Craven, 390 Mass. at 200; Herman & MacLean v. Huddleston, 459 U.S. 375, 389 (1983); Medical Malpractice Joint Underwriting Assoc. of Mass. v. Commissioner of Insurance, 395 Mass. 43, 46-47 (1985). “[T]he adoption of an intermediate standard of proof, such as the ‘clear and convincing’ standard, too often serves ‘as the functional equivalent for the more familiar “reasonable doubt” standard.’” Medical Malpractice Joint Underwriting Assoc. of Mass., 395 Mass. at 47 (citations omitted). “[S]uch intermediate standards of proof in civil cases should not be extended.” Cumberland Cattle, 361 Mass. at 830. See also P.J. Liacos, Massachusetts Evidence 201 (6th Ed. 1994). The burden of proof is typically placed on the party in possession of the facts or the party seeking relief or change. See Moore v. Kulicke & Soffa Industries, Inc., 318 F.3d 561, 571 (3rd. Circ. 2003); United States v. Denver & R.G.R. Co., 191 U.S. 84, 91-92 (1903). However, “while the difficulty of ascertaining where the truth lies may make it appropriate to place the burden of proof on the proponent of an issue, it does not justify the additional onus of an especially high standard of proof.” Cooper v. Oklahoma, 517 U.S. 348, 366-67 (1996) (holding that statute which required proof of incompetence to stand trial by clear and convincing evidence violated due process).
Generally, cases in which a clear and convincing standard has been applied are cases in which the burden of proof is on the government, such as when the government is asserting that a taxpayer engaged in civil fraud or when the government is trying to prove “knowing conduct” on the part of a foundation manager, see U.S. Tax Court Rule 142(b) and (c), or cases involving exceptional – often irreversible – circumstances. For example, a third-party seeking to terminate life-sustaining treatment to an incompetent party may be required to prove by clear and convincing evidence that the incompetent person would so desire. Cruzan v. Director, Mo. Dept. of Health, 497 U.S. 261, 280 (1990). Similarly, an unemancipated, unmarried minor seeking to obtain an abortion without parental notification may be required to show by clear and convincing evidence that she is entitled to bypass parental notification. See Ohio v. Akron Center for Reproductive Health, 497 U.S. 502, 515-516 (1990). These cases illustrate that the imposition of a heightened standard of proof would raise due process concerns, and they underscore that the heightened clear and convincing standard should not be “extended” to ordinary civil cases, Cumberland Cattle, 361 Mass. at 830, but should be reserved for “a very limited number of cases where ‘particularly important individual interests or rights are at stake,’” Craven, 390 Mass. at 200 (quoting Herman & MacLean, 459 U.S. at 389) (other citations omitted), or when the burden of proof is on the government.
Those circumstances were lacking in the present appeals. These appeals involve civil claims for the abatement of tax, exactly the type of claim the Board routinely decides using the preponderance standard. Moreover, the burden of proof in these appeals was not on the Commissioner, but on the appellant, which makes the use of a clear and convincing standard all the more inappropriate. Though none of the circumstances in which it is appropriate to apply a clear and convincing standard in a civil matter was present, the majority applied a clear and convincing standard because it seemed “reasonable” to do so. This was error.
As the majority correctly points out, the Board has applied a heightened standard of proof in certain previous appeals when applicable legal authority required it to do so. In appeals involving a taxpayer’s constitutional challenge under the Commerce Clause on the states’ apportionment method, Supreme Court and Supreme Judicial Court precedent requires the application of a heightened, although slightly different, standard of proof. See Container Corp. of Am. v. Franchise Tax Board, 463 U.S. 159, 164 (1983) (quoting Exxon Corp. v. Department of Revenue of Wisc., 447 U.S. 207, 221 (1980)) (“[T]he taxpayer has the ‘distinct burden of showing by “clear and cogent evidence” that the [state tax] results in extraterritorial values being taxed.’”); See also Gillette Co. v. Commissioner of Revenue, 425 Mass. 670, 680 (1997). In the present appeals, neither the applicable statutes nor any other legal authority requires or even permits the application of a clear and convincing standard. The majority’s allusion to such cases is therefore inapposite. Moreover, neither the appellee nor the majority has cited any other instance in federal or Massachusetts tax law where such a heightened standard of proof has been placed on a taxpayer seeking a tax abatement or refund.
IV. Conclusion
Accordingly, I concur in the majority’s decision insofar as it relates to tax year 2001 because the majority applied the correct standard of proof. However, with respect to tax years 2002 and 2003, the majority’s use of a clear and convincing standard not only misreads the plain language of the statutes at issue but also ignores the Board’s statutory authority, its own rules, and decades of relevant federal and Massachusetts precedent. Because it was reached using an incorrect standard of proof, I dissent from the decision with respect to tax years 2002 and 2003.
By: _________________________________
Frank J. Scharaffa, Commissioner
A true copy,
Attest: _______________________
Clerk of the Board
COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD
STEPHEN MORTE v. BOARD OF ASSESSORS OF
THE TOWN OF MATTAPOISETT
Docket No. F303740 Promulgated:
February 10, 2011
This is an appeal filed under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 59, §§ 64 and 65 from the refusal of the Board of Assessors of the Town of Mattapoisett (“assessors” or “appellee”), to abate taxes on real estate owned by and assessed to Stephen Morte (“appellant”) under G.L. c. 59, §§ 11 and 38, for fiscal year 2009 (“fiscal year at issue”).
Commissioner Rose (“Presiding Commissioner”) heard the appeal and, in accordance with G.L. c. 58A, § 1A and 831 CMR 1.20, issued a single-member decision for the appellee.
These findings of fact and report are made at the request of the appellant pursuant to G.L. c. 58A, § 13 and 831 CMR 1.32.
Stephen Morte, pro se, for the appellant.
Donald Fleming, assessor, for the appellee.
FINDINGS OF FACT AND REPORT
Based on the testimony and exhibits entered into evidence at the hearing of this appeal, the Presiding Commissioner made the following findings of fact.
On January 1, 2008, Stephen Morte was the assessed owner of a parcel of real estate located at 0 Holly Woods Road, 5A, in Mattapoisett (“subject property”). The subject property consists of 2.14 acres improved with a two-story, single-family home which the appellant purchased in September of 2005 for $991,750. The dwelling on the subject property has 2,987 feet of finished living area, with seven total rooms, including three bedrooms, and also two full bathrooms and one half bathroom. The subject property also features an in-ground swimming pool and a shed.
The subject property is an oceanview property. The assessors calculated its land value using a special valuation formula, coded as “LC5” on the property record card, to reflect the increase in fair cash value attributable to having ocean views. For the fiscal year at issue, the assessors valued the subject property at $1,084,900. The land value of the subject property was $699,000 while the dwelling was valued at $367,300. The pool and shed were valued at an additional $18,600. Taxes were assessed at the rate of $9.48 per thousand, in the total amount of $10,378.22, which included a surcharge under the Community Preservation Act. The appellant timely paid the taxes due without incurring interest.
On January 26, 2009, the appellant timely filed an Application for Abatement with the assessors. On April 26, 2009, the appellant’s Application for Abatement was deemed denied.[20] The appellant timely filed his appeal with the Appellate Tax Board (“Board”) on July 13, 2009. On the basis of these facts, the Presiding Commissioner found that the Board had jurisdiction to hear and decide this appeal.
The appellant’s primary contention was that the subject property’s land was overvalued. He argued that the land was valued at double its fair cash value. In support of this argument, the appellant introduced property record cards for eight purportedly comparable properties in Mattapoisett, including two properties also located on Holly Woods Road. He also introduced information from the assessors’ on-line database for two other properties, both of which are located on Holly Woods Road.
The appellant relied most heavily on the assessed values of three properties on Holly Woods Road to demonstrate that the land value of the subject property was excessive. Specifically, the appellant pointed to the assessed values of 24, 30, and 46 Holly Woods Road as evidence that the subject property was overvalued. However, each of those properties is located on the opposite side of Holly Woods Road from the subject property. They are not oceanview properties and therefore were not assessed using the “LC5” valuation formula used by the assessors to calculate the land values of oceanview properties, including the subject property.[21] The Presiding Commissioner found that these properties were not sufficiently comparable to the subject property to provide probative evidence of its fair cash value.
Both the appellant and the assessors introduced property record cards for a number of properties in Mattapoisett into evidence, most of which involved oceanview properties whose land values were calculated by the assessors using the “LC5” valuation formula. The evidence showed that the assessed land values of all of the oceanview properties were calculated consistently. For example, both the assessors and the appellant offered property record cards for 3 Holly Woods Road and 11 Holly Woods Road. 3 Holly Woods Road is a 1.53-acre parcel of land improved with a single-family dwelling. Its land was valued at $677,500. 11 Holly Woods Road is a 2.11-acre parcel of land improved with a single-family dwelling. Its land was valued at $697,750, nearly the same as the subject property’s 2.14 acres, which were valued at $699,000.
Furthermore, the sales data in the record supported the assessors’ valuation of oceanview properties. For example, 4 Hilton Avenue is a 0.46-acre parcel of land improved with a single-family dwelling. It is an oceanview property which sold in May of 2008 for $890,000. Its overall assessed value for the fiscal year at issue was $873,700 and its land value was $629,750. Similarly, 17 Avenue B is 0.20-acre parcel of land improved with a single-family dwelling. It is an oceanview property which sold in April of 2007 for $1,000,000. Its overall assessed value for the fiscal year at issue was $912,450 and its land value was $585,250.
On the basis of all of the evidence, the Presiding Commissioner found that the appellant did not meet his burden of proving that the subject property’s fair cash value was lower than its assessed value. In sum, the appellant’s contention that the land value of the subject property was excessive failed because it was premised largely on a comparison of properties that were not oceanview properties and therefore were not comparable to the subject property. The Presiding Commissioner found that the sales and assessment data entered into the record regarding oceanview properties supported both the land valuation and overall assessed value of the subject property. Based on these findings of fact, the Presiding Commissioner found that the appellant failed to meet his burden of proving that the assessors overvalued the subject property for the fiscal year at issue. Accordingly, the Presiding Commissioner issued a decision for the appellee.
OPINION
The assessors are required to assess real estate at its fair cash value. G.L. c. 59, § 38. Fair cash value is defined as the price on which a willing seller and a willing buyer in a free and open market will agree if both of them are fully informed and under no compulsion. Boston Gas Co. v. Assessors of Boston, 334 Mass. 549, 566 (1956).
The taxpayer has the burden of proof to make out his right to an abatement of the assessed tax as a matter of law. Schlaiker v. Board of Assessors of Great Barrington, 365 Mass. 243, 245 (1974). The assessed value of a parcel of real estate is presumed to be valid until the taxpayer sustains his burden of proving otherwise. Id.
In appeals before the Board, the taxpayer “may present persuasive evidence of overvaluation either by exposing flaws or errors in the assessors’ method of valuation, or by introducing affirmative evidence of value which undermines the assessors’ valuation.” Donlon v. Assessors of Holliston, 389 Mass. 848, 855 (1983). “[A]ctual sales of property generally furnish strong evidence of market value, provided they are arm’s-length transactions.” Foxboro Associates v. Assessors of Foxborough, 385 Mass. 679, 682 (1982). “Sales of comparable realty in the same geographic area and within a reasonable time of the assessment date contain credible data and information for determining the value of the property at issue.” Giard v. Assessors of Colrain, Mass. ATB Findings of Fact and Reports 2009-115, 123 (citing McCabe v. Chelsea, 265 Mass. 494, 496 (1929)). The assessed values of comparable properties may also be presented as evidence of fair cash value. G.L. c. 58A, § 12B. However, “[r]eliable comparable sales data will ordinarily trump comparable assessment information for purposes of finding a property’s fair cash value.” Graham v. Assessors of West Tisbury, Mass. ATB Findings of Fact and Reports 2007-321, 403, aff’d, 73 Mass. App. Ct. 1107 (2008). Whether offering assessed values or actual sales, the taxpayer “bears the burden of ‘establishing the comparability of . . . properties [used for comparison] to the subject property.'” Wood v. Assessors of Fall River, Mass. ATB Findings of Fact and Reports 2008-213, 225.
In the present appeal, the Presiding Commissioner found and ruled that the properties most heavily relied upon by the appellant to establish the overvaluation of subject property were not comparable to the subject property because they were not oceanview properties, like the subject property. Although the appellant also offered evidence involving several oceanview properties, the Presiding Commissioner found and ruled that that evidence actually provided support for the assessment. Specifically, the evidence in the record regarding oceanview properties in Mattapoisett showed that the land values of oceanview properties were calculated consistently. Further, the assessors’ valuations of oceanview properties were supported by the sales data reflected on the property record cards. For example, 4 Hilton Avenue is a 0.46-acre parcel of land improved with a single-family dwelling. It is an oceanview property which sold in May of 2008 for $890,000. Its overall assessed value for the fiscal year at issue was $873,700 and its land value was $629,750. Similarly, 17 Avenue B is a 0.20-acre parcel of land improved with a single-family dwelling. It is an oceanview property which sold in April of 2007 for $1,000,000. Its overall assessed value for the fiscal year at issue was $912,450 and its land value was $585,250. The Presiding Commissioner found and ruled that the sales and assessment data of comparable oceanview properties served to support, rather than undermine, the assessed value of the subject property.
On the basis of all of the evidence, the Presiding Commissioner found and ruled that the appellant failed to establish that the assessed value of the subject property was greater than its fair cash value, and, therefore, found and ruled that the appellant failed to establish his right to an abatement of the tax. Accordingly, the Presiding Commissioner issued a decision for the appellee in this appeal.
APPELLATE TAX BOARD
By: _____ ________________ James D. Rose, Commissioner
A true copy,
Attest: ___________
Clerk of the Board
COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD
MAIN STREET PROPERTY, INC. BOARD OF ASSESSORS OF
THE TOWN OF WAYLAND
Docket Nos. F287964, F294446 Promulgated:
F299560 March 9, 2011
These are appeals filed under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 59, §§ 64 and 65 from the refusal of the Board of Assessors of the Town of Wayland (“appellee” or “assessors”) to abate taxes on certain real estate in Wayland owned by and assessed to Main Street Property, Inc. (“appellant”) under G.L. c. 59, §§ 11 and 38, for fiscal years 2007, 2008 and 2009 (“fiscal years at issue”).
Commissioner Mulhern heard these appeals and was joined by Chairman Hammond and Commissioners Scharaffa, Egan and Rose in the decisions for the appellee.
These findings of fact and report are made pursuant to a request by the appellant under G.L. c. 58A, § 13 and 831 CMR 1.32.
Matthew A. Luz, Esq., for the appellant.
Mark J. Lanza, Esq., for the appellee.
FINDINGS OF FACT AND REPORT
On January 1, 2006, January 1, 2007, and January 1, 2008, the appellant was the assessed owner of a 4.925-acre parcel of real estate in the Town of Wayland improved with two, one and two-story, retail/office buildings, with a total leasable area of 47,238 square feet (“subject property”).
For fiscal year 2007, the assessors valued the subject property at $5,169,600 and assessed a tax thereon, at the rate of $13.82 per thousand, in the amount of $71,443.87. On December 29, 2006, Wayland’s Collector of Taxes sent out the town’s actual real estate tax bills for fiscal year 2007. In accordance with G.L. c. 59, § 57C, the appellant paid the tax without incurring interest. On January 11, 2007, in accordance with G.L. c. 59, § 59, the appellant timely filed its abatement application with the assessors. The assessors denied the appellant’s application on February 12, 2007, and on March 16, 2007, the appellant timely filed an appeal with the Board.
For fiscal year 2008, the assessors valued the subject property at $5,282,800 and assessed a tax thereon, at the rate of $14.98 per thousand, in the amount of $79,136.34. On December 20, 2007, Wayland’s Collector of Taxes sent out the town’s actual real estate tax bills for fiscal year 2008. In accordance with G.L. c. 59, § 57C, the appellant paid the tax without incurring interest. On January 18, 2008, in accordance with G.L. c. 59, § 59, the appellant timely filed its abatement application with the assessors. The assessors denied the appellant’s application on April 7, 2008, and on April 23, 2008, the appellant timely filed an appeal with the Board.
For fiscal year 2009, the assessors valued the subject property at $5,323,200 and assessed a tax thereon, at the rate of $16.37 per thousand, in the amount of $87,140.78. On December 29, 2008, Wayland’s Collector of Taxes sent out the town’s actual real estate tax bills for fiscal year 2009. In accordance with G.L. c. 59, § 57C, the appellant paid the tax without incurring interest. On January 12, 2009, in accordance with G.L. c. 59, § 59, the appellant timely filed its abatement application with the assessors. The assessors denied the appellant’s application on April 10, 2009, and on May 8, 2009, the appellant timely filed an appeal with the Board. On the basis of these facts, the Board found and ruled that it had jurisdiction to hear and decide these appeals.
The subject property is located at 35 Main Street in the Town of Wayland, a residential suburb located in Middlesex County and situated approximately 17 miles west of Boston. Wayland is served by a network of local highways including Routes 20, 27, 30 and 126, which also provide access to Routes 9, I90 (Mass Pike) and I95/128. The subject property is located in the southwestern section of Wayland, known as Cochituate, at the intersection of Main Street (Route 27) and Commonwealth Road (Route 30) near the Natick and Framingham municipal borders. Located across Main Street from the subject property is a multi-tenant retail building. Located across Commonwealth Road are a bank branch office building, a bridal shop, and an animal hospital. A gas station abuts the front of the subject property and a professional office building and undeveloped land abut to the rear. Other properties in the immediate area include another bank branch office building, a post office, professional office buildings, retail buildings, and single family homes. As a result of its location, the subject property is considered to have an active location for commercial uses.
The subject property consists of a 4.925-acre parcel of property improved with two multi-tenant retail and office buildings. The subject property is identified by the assessors as Parcel 21 on Map 51D, and is located in the Business A and Business B zoning districts. Although the subject property does not meet the current zoning requirements, it was constructed prior to the existing zoning regulations and therefore is considered a legal nonconforming use. Access to the site is via curb cuts on both Main Street and Commonwealth Road. There is about 274.31 feet of frontage along the easterly side of Main Street, 485.06 feet of frontage along the southerly side of Commonwealth Road, and 47.70 feet at the corner of Main Street and Commonwealth Road. The site is reported to be level at grade with Commonwealth Road and above the grade of Main Street in its northwest corner and slopes downward in the area that fronts along Main Street. The existing structures occupy about 18.6% of the parcel’s total area. The remainder of the site is asphalt-paved to provide parking for about 274 vehicles. Utilities available include municipal water, gas and telephone, and there is an on-site septic system.
The two multi-tenant, retail/office buildings located on the parcel were constructed in stages during 1960, 1968, and 1986. The buildings are wood and masonry frame over a concrete foundation. The roofs are partially flat with rubber membrane and partially pitched with an asphalt shingle cover. The exteriors are a mix of facades which include brick, concrete panel, stone, and vinyl siding. The interior finishes include suspended acoustical tile ceilings, carpet or ceramic tile floor covers, and sheetrock walls with plaster and paint, with some walls covered with wallpaper. The lighting throughout is fluorescent panel, fluorescent strip, and recessed lighting fixtures. Heating is gas-fired, forced hot-air, with each rentable unit separately zoned. Both buildings are served by a wet sprinkler system. The two building have a combined total leasable area of 42,840 square feet.
Building 1 has approximately 29,692 square feet of gross building area. The building contains two rentable retail units on the first floor that range in size between 1,000 and 16,200 square feet. The first floor includes Donelan’s Supermarket (“Donelan’s”), the anchor tenant for this building. The second floor is accessed from two interior staircases and is subdivided into nine office suites which range in size from 350 to 1,850 square feet. There are two lavatories in the common area of the first floor, two lavatories in the common area of the second floor, and also three lavatories in the space occupied by Donelan’s Supermarket.
Building 2 is a smaller retail/office building with a gross floor area of 17,546 square feet. The layout is similar to that of Building 1. The first floor has four retail units and one office unit ranging in size from 800 to 6,000 square feet. The anchor tenant is RiteAid Pharmacy which is located on the first floor. Other retail users include a barber shop, J.J. McKay’s Restaurant, and a Bank of America bank branch. The second floor is subdivided into eight office suites, ranging in size from 300 to 1,000 square feet. There are two lavatories in the ground floor common area, two lavatories in the second level common area, and two lavatories in the first floor retail space occupied by RiteAid Pharmacy.
The appellant presented its case-in-chief through the testimony of its commercial real estate valuation expert, Eric Wolff, and the introduction of his summary appraisal report. Based on his education and experience, the Board qualified Mr. Wolff as an expert witness in the field of real estate valuation. Given the location and zoning requirements of the subject property, Mr. Wolff concluded that the subject property’s highest and best use was its current use as a mix of retail and office buildings.
To ascertain the subject property’s potential gross income, Mr. Wolff first reviewed the subject property’s actual rents provided by the owner of the subject property. According to Mr. Wolff, the subject property’s average retail rent, excluding Donelan’s, was $19.83 per square foot as of January 1, 2006, $19.44 per square foot as of January 1, 2007, and $22.60 per square foot as of January 1, 2008. The Donelan’s space rented at $11.11 as of January 1, 2006, $12.00 as of January 1, 2007, and $13.09 as of January 1, 2008. The subject property’s average office rent was $22.84 per square foot as of January 1, 2006, $23.33 per square foot as of January 1, 2007, and $26.82 as of January 1, 2008.
To determine if these rents were consistent with the market, Mr. Wolff researched rents of similar retail and office space in the Wayland area. His research revealed that for fiscal year 2007, retail rents ranged from $18.50 to $24.45 per square foot and office rents ranged from $13.00 to $21.00 per square foot; for fiscal year 2008 retail rents ranged from $16.54 to $30.00 per square foot and office rents ranged from $15.30 to $19.50 per square foot; and, for fiscal year 2009, retail rents ranged from $13.00 to $25.00 per square foot and office rents ranged from $13.00 to $23.00 per square foot.
Relying on these purportedly comparable rents, Mr. Wolff estimated market rents for the subject property’s retail space, excluding Donelan’s, at $20.00 per square foot for fiscal years 2007 and 2008, and at $23.00 for fiscal year 2009. He estimated market rents for the subject property’s office space at $23.00 for fiscal years 2007 and 2008 and at $26.00 per square foot for fiscal year 2009. Lastly, Mr. Wolff estimated market rent for the Donelan’s retail space at $11.00 per square foot for fiscal year 2007, $12.00 per square foot for fiscal year 2008, and $13.00 per square foot for fiscal year 2009.
All of Mr. Wolff’s purportedly comparable leases were for properties located in Framingham, Sudbury and Natick. He cited no leases for properties in Wayland. In addition, a majority of the retail leases offered in his study had triple-net terms, with the tenant bearing most of the expenses. A majority of the office leases he cited were rented on a modified gross basis, with the tenant bearing the responsibility for only some of the expenses. He reported that in the case of the subject property, the spaces were leased on a gross basis, requiring the landlord to pay all expenses.
He then multiplied his projected market rents by the applicable leasable areas to calculate potential gross income (“PGI”) for the fiscal years at issue. To reach his effective gross income (“EGI”) amounts, Mr. Wolff deducted a vacancy rate of 10%, which he asserted was based on conversations with local brokers and consistent with the market. Mr. Wolff conceded, however, that during the fiscal years at issue, the subject property’s actual vacancy was less than 2%.
For expenses, Mr. Wolff noted that within the subject property’s competitive market area, the landlord is responsible for all operating expenses of the building, including those associated with the management and structural maintenance of the building. Actual operating expenses for the subject property included insurance, utilities, repairs and maintenance, landscaping, snow removal, trash removal, cleaning, and legal and profession fees. A study of the subject property’s expenses as provided by the owner revealed that the subject property’s expenses totaled approximately 21% of the subject property’s effective gross income. Mr. Wolff found this to be reasonable and consistent with market averages in the area and he therefore utilized actual expenses in his projections. In addition, he deducted from the subject property’s EGI a management fee equal to 5% of EGI, a replacement reserve allowance equal to 3% of PGI, and a commission expense equal to 1% of PGI to derive a stabilized net operating income (“NOI”).
The final step in Mr. Wolff’s income-capitalization analysis was the selection of a capitalization rate. Mr. Wolff developed his capitalization rates using a band-of-investment technique. In his analyses, Mr. Wolff assumed interest lending rates ranging from 6.75% to 7% and equity yield rates ranging from 13% to 14.5%. He also reviewed rate ranges for “non-investment” grade retail and office properties located in suburban markets published in industry surveys such as the with support from the Price-Waterhouse Coopers-Korpacz Report (“Korpacz Report”). From his assumptions, Mr. Wolff selected a capitalization rate of 9.0% for fiscal year 2007, 8.75% for fiscal year 2008, and 9.5% for fiscal year 2009. Finally, to his base capitalization rates he added the applicable tax factor to derive his overall capitalization rates of 10.382%, 10.248% and 11.137%, respectively.
Mr. Wolff’s income-capitalization calculations are reproduced in the following tables.
Fiscal Year 2007
|
|
|
|
|
|
|
| INCOME |
Size |
Rate |
Potential Income |
||
| Retail Space (Donelan’s)Retail Space
Office Space Potential Gross Income (“PGI”) |
14,400 18,240 10,200 42,840 |
$11.00 $20.00 $23.00 |
$158,400 $364,800 $234,600
|
$ 757,800 |
|
| Less Vacancy @ 10% |
|
|
|
|
-$ 75,780 |
| Effective Gross Income (“EGI”) |
$ 719,910 |
||||
| EXPENSES
Operating Expenses @ 21% of EGI |
$ 143,224 |
||||
| Management Fee @ 5% of EGI |
$ 34,101 |
||||
| Reserves for Replacement @ 3% of PGI |
|
|
$ 22,734 |
||
| Commissions @ $1% of PGI |
|
|
|
|
$ 7,578 |
| Less Total Expenses |
-$207,637 |
||||
| Net-Operating Income (“NOI”) |
$ 474,383 |
||||
| Capitalization Rate |
9.000% |
||||
| Tax Factor |
1.382% |
||||
| Total Capitalization Rate |
10.382% |
||||
| Capitalized Value (rounded) |
|
|
|
|
$ 4,570,000 |
Fiscal Year 2008
|
|
|
|
|
|
| INCOME |
Size |
Rate |
Potential Income |
|
| Retail Space (Donelan’s)Retail Space
Office Space Potential Gross Income (“PGI”) |
16,200[22] 16,660 9,980 42,840 |
$12.00 $20.00 $23.00 |
$194,400 $333,200 $229,540 |
$ 757,140 |
| Less Vacancy @ 10% |
|
|
|
-$ 75,780[23] |
| Effective Gross Income (“EGI”) |
$ 681,426 |
|||
| EXPENSES
Operating Expenses @ 21% of EGI |
$ 143,099 |
|||
| Management Fee @ 5% of EGI |
$ 34,071 |
|||
| Reserves for Replacement @ 3% of PGI |
|
|
$ 22,714 |
|
| Commissions @ $1% of PGI |
|
|
|
$ 7,571 |
| Less Total Expenses |
-$207,456 |
|||
| Net-Operating Income (“NOI”) |
$ 473,970 |
|||
| Capitalization Rate |
8.750% |
|||
| Tax Factor |
1.498% |
|||
| Total Capitalization Rate |
10.248% |
|||
| Capitalized Value (rounded) |
|
|
|
$ 4,625,000 |
Fiscal Year 2009
|
|
|
|
|
|
| INCOME |
Size |
Rate |
Potential Income |
|
| Retail Space (Donelan’s)Retail Space
Office Space Potential Gross Income (“PGI”) |
16,200 16,660 9,980 42,840 |
$13.00 $23.00 $26.00 |
$210,600 $383,180 $259,480 |
$ 853,260 |
| Less Vacancy @ 10% |
|
|
|
-$ 37,268[24] |
| Effective Gross Income (“EGI”) |
$ 767,934 |
|||
| EXPENSES
Operating Expenses @ 21% of EGI |
$ 161,266 |
|||
| Management Fee @ 5% of EGI |
$ 38,397 |
|||
| Reserves for Replacement @ 3% of PGI |
|
|
$ 25,598 |
|
| Commissions @ $1% of PGI |
|
|
|
$ 8,533 |
| Less Total Expenses |
$ 233,793 |
|||
| Net-Operating Income (“NOI”) |
$ 534,141 |
|||
| Capitalization Rate |
9.500% |
|||
| Tax Factor |
1.637% |
|||
| Total Capitalization Rate |
11.137% |
|||
| Capitalized Value (rounded) |
|
|
|
$ 4,800,000 |
The assessors presented no affirmative evidence of value but instead relied on the presumed validity of the assessment.
Based on the evidence presented, the Board agreed with the appellant’s expert that the income capitalization approach was the appropriate method to use in valuing the subject property for the fiscal years at issue. The Board found, however, that Mr. Wolff’s analysis was flawed in several respects and was, therefore, unreliable.
In his analysis, Mr. Wolff used projected retail and office rents derived from a review of the subject property’s existing leases. In his analysis, however, Mr. Wolff did not provide, nor did he know the start dates or duration of the subject property’s existing leases. Without this information, the Board found that it was unable to determine whether or not the subject rents were reflective of the market rentals for the fiscal years at issue. Also, Mr. Wolff included in his analyses listings of numerous retail and office rents in the surrounding area. All of these leases were located outside of Wayland. Although Mr. Wolff testified that the majority of his rental comparables had a superior location compared to the subject property, he failed to offer an explanation for any adjustments made but instead simply chose a lower per square value, compared to the average rental rate of his chosen comparables, to attribute to the subject property. Further, Mr. Wolff did not claim that there were no Wayland rents available, but instead stated that he was unable to obtain the information in his research.
Further, Mr. Wolff stated in his report that the subject property’s retail and office spaces were leased on a gross basis, with the landlord responsible for the payment of all expenses. His comparables, however, were primarily triple-net and modified-gross leases with the tenant responsible for at least some of the operating expenses. Despite the disparity in lease terms, Mr. Wolff made no adjustments in his analyses.
Mr. Wolff further testified that according to conversations with real estate brokers in the Wayland area the vacancy rate for retail and office space similar to the subject property ranged between 5% and 10%. From these discussions, he determined that 10% was an appropriate vacancy rate to use for all of the fiscal years at issue. However, the Board found that Mr. Wolff’s use of a 10% vacancy factor, at the high end of the range and despite the subject property’s actual vacancy rate of less than 2% for each of the fiscal years at issue, was overstated and resulted in an understatement of the subject property’s EGI for each of the fiscal years at issue.
The Board further found that Mr. Wolff’s adoption of the subject’s property’s reported operating expenses, as a percentage of EGI, without providing substantiating market evidence beyond his personal statement that it was “reflective of the market,” lacked reliability and further undermined the validity of his analysis. Finally, the Board found that Mr. Wolff’s capitalization rates, which presumed equity returns ranging from 13.0% to 14.5%, were unsubstantiated.
Moreover, the Board found other errors in Mr. Wolff’s appraisal report, including mathematical and typographical errors. For example, Mr. Wolff stated in his report that for fiscal year 2009 the subject property’s office rents ranged from $21.60 to $35.56 per square foot with an average of $23.33 per square foot. At trial, however, Mr. Wolff testified that the average office rent was in fact $26.82 per square foot. He did not, however, make any adjustments to his income-capitalization analysis to reflect this discrepancy. Also, in his income-capitalization analyses, for all fiscal years at issue, Mr. Wolff stated that the vacancy allowance was 10% of PGI. For fiscal years 2008 and 2009, however, Mr. Wolff used the same number that was used for fiscal year 2007, despite the differences in PGI.
On this basis, the Board found that the appellant failed to meet its burden of proving that the subject property was overvalued for the fiscal years at issue. Accordingly, the Board issued decisions for the appellee in these appeals.
OPINION
The assessors are required to assess real estate at its “fair cash value.” G.L. c. 59, § 38. Fair cash value is defined as the price on which a willing seller and a willing buyer will agree if both of them are fully informed and under no compulsion. Boston Gas Co. v. Assessors of Boston, 334 Mass. 549, 566 (1956).
Generally, real estate valuation experts, the Massachusetts courts, and this Board rely upon three approaches to ascertain the fair cash value of property: income capitalization; sales comparison; and cost of reproduction. Correia v. New Bedford Redevelopment Authority, 375 Mass. 360, 362 (1978). “The Board is not required to adopt any particular method of valuation.” Pepsi-Cola Bottling Co. v. Assessors of Boston, 397 Mass. 447, 449 (1986). Regardless of which method is employed to determine fair cash value, the Board must determine the highest price which a hypothetical willing buyer would pay to a hypothetical willing seller in an assumed free and open market. Irving Saunders Trust v. Board of Assessors of Boston, 26 Mass. App. Ct. 838, 845 (1989). The validity of a final estimate of market value largely depends on how well it can be supported by market data. The Appraisal Institute, The Appraisal of Real Estate 134 (12th Ed., 2001).
The income capitalization method “is frequently applied with respect to income producing property.” Taunton Redevelopment Associates v. Assessors of Taunton, 393 Mass. 293, 295 (1984). Under this approach, a valuation figure is determined by dividing net operating income by a capitalization rate. Board of Assessors of Brookline v. Buehler, 396 Mass. 520, 522-23 (1986). The net income figure is computed by deducting operating expenses from gross rental income. General Electric Co. v. Assessors of Lynn, 393 Mass. 591, 609 (1984).
In applying the income-capitalization method, the income stream used must reflect the property’s earning capacity or market rental value. Pepsi-Cola Bottling, 397 Mass. at 451. Imputing rental income to the subject property based on fair market rentals from comparable properties is evidence of value if, once adjusted, the rents are indicative of the subject property’s earning capacity. See Correia v. New Bedford Redevelopment Authority, 5 Mass. App. Ct. 289, 293-94 (1977), rev’d on other grounds, 375 Mass. 360 (1978); Library Services, Inc. v. Malden Redevelopment Authority, 9 Mass. App. Ct. 877, 878 (1980) (rescript); AVCO Manufacturing Corporation v. Assessors of Wilmington, Mass. ATB Findings of Fact and Reports 1990-142. It is the earning capacity of real estate, rather than its actual income, which is probative of fair market value. Assessors of Quincy v. Boston Consolidated Gas Co., 309 Mass. 60, 64 (1941). Vacancy rates must also be market based when determining fair cash value. Donovan v. City of Haverhill, 247 Mass. 69, 71 (1923).
After accounting for vacancy and rent losses, the net operating income is obtained by deducting the landlord’s appropriate expenses. General Electric Co. v. Assessors of Lynn, 393 Mass. 591, 610 (1984). The expenses should reflect the market. Id. Real estate taxes are not considered operating expenses for purposes of determining net operating income. Alstores Realty Corporation v. Assessors of Peabody, 391 Mass. 60, 70 (1984). “The expense of local taxation turns on the very point in dispute, the fair cash value of the property. Logically, therefore, income should be capitalized before taxes.” Assessors of Lynnfield v. New England Oyster House, Inc., 362 Mass. 696, 700 n.2 (1972). See also, Board of Assessors of Lynn v. Shop-Lease Co., Inc., 364 Mass. 569, 572 (1974) (property’s net operating income is determined before real estate taxes). Real estate taxes are accounted for by use of an effective tax factor in the capitalization rate. Taunton Redevelopment, 393 Mass. at 295.
The capitalization rate should consider the return necessary to attract investment capital. Taunton Redevelopment, 393 Mass. at 295. The “tax factor” is a percentage added to the capitalization rate “to reflect the tax which will be payable on the assessed valuation produced by the [capitalization] formula.” Assessors of Lynn v. Shop-Lease Co., 364 Mass. 569, 573 (1974). “Logically, therefore, income should be capitalized before taxes ‘with the capitalization rate increased to yield the return the investor expects plus the amount of local taxes payable.’” Alstores, 391 Mass. at 70 n. 19, quoting New England Oyster House, Inc. 362 Mass. at 700 n. 2.
Generally, in multiple tenancy properties like the subject property, it is appropriate to add a tax factor to the capitalization rate because the landlord is assumed to be responsible for paying the real estate taxes, and the tenants’ contribution toward the real estate tax, if any, is included in the landlord’s gross income. Taunton Redevelopment, 393 Mass. at 295-96; see also General Electric Co., 393 Mass. at 610.
The Board is entitled to presume that the assessment is valid until the taxpayer sustains his or her burden of proving otherwise. Schlaiker v. Board of Assessors of Great Barrington, 365 Mass. 243, 245 (1974). Accordingly, the burden of proof is upon the taxpayer to make out his or her right as a matter of law to an abatement of the tax. Id. The taxpayer must demonstrate that the assessed valuation of his or her property was improper. See Foxboro Associates v. Board of Assessors of Foxborough, 385 Mass. 679, 691 (1982). In appeals before this Board, a taxpayer “may present persuasive evidence of overvaluation either by exposing flaws or errors in the assessors’ method of valuation, or by introducing affirmative evidence of value which undermines the assessors’ valuation.” General Electric Co., 393 Mass. at 600, (quoting Donlon v. Assessors of Holliston, 389 Mass. 848, 855 (1983)).
“The board [can] accept such portions of the evidence as appear to have the more convincing weight. The market value of the property [can] not be proved with mathematical certainty and must ultimately rest in the realm of opinion, estimate, and judgment . . . . The board [can] select the various elements of value as shown by the record and from them form . . . its own independent judgment.” Assessors of Quincy v. Boston Consolidated Gas Company, 309 Mass. 60, 72 (1941). See also, North American Philips Lighting Corp. v. Assessors of Lynn, 392 Mass. 296, 300 (1984); New Boston Garden Corp. v. Board of Assessors of Boston, 383 Mass. 456, 473 (1981); Jordan Marsh Co. v. Assessors of Malden, 359 Mass. 106, 110 (1971).
In the present appeals, the Board found that Mr. Wolff’s income capitalization analyses were flawed. First, the Board found that by utilizing the subject property’s actual rents without knowing the start dates and duration, Mr. Wolff was unable to ascertain if in fact these rents were reflective of the market. The Board also found that Mr. Wolff’s research of area rents, while failing to include any rents from Wayland, was flawed. Further, the Board found that a majority of Mr. Wolff’s comparable leases had triple-net or modified-gross terms compared to the subject property’s purportedly gross leases whereby the landlord was responsible for all operating expenses. Despite the significant difference in lease terms, Mr. Wolff failed to make any adjustments when determining his suggested market rate rents. The Board further found that Mr. Wolff’s vacancy rate of 10%, which was at the top of the range provided to him by area brokers and was more than five times the subject property’s actual vacancy during the fiscal years at issue, was excessive and resulted in an understatement of the subject property’s EGI for each of the fiscal years at issue.
Next, the Board found that Mr. Wolff’s adoption of the subject property’s operating expenses, as a percentage of EGI, based solely on his personal statement that they were reflective of the market and without offering any substantiating market data, lacked reliability. Finally, the Board found that Mr. Wolff’s capitalization rates, which presumed equity returns ranging from 13.0% to 14.5% lacked supporting evidence and therefore were unreliable.
Based on the foregoing facts, the Board found that appellant failed to meet its burden of proving that the subject property was overvalued for the fiscal years at issue. Accordingly, the Board entered decisions for the appellee in these appeals.
THE APPELLATE TAX BOARD
By: ___________________________________
Thomas W. Hammond, Jr., Chairman
A true copy,
Attest: ____________________________
Clerk of the Board
COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD
AQUIDNECK INVESTMENTS, INC. v. COMMISSIONER OF REVENUE
Docket No. C298158 Promulgated:
March 17, 2011
This is an appeal under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 62C, § 39 from the refusal of the appellee to abate corporate excise assessed against Aquidneck Investments, Inc. under G.L. c. 63, § 32 for the tax years ending December 31, 2001 through December 31, 2006 (“tax years at issue”).
Commissioner Rose heard this appeal. Chairman Hammond and Commissioners Scharaffa and Mulhern joined him in the decision for the appellee.
These findings of fact and report are made pursuant to a request by the appellee under G.L. c. 58A, § 13 and 831 CMR 1.32.
Jeffrey S. Entin, Esq., for the appellant.
Julie A. Flynn, Esq. and Timothy R. Stille, Esq., for the appellee.
FINDINGS OF FACT AND REPORT
Based on the testimony and exhibits offered into evidence at the hearing, the Appellate Tax Board (“Board”) made the following findings of fact.
Aquidneck Investments, Inc. (“Aquidneck” or “corporation”), formerly known as Star Wash, Inc., was organized on November 15, 1979. In 1991, its Articles of Organization were amended to change the corporate name and also to change the purpose of the corporation from an automobile service station to the operation of a gasoline station and a convenience store selling beer and wine. During the tax years at issue, Jeffrey S. Entin served as president and clerk of the corporation and Theresa Entin served as treasurer. On December 18, 1991, Aquidneck was issued a license to sell beer and wine in the Town of Somerset.
On April 29, 1997, Aquidneck, Jeffrey S. Entin and Theresa A. Entin, entered into a lease agreement with Somerset Energy, Inc. (“Somerset Energy” or “lessee”) to lease the premises of Aquidneck’s gas station and convenience store during the period May 1, 1997 through April 30, 2002. In accordance with the lease agreement, Somerset Energy was required to make monthly rental payments. Pursuant to paragraph 14.2 of the lease agreement, Aquidneck allowed Somerset Energy to use its liquor license and “in consideration of the rent paid,” Somerset Energy was allowed to “keep the profit derived from the sale of the beer and wine.” Aquidneck, however, was responsible for the payment of all fees associated with the beer and wine license. The lease agreement was twice renewed, through August 2009, when the real estate, which was owned by an unrelated third party, was foreclosed upon. For each of the tax years at issue, Aquidneck submitted a liquor license renewal application to the Town of Somerset. Each application was filed in the name of Aquidneck, signed by Jeffrey S. Entin as president, and listed Theresa A. Entin as Manager. Mr. Entin testified that during the tax years at issue, Ms. Entin checked in regularly with the owner of Somerset Energy to make sure that the liquor license was being used appropriately and in accordance with license regulations.
On or about August 31, 1998, Aquidneck was involuntarily dissolved by the Commonwealth for failure to file Annual Reports with the Secretary of State. On November 29, 2006, Aquidneck filed an Application for Revival pursuant to G.L. c. 156B, § 108. Question #8 on the appellant’s Application for Revival asks the applicant to “describe fully the activities, if any, of the corporation since dissolution.” The appellant’s response, signed by Mr. Entin under the pains and penalties of perjury, was that the “corporation leases a business in Somerset, Massachusetts.” On January 19, 2007, the Secretary of State’s Office issued a “Revival Certificate” stating “[Aquidneck] is revived for all purposes and without limitation of time with the same powers, duties and obligations as if the corporation had not been dissolved.”
Subsequently, on September 28, 2007, Jeffrey S. & Theresa A. Entin entered into a purchase and sale agreement with Red’s Somerset, Inc., d/b/a Red’s Somerset, for the sale of the liquor license held in the name of Aquidneck for the sum of $115,000.
On May 20, 2008, Aquidneck filed Form 355S S Corporation Excise Returns for the tax years at issue. On each of the tax returns, Aquidneck reported a Massachusetts corporate excise liability of $456, the minimum corporate excise liability. The appellant paid the tax associated with the returns for the tax years at issue. Subsequently, the appellant filed an Application for Abatement with the Commissioner of Revenue (“Commissioner”), which she denied on June 18, 2008.[25] On July 9, 2008, Aquidneck timely filed an appeal with the Board. On this basis, the Board found that it had jurisdiction to hear and decide this appeal.
Based on the evidence presented, including the appellant’s sworn statement on its Application for Revival, the Board found and ruled that during the tax years at issue, Aquidneck was doing business in the commonwealth and therefore was subject to the corporate excise under G.L. c. 63, § 32. At all material times, Aquidneck leased its gas station and convenience store, including the use of its liquor license, to a third party for consideration. In accordance with the rental agreement, Jeffrey Entin, in his capacity as president of Aquidneck, annually renewed the liquor license which, in turn, was leased to Somerset Energy, Inc. Theresa Entin was listed as Manager on the liquor license and regularly checked in with Somerset Energy, Inc. to ensure that the liquor license was being used properly and in accordance with all regulations. Further, pursuant to the rental agreement, Aquidneck received rental payments that ranged from $2,500 to $5,000 per month. Accordingly, the Board found that during the tax years at issue, Aquidneck’s leasing of the gas station and convenience store and the exercise of its rights under the liquor license constituted “doing business” in the commonwealth for purposes of § 32 and, Aquidneck therefore, it was liable for the corporate excise.
OPINION
The first issue in the present appeal is whether, for the tax years at issue, Aquidneck was liable for the Massachusetts corporate excise. During the tax years at issue, G.L. c. 63, § 32 imposed on “every domestic corporation . . . exercising its charter, or qualified to do business or actually doing business in the commonwealth.”[26] G.L. c. 63, § 32 (2006). The term “doing business” includes,
each and every act, power, right, privilege, or immunity exercised or enjoyed in the commonwealth, as an incident to or by virtue of the powers and privileges acquired by the nature of such organizations, as well as, the buying, selling or procuring of services or property.
G.L. c. 63, § 32.
Mr. Entin testified that Aquidneck sold its entire business and all assets in 1997 and that, during the tax years at issue, the appellant was not doing business in the Commonwealth. Therefore, the appellant argued, it was not subject to the corporate excise.
However, during the tax years at issue, the appellant leased its gas station and convenience store to Somerset Energy for consideration. Pursuant to the terms of the lease agreement, Aquidneck annually renewed its liquor license, in accordance with G.L. c. 138, § 15, and allowed Somerset Energy to sell beer and wine under the umbrella of its liquor license.
Pursuant to G.L. c. 138, § 15, corporations organized under the laws of the commonwealth may be granted a liquor license. Aquidneck, in its corporate capacity, annually applied for and was granted a liquor license. It is well established that a liquor license is a “personal privilege.” Jubenville v. Jubenville, 313 Mass. 103, 106 (1942). In the present appeal, the Board found that by annually renewing its liquor license and executing and renewing leases, the appellant exercised its powers, rights and privileges as a Massachusetts corporation and therefore, was “doing business” within the commonwealth pursuant to § 32.
The second issue is whether a corporation that was involuntarily dissolved prior to the tax year at issue but was later revived pursuant to G.L. c. 156B, s. 108, is liable for the corporate excise.
If a corporation has failed to comply with the provisions of law requiring the filing of reports with the Secretary of State (“Secretary”), the Secretary may dissolve the corporation, subject to the provisions of G.L. c. 156B, §§ 101, 102, 104 and 108. See Urban Computer Systems, Inc. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 1988-286, 291. Once dissolved, a corporation may subsequently file an Application for Revival; if the Secretary approves such an application the corporation shall:
stand revived with the same powers, duties and obligations as if it had not been dissolved, and all acts and proceedings of its officers, directors and stockholders, acting or purporting to act as such, which would have been legal and valid but for such dissolution shall stand ratified and confirmed.
G.L. c. 156B, § 108.
Aquidneck was involuntarily dissolved in 1998 for failure to file Annual Reports with the Secretary office. Subsequently, on January 19, 2007, the Secretary issued to Aquidneck a Revival Certificate reviving the corporation “for all purposes and without limitation of time with the same powers, duties and obligations as if the corporation had not been dissolved.”
Where there is no evidence that the corporation or its officers acted in a corporate capacity during its period of dissolution, the corporation may not be liable for corporate excises. Urban Computer, Mass. ATB Findings of Fact and Reports at 1988-292-293. Conversely, if there is evidence of “any active business . . . carried on in the name of the corporation,” or “any known acts . . . of its officers, directors, or stockholders purporting to act as such,” the corporation is liable for corporate excises. Id.
In the present appeal, subsequent to its involuntary dissolution, Aquidneck twice renewed the lease agreement with Somerset Energy for the lease of Aquidneck’s gas station and convenience store and received monthly rental payments pursuant to that agreement. In addition, for each of the tax years at issue, Mr. Entin, in his capacity as president of Aquidneck, applied for the renewal of Aquidneck’s liquor license. Theresa Entin, also a corporate officer of Aquidneck, was listed as the Manager on the liquor license and routinely checked in with the lessee to ensure that the liquor license was being utilized appropriately and in accordance with the license regulations. The Board found that the above-mentioned actions constituted active business carried on by the corporation and were “known acts” by the appellant’s corporate officers during the period of dissolution.
The Board therefore found that Jeffrey Entin and Theresa Entin, in their roles as officers and directors of Aquidneck, regularly conducted business in the name of Aquidneck during the period of dissolution. The acts of a dissolved corporation’s officers, conducted during dissolution, are ratified and confirmed as acts of the corporation upon revival. Urban Computer, Mass. ATB Findings of Fact and Reports at 1988-293. Therefore, the Board found that Aquidneck was liable for the corporate excise for the tax years at issue.
In conclusion, the Board found that Aquidneck was doing business and also using its property in the Commonwealth, pursuant to G.L. c. 63, § 32, during the tax years at issue. The Board further found that the actions of Jeffrey Entin and Theresa Entin during the period of dissolution were known acts of Aquidneck’s officers and directors and, therefore, were ratified and confirmed as acts of the corporation. Accordingly, the Board found that Aquidneck was liable for corporate excise for the tax years at issue.
APPELLATE TAX BOARD
By: ____
Thomas W. Hammond, Jr., Chairman
COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD
AUSTIN & SUSAN KOLBERT v. BOARD OF ASSESSORS OF
THE TOWN OF PELHAM
Docket Nos. F305956 Promulgated:
March 17, 2011
This is an appeal filed under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 59, §§ 64 and 65 from the refusal of the Board of Assessors of the Town of Pelham (“assessors” or “appellee”) to abate taxes on certain real estate located in the Town of Pelham owned by and assessed to Austin & Susan Kolbert (“appellants”) under G.L. c. 59, §§ 11 and 38, for fiscal year 2010.
Chairman Rose (“Presiding Commissioner”) heard this appeal under G.L. c. 58A, § 1A and 831 CMR 1.20 and issued a single-member decision for the appellee.
These findings of fact and report are made pursuant to a request by the appellee under G.L. c. 58A, § 13 and 831 CMR 1.32.
Austin Kolbert, pro se, for the appellants.
Martha Leamy, assistant assessor, for the appellee.
FINDINGS OF FACT AND REPORT
Based on the testimony and exhibits offered into evidence at the hearing of this appeal, the Presiding Commissioner made the following findings of fact.
On January 1, 2009 the appellants were the assessed owners of a 34.5-acre parcel of landlocked land in Pelham identified on the assessors’ Map 6 as Lot 33. For fiscal year 2010, the assessors valued the subject property at $59,000 and assessed a tax thereon, at the rate of $18.34 per thousand, in the amount of $1,082.06. On February 1, 2010, in accordance with G.L. c. 59, § 59, the appellants timely filed an Application for Abatement with the assessors, which the assessors denied on February 9, 2010. The appellants seasonably filed an appeal with the Appellate Tax Board (“Board”), which the Board received on May 12, 2010 in an envelope postmarked May 8, 2010.[27] On the basis of these facts, the Presiding Commissioner found and ruled that the Board had jurisdiction to hear and decide this appeal.
The appellants testified that the subject property is a landlocked parcel which is utilized as a wood lot by the original owner. The appellants further testified that there is no access to the property other than over a legal right of way and that little use has occurred on the land other than occasional wood cutting or clearing. The appellants argued that similar landlocked parcels of land in Pelham are valued at a lower rate compared to the subject property and that the subject property is more appropriately valued at $500 per acre, for a total of $17,250. The appellants presented no evidence concerning these other parcels and presented no exhibits or witnesses other than Mr. Kolbert. The assessors rested on the presumed validity of their assessment.
On the basis of the evidence presented at the hearing, the Presiding Commissioner found that the appellants failed to meet their burden of proving that the subject property was overvalued for the fiscal year at issue. Accordingly, the Presiding Commissioner issued a decision for the appellee.
OPINION
The assessors are required to assess real estate at its fair cash value. G.L. c. 59, § 38. Fair cash value is defined as the price on which a willing seller and a willing buyer will agree if both of them are fully informed and under no compulsion. Boston Gas Co. v. Assessors of Boston, 334 Mass. 549, 566 (1956). The appellants have the burden of proving that the property has a lower value than that assessed. “‛The burden of proof is upon the petitioner[s] to make out [their] right as [a] matter of law to [an] abatement of the tax.’” Schlaiker v. Assessors of Great Barrington, 365 Mass. 243, 245 (1974) (quoting Judson Freight Forwarding Co. v. Commonwealth, 242 Mass. 47, 55 (1922)). “[T]he board is entitled to ‛presume that the valuation made by the assessors [is] valid unless the taxpayers . . . prov[e] the contrary.’” General Electric Co. v. Assessors of Lynn, 393 Mass. 591, 598 (1984) (quoting Schlaiker, 365 Mass. at 245). In appeals before this Board, taxpayers “‛may present persuasive evidence of overvaluation either by exposing flaws or errors in the assessors’ method of valuation, or by introducing affirmative evidence of value which undermines the assessors’ valuation.’” General Electric Co., 393 Mass. at 600 (quoting Donlon v. Assessors of Holliston, 389 Mass. 848, 855 (1983)).
In the present appeal the appellants offered no evidence of overvaluation beyond mere assertions. The appellants testified that the subject property is a landlocked parcel of land which is used occasionally for wood cutting or clearing and argued that the subject property was overvalued in comparison to other landlocked parcels in Pelham. However, the appellants offered no evidence to support their assertion and to prove that the subject assessment exceeded the fair cash value. Therefore, the Presiding Commissioner found and ruled that the appellants failed to meet their burden of proving that the subject property was overvalued for fiscal year 2010.
Accordingly, the Presiding Commissioner issued a single-member decision for the appellee.
APPELLATE TAX BOARD
By: _
James D. Rose, Commissioner
A true copy,
Attest:
Clerk of the Board
COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD
JAMES D. & CHERLYN FLANAGAN v. BOARD OF ASSESSORS OF
THE TOWN OF MILFORD
Docket No. F303417 Promulgated:
March 17, 2011
This is an appeal filed under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 59, §§ 64 and 65 from the refusal of the Board of Assessors of the Town of Milford (“appellee” or “assessors”) to abate taxes on real estate located in the Town of Milford, owned by and assessed to James D. & Cheryln Flanagan (“appellants”) under G.L. c. 59, §§ 11 and 38, for fiscal year 2009 (“fiscal year at issue”).
Commissioner Mulhern (“Presiding Commissioner”) heard this appeal under G.L. c. 58A, § 1A and 831 CMR 1.20 and issued a single-member decision for the appellee.
These findings of fact and report are made pursuant to a request by the appellants under G.L. c. 58A, § 13 and 831 CMR 1.32.
James D. Flanagan, pro se, for the appellants.
Priscilla Hogan, assessor, for the appellee.
FINDINGS OF FACT AND REPORT
On the basis of the exhibits and testimony offered into evidence during the hearing of this appeal, the Presiding Commissioner made the following findings of fact.
On January 1, 2008, the appellants were the assessed owners of a parcel of real estate improved with a single-family dwelling located at 8 Whispering Pine Drive in Milford (“subject property”). For the fiscal year at issue, the assessors valued the subject property at $454,700 and assessed a tax, at the rate of $12.53 per thousand, in the total amount of $5,697.39. The Milford Collector of Taxes mailed the fiscal year 2009 tax bills on December 29, 2008. In accordance with G.L. c. 59, § 57C, the appellants paid the tax due without incurring interest. On January 23, 2009, in accordance with G.L. c. 59, § 59, the appellants timely filed an abatement application with the assessors. The assessors denied the abatement application on April 23, 2009. On July 7, 2009, the appellants seasonably filed an appeal with the Appellate Tax Board (“Board”). On the basis of these facts, the Presiding Commissioner found and ruled that the Board had jurisdiction to hear and decide this appeal.
The subject property is a 1.037-acre parcel of land improved with a single-family, wood-frame, Colonial-style dwelling. The subject dwelling, which was built in 1997, has a clapboard exterior and an asphalt, gable-style roof. The dwelling contains 2,129 square feet of living area and has a total of eight rooms, including four bedrooms, as well as two full bathrooms and one half bathroom. The living room, family room and dining room have hardwood floors. The entry way, kitchen and baths have ceramic tile, and the bedrooms have carpet flooring. The master bath has double sinks, a separate shower and a Jacuzzi tub. The dwelling is heated by a forced-hot-water, oil-fueled heating system. Other amenities include one fireplace, central air conditioning, an attached two-car garage, an enclosed porch, an in-ground pool, and a shed. Overall the subject dwelling is in good condition. The subject property is located on a dead-end drive in a sub-division of reasonably similar properties.
In an attempt to prove that the subject property was overvalued, the appellants offered into evidence the “parcel summary” printouts, downloaded from the assessors’ website, of six properties that sold between April 13, 2007 and November 6, 2007 with sale prices that ranged from $400,000 to $425,000, and also four purportedly comparable properties that had lower assessed values than the subject property. The appellants did not, however, offer into evidence the property record cards for these properties nor did they provide a reasonably detailed description of each property, including finished living area and location. Moreover, the appellants failed to offer any charts or other evidence comparing the characteristics of the purportedly comparable properties to those of the subject property with reasonable adjustments for differences.
In support of their assessment, the assessors offered into evidence the testimony of Priscilla Hogan, as well as sales data from five purportedly comparable properties that sold during 2007. The five properties ranged in size from 0.346 to 1.915 acres, and all were improved with Colonial-style homes with finished living areas that ranged from 1,800 to 2,774 square feet. After making adjustments for differences in lot size, total living area, location, and overall condition, the adjusted sale prices of the assessors’ comparable properties ranged in value from $402,000 to $519,500.
On the basis of all of the evidence, the Presiding Commissioner found that the appellants failed to demonstrate that the fair cash value of the subject property was less than its assessed value. The Presiding Commissioner found that while the parcel summary printouts provided basic information about the appellants’ purportedly comparable properties, they did not supply the necessary detailed information contained in property record cards, which would allow the Presiding Commissioner to properly establish basic comparability with the subject property. Further, the appellants failed to make adjustments for differences between their purportedly comparable properties and the subject property.
Based on these findings, and after considering all of the evidence, the Presiding Commissioner ultimately found that the appellants failed to meet their burden of proving that the subject property was overvalued for the fiscal year at issue. The Presiding Commissioner, therefore, decided this appeal for the appellee.
OPINION
Assessors are required to assess real estate at its fair cash value as of the first day of January preceding the fiscal year at issue. G.L. c. 59, §§ 11 and 38. The fair cash value of property is defined as the price upon which a willing buyer and a willing seller would agree if both were fully informed and under no compulsion. Boston Gas Co. v. Assessors of Boston, 334 Mass. 549, 566 (1956). The burden of proof is upon the taxpayers to make out their right to an abatement. Schlaiker v. Assessors of Great Barrington, 365 Mass. 243, 245 (1974). The assessment is presumed to be valid unless the taxpayers meet their burden of proving otherwise. Id. A right to an abatement can be proven by either introducing evidence of fair cash value or by proving that the assessors erred in their method of valuation. General Electric Co. v. Assessors of Lynn, 393 Mass. 591, 600 (1984).
Generally, real estate valuation experts, the Massachusetts courts, and this Board rely upon three approaches to determine the fair cash value of property: income capitalization, sales comparison, and cost reproduction. Correia v. New Bedford Redevelopment Authority, 375 Mass. 360, 362 (1978). “The board is not required to adopt any particular method of valuation.” Pepsi-Cola Bottling Co. v. Assessors of Boston, 397 Mass. 447, 449 (1986).
Actual sales of the subject “are very strong evidence of fair market value, for they represent what a buyer has been willing to pay to a seller for [the] particular property [under appeal].” New Boston Garden Corp. v. Board of Assessors of Boston, 383 Mass. 456, 469 (1981) (quoting First Nat’l Stores, Inc. v. Assessors of Somerville, 358 Mass. 554, 560 (1971). “Evidence of the sale prices of ‘reasonably comparable property’ is the next best evidence to the sale of the property in question.” Lattuca v. Robsham, 442 Mass. 205, 216 (2004). Properties are “comparable” to the subject property when they share “fundamental similarities” with the subject property, including similar age, locations, sizes and date of sale. Id. at 216. The appellants bear the burden of “establishing the comparability of . . . properties [used for comparison] to the subject propert[ies].” Wood v. Assessors of Fall River, Mass. ATB Findings of Fact and Report 2008-213, 225. “Once basic comparability is established, it is then necessary to make adjustments for the differences, looking primarily to the relative quality of the properties, to develop a market indicator of value.” New Boston Garden Corp. v. Assessors of Boston, 383 Mass. 456, 470 (1981).
“At any hearing relative to the assessed fair cash valuation or classification of property, evidence as to fair cash valuation or classification of property at which assessors have assessed other property of a comparable nature or class shall be admissible.” G.L. c. 58A, § 12B. “The introduction of such evidence may provide adequate support for either the granting or denial of an abatement.” John Alden Sands v. Assessors of Bourne, Mass. ATB Findings of Fact and Reports 2007-1098, 1106-07, (citing Chouinard v. Assessors of Natick, Mass. ATB Findings of Fact and Reports 1998-299, 307-308.
In the present appeal, the Presiding Commissioner found that the appellants failed to demonstrate that the fair cash value of the subject property was less than its assessed value. The Presiding Commissioner found that while the parcel summary printouts provided basic information about the appellants’ purportedly comparable properties, they did not supply the detailed information contained in property record cards, which would allow the Presiding Commissioner to properly establish basic comparability with the subject property. See Lareau v. Assessors of Norwell, Mass. ATB Findings of Fact and Reports 2010-879, 890-91 (ruling that the appellants’ failure to submit property record cards and other fundamental evidence containing corroborating and detailed information about their purportedly comparable properties compromised the appellants’ ability to prove that their property was overvalued). In addition, the Presiding Commissioner found that the appellants failed to make any adjustments for differences that existed between their purportedly comparable properties and the subject property. See New Boston Garden Corp., 383 Mass. at 470.
“The board [is] not required to believe the testimony of any particular witness but [may] accept such portions of the evidence as appear to have the more convincing weight.” Assessors of Quincy v. Boston Consol. Gas Co., 309 Mass. 60, 72 (1941). “The credibility of witnesses, the weight of evidence, and inferences to be drawn from the evidence are matters for the board.” Cummington School of the Arts, Inc. v. Assessors of Cummington, 373 Mass. 597, 605 (1977).
Accordingly, the Presiding Commissioner issued a single-member decision for the appellee.
APPELLATE TAX BOARD
By: ____________
Thomas J. Mulhern, Commissioner
A true copy,
Attest: ______ _____ _____
Clerk of the Board
COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD
HOWARD D. HAYNES v. BOARD OF ASSESSORS OF THE TOWN OF MIDDLETON
Docket Nos. F291427 (FY 2007) Promulgated:
F294631 (FY 2008) March 30, 2011
F303547 (FY 2009)
F294630 (FY 2008)
F303548 (FY 2009)
These are appeals under the formal procedure, pursuant to G.L. c. 59, §§ 64 and 65 and 831 CMR 1.03 and 1.04, from the refusal of the Board of Assessors of the Town of Middleton (“assessors” or “appellee”) to abate taxes on two parcels of real estate in the Town of Middleton owned by and assessed to Howard D. Haynes (“appellant”) under G.L. c. 59, §§ 11 and 38, for fiscal years 2007, 2008, and 2009 for the improved parcel located at 11 Averill Road and for fiscal years 2008 and 2009 for the improved parcel located at 9 Averill Road (collectively, “fiscal years at issue”).
Commissioner Egan heard these appeals. Chairman Hammond and Commissioners Scharaffa, Rose, and Mulhern joined her in decisions for the appellant in docket numbers F294631 and F303547, which relate to the 11 Averill Road property for fiscal years 2008 and 2009, respectively, and decisions for the appellee in docket numbers F291427, F294630, and F303548, which relate to the 11 Averill Road property for fiscal year 2007 and to the 9 Averill Road property for fiscal years 2008 and 2009, respectively.
These findings of fact and report are made pursuant to a request by the appellee under G.L. c. 58A, § 13 and 831 CMR 1.32.
Mark F. Murphy, Esq. for the appellant.
James F. Sullivan, Esq. for the appellee.
FINDINGS OF FACT AND REPORT
On January 1, 2006, 2007, and 2008, the appellant was the assessed owner of a parcel of real estate located at 11 Averill Road in the Town of Middleton and, on January 1, 2007 and January 1, 2008, was also the assessed owner of a parcel of real estate located at 9 Averill Road in Middleton (collectively, “subject properties”). The 11 Averill Road parcel contains approximately 4.18 acres of land and is improved with a two-family home (“11 Averill Road property”). The 9 Averill Road parcel contains approximately 1.86 acres of land and is also improved with a two-family home (“9 Averill Road property”). The relevant assessment information for the subject properties for the fiscal years at issue is contained in the following two tables.
11 Averill Road Property
|
Docket Number |
Fiscal Year |
Assessment |
Tax Rate/$1,000 |
Tax Assessed* |
|
F291427 |
2007 |
$595,600 |
$ 9.81 |
$5,842.84 |
|
F294631 |
2008 |
$687,400 |
$ 9.69 |
$6,660.91 |
|
F303547 |
2009 |
$575,200 |
$10.99 |
$6,321.45 |
*The tax assessed does not include a Community Preservation Act (“CPA”) tax of $56.92 for fiscal year 2008 and $52.22 for fiscal year 2009. There was no CPA tax for fiscal year 2007.
9 Averill Road Property
|
Docket Number |
Fiscal Year |
Assessment |
Tax Rate/$1,000 |
Tax Assessed* |
|
F294630 |
2008 |
$611,500 |
$ 9.69 |
$5,925.44 |
|
F303548 |
2009 |
$507,200 |
$10.99 |
$5,574.13 |
*The tax assessed does not include a CPA tax of $49.56 for fiscal year 2008 and $44.75 for fiscal year 2009.
The pertinent payment and other jurisdictional information, including relevant filing dates, for the subject properties for the fiscal years at issue are contained in the following two tables.
11 Averill Road Property
|
Docket Number |
Fiscal Year |
Tax Bill Mailed |
Tax Payment |
Abatement Application |
Assessors’ Denial |
Petition to Board |
|
F291427 |
2007 |
12/29/2006 |
timely |
02/01/2007 |
03/27/2007 |
06/21/2007 |
|
F294631 |
2008 |
12/31/2007 |
timely |
01/30/2008 |
03/11/2008 |
05/01/2008 |
|
F303547 |
2009 |
12/31/2008 |
timely |
01/28/2009 |
04/28/2009 |
07/10/2009 |
9 Averill Road Property
|
Docket Number |
Fiscal Year |
Tax Bill Mailed |
Tax Payment |
Abatement Application |
Assessors’ Denial |
Petition to Board |
|
F294630 |
2008 |
12/31/2007 |
timely |
01/30/2008 |
03/11/2008 |
05/01/2008 |
|
F303548 |
2009 |
12/31/2008 |
timely |
01/28/2009 |
04/28/2009 |
07/10/2009 |
Based on these facts and in accordance with G.L. c. 59, §§ 57C, 59, and 64 and 65, the Appellate Tax Board (“Board”) found and ruled that it had jurisdiction over these appeals.
At the hearing of these appeals, the appellant argued that the subject properties were overvalued. He attempted to prove this contention through the testimony of a licensed real estate appraiser, Rebecca Kilborn of Kilborn Property Consultants, whom the Board qualified, over the objection of the assessors’ counsel, as a real estate valuation expert for purposes of these appeals. The appellant also introduced numerous exhibits into evidence, including Ms. Kilborn’s summary appraisal reports.
In support of the assessments, the assessors presented their case-in-chief through the testimony of three witnesses, namely, their licensed real estate appraiser, Scott McKeen of Grasso Appraisal Services, Inc., whom the Board also qualified, without objection, as a real estate valuation expert for purposes of these appeals, Brad Swanson, Middleton’s assistant assessor and Patricia Ohlson, a member of the assessors. In addition, the assessors entered various documents into evidence, including Mr. McKeen’s general purpose appraisal reports and all necessary jurisdictional documents. At the hearing, the 11 Averill Road property was tried first, followed by the 9 Averill Road property. Based on this record, a summary of the salient evidence relating to both subject properties and then to each property individually, as well as the Board’s subsidiary and ultimate findings of fact for each, follow.
I. Introduction
Middleton is located in the northeastern section of the Commonwealth, about twenty miles north of Logan International Airport. Middleton is bordered by North Andover to the north, North Reading and Lynnfield to the west, Peabody and Danvers to the south, and Boxford and Topsfield to the east. Middleton contains approximately 14.28 square miles and had a population approaching 7,000 persons as of 2000. The town is conveniently located between Routes 1 and I-495 with access to I-95 and Route 1 via state Routes 62 and 114, as well as access to I-495 via state Route 114.
Middleton, which was originally part of Salem Village, was incorporated in 1728. It is so named because it lies halfway between the Andover/Lawrence area and Salem. Once a farming community, Middleton is now predominantly residential with commercial and retail establishments along the Route 114 corridor.
The subject properties are located on Averill Road, which is situated off School Street in the northern section of town. The area is rural with considerable open space and wetland. Averill Road is an approximately one-quarter-mile-long, cul-de-sac with a mix of single-family and two-family homes, which were built within the past twenty years.
According to Ms. Kilborn, the appellant’s real estate valuation expert, the area real estate market for two-family properties about the size of the subject properties began to decline toward the latter part of 2005. Mr. McKeen, the assessors’ real estate valuation expert, believed that this market was stable between 2005 and 2006 and did not begin its decline until 2007.
II. 11 Averill Road Property
Description
The 11 Averill Road property’s home is a center entrance, two-family, two-story, Colonial-style, side-by-side, duplex house located on a 4.18-acre parcel. The parcel contains extensive wetlands and, because of its composition and conservation restrictions, only about one-half acre is buildable. The appellant constructed the dwelling on this parcel in 2004 only after obtaining a special permit from Middleton’s Zoning Board of Appeals and an Order of Condition from the Massachusetts Department of Environmental Protection, which limited his ability to fully utilize much of the parcel. The parcel’s topography slopes slightly from the front to the back, and it is heavily wooded providing significant privacy and a natural setting. The area around the duplex has average landscaping and paved parking areas adjacent to each side of the duplex.
The subject duplex contains two equally sized living areas of 1,258 square feet each, plus two eleven-by-thirteen-foot screened porches attached to each side of the duplex in the back of the house, as well as a 36-square-foot shared front entry. Each side also has an unfinished full basement and an unfinished attic. The duplex’s exterior siding is vinyl, and the roof is finished with asphalt shingles. Each unit has an identical layout of an eat-in kitchen with a bar area, a living room, one half bathroom, and a family room on the first floor, plus two bedrooms and a full bathroom on the second level. The interior is finished with painted sheetrock walls and ceilings, carpeted floors and stairs, and several rooms with recessed lighting. There are no fireplaces, but there is a cathedral ceiling and skylight in the family room on each side. The utilities servicing the duplex include propane gas and private water and septic. The electric line is underground. Each of the units in the duplex has its own heating, electrical, and air-conditioning systems and meters. The duplex is in overall good condition with no items of deferred maintenance.
Appellant’s Real Estate Valuation Expert
Ms. Kilborn determined that the highest and best use of the 11 Averill Street property for the fiscal years at issue was its existing use as a two-family residential property. To estimate its fair cash value, she relied principally on a sales-comparison approach. For fiscal year 2007, she selected, and applied some adjustments to, four purportedly comparable properties located at: 2-4 Summer Street in Andover (Sale 1); 265-267 Middlesex Street in North Andover (Sale 2); 25 Clark Street in Danvers (Sale 3); and 7-9 Washington Street in Andover (Sale 4). She did not select any comparable sales from Middleton because she claimed none existed. The following two tables contain a summary of her sales-comparison methodology for fiscal year 2007.
11 Averill Road Property
Fiscal Year 2007
Sales 1 & 2
|
Subject |
Sale 1 |
Adj ($) |
Sale 2 |
Adj ($) |
|
|
11 Averill Rd Middleton
|
2-4 Summer St Andover |
265-267 Middlesex No Andover |
|||
| Proximity (miles) |
9 miles |
10 miles |
|||
| Sale Price (“SP”) |
$595,600* |
$492,000 |
$473,000 |
||
| SP/Gross Living |
Area (“LV”)
$164.00
$178.80
Date of Sale
01/01/2006**
03/31/2005
-16,400
07/11/2005
Location
Good
Good
Good
View
Neighborhood
Neighborhood
Neighborhood
Site
19,602 SF (useable)
5,520 SF
4,792 SF
Year Built
2004
1893-updates
1900-updates
Condition
Good
Good
+5,000
Good
+5,000
Bedrooms
2 & 2
3 & 3
2 & 3
Baths
1½ & 1½
1½ & 1½
1 & 1
Finished LA
2,552 SF
3,000 SF
-13,440
2,855 SF
-9,090
Fireplace
No
No
No
Separate Utilities
Yes
Yes
Yes
Screened Porch
Yes
No
Enclosed Porch
Garage/Carport
No
1-Car Garage
-5,000
2-Car Garage
-10,000
Patio/Deck
No
No
Deck
Comments
Duplex
Duplex
Net Adjustment ($)
-29,840
-14,090
Adj Sale Price
$462,160
$458,910
*Assessed Value
**Valuation Date
11 Averill Road Property
Fiscal Year 2007
Sales 3 & 4
|
Subject |
Sale 3 |
Adj ($) |
Sale 4 |
Adj ($) |
|
|
11 Averill Rd Middleton
|
25 Clark St Danvers |
7-9 Washington Andover |
|||
| Proximity (miles) |
6 miles |
9 miles |
|||
| Sale Price (“SP”) |
$595,600* |
$445,000 |
$442,500 |
||
| SP/Gross Living |
Area (“LV”)
$184.42
$201.50
Date of Sale
01/01/2006**
12/16/2005
12/23/2005
Location
Good
Good
Good
View
Neighborhood
Neighborhood
Neighborhood
Site
19,602 SF (useable)
7,550 SF
7,160 SF
Year Built
2004
1900-updated
1900-updated
Condition
Good
Good
+5,000
Good
+5,000
Bedrooms
2 & 2
2 & 2
3 & 3
Baths
1½ & 1½
2 & 1
1 & 1
Finished LA
2,552 SF
2,413 SF
+4,170
2,196 SF
+10,680
Fireplace
No
No
No
Separate Utilities
Yes
Yes
Yes
Screened Porch
Yes
Yes
No
Garage/Carport
No
No
2-Car Garage
-10,000
Patio/Deck
No
Porch
Porch
Comments
Duplex
Net Adjustment ($)
+9,170
+5,680
Adj Sale Price
$454,170
$448,180
*Assessed Value
**Valuation Date
Based on this data and placing the most reliance on Sale 1, Ms. Kilborn estimated the value of the 11 Averill Street property at $462,000 for fiscal year 2007.
For fiscal year 2008, Ms. Kilborn selected, and applied some adjustments to, a different set of four purportedly comparable properties located at: 31-33 Phillips Court in North Andover (Sale 1); 50-52 Marblehead Street in North Andover (Sale 2); 25 School Street in Danvers (Sale 3); and 262 Andover Street in North Andover (Sale 4). As in her sales-comparison approach for fiscal year 2007, she did not select any comparable sales from Middleton for fiscal year 2008 because she claimed none existed. The following two tables contain a summary of her sales-comparison methodology for fiscal year 2008.
11 Averill Road Property
Fiscal Year 2008
Sales 1 & 2
|
Subject |
Sale 1 |
Adj ($) |
Sale 2 |
Adj ($) |
|
|
11 Averill Rd Middleton
|
31-33 Phillips Ct No Andover |
50-52 Marblehead No Andover |
|||
| Proximity (miles) |
9 miles |
10 miles |
|||
| Sale Price (“SP”) |
$687,400* |
$421,000 |
-10,000*** |
$467,500 |
|
| SP/Gross Living |
Area (“LV”)
$171.32
$136.25
Date of Sale
01/01/2007**
05/22/2006
08/28/2006
Location
Good
Good
Average
+10,000
View
Neighborhood
Neighborhood
Neighborhood
Site
19,602 SF (useable)
10,890 SF
10,454 SF
Year Built
2004
1901-updated
1905-updated
Condition
Good
Good (+5%)
+20,550
Good
Bedrooms
2 & 2
3 & 3
3 & 3
Baths
1½ & 1½
2 & 1
2 & 2
Finished LA
2,552 SF
2,399 SF
+4,590
3,431
-26,370
Fireplace
No
No
No
Separate Utilities
Yes
Yes
Yes
Screened Porch
Yes
No
No
Garage/Carport
No
No
2-Car Garage
-10,000
Patio/Deck
No
Deck
Porch
Comments
Duplex
Duplex
Duplex
Net Adjustment ($)
+15,140
-26,370
Adj Sale Price
$436,140
$441,130
*Assessed Value
**Valuation Date
***Adjusted for a concession at closing
11 Averill Road Property
Fiscal Year 2008
Sales 3 & 4
|
Subject |
Sale 3 |
Adj ($) |
Sale 4 |
Adj ($) |
|
|
11 Averill Rd Middleton
|
25 School St Danvers |
262 Andover St No Andover |
|||
| Proximity (miles) |
6 miles |
8 miles |
|||
| Sale Price (“SP”) |
$687,400* |
$465,000 |
$375,000 |
||
| SP/Gross Living |
Area (“LV”)
$196.04
$173.93
Date of Sale
01/01/2007**
09/28/2006
06/08/2007
+6,250
Location
Good
Good
Good
View
Neighborhood
Neighborhood
Neighborhood
Site
19,602 SF (useable)
5,012 SF
12,632 SF
Year Built
2004
1905-updated
1978
Condition
Good
Good
Average (+10%)
+37,500
Bedrooms
2 & 2
2 & 3
2 & 2
Baths
1½ & 1½
1 & 2
1½ & 1½
Finished LA
2,552 SF
2,372 SF
+5,400
2,156 SF
+11,880
Fireplace
No
No
No
Separate Utilities
Yes
Yes
Yes
Screened Porch
Yes
No
No
Garage/Carport
No
2-Car Garage
-10,000
No
Patio/Deck
No
Porch
No
Comments
Duplex
Duplex
Net Adjustment ($)
-4,600
+49,380
Adj Sale Price
$460,400
$424,380***
*Assessed Value
**Valuation Date
***The Board noted that Ms. Kilborn erred in her calculations with respect to Sale 4. Based on her individual adjustments, the net adjustment and adjusted sale price should be +$55,630 and $430,630, respectively.
Based on this data and relying on all of these sales, including Sale 4 which was a bank sale, Ms. Kilborn estimated the value of the 11 Averill Street property at $440,000 for fiscal year 2008.
For fiscal year 2009, Ms. Kilborn selected, and applied some adjustments to, another set of four purportedly comparable properties located at: 415-417 Winter Street in North Andover (Sale 1); 36 Cherry Street in Danvers (Sale 2); 63 Lawrence Street in Danvers (Sale 3); and 12-14 Summit Street in North Andover (Sale 4). As in her sales-comparison approaches for fiscal years 2007 and 2008, she did not select any comparable sales from Middleton for fiscal year 2009 because she claimed none existed. The following two tables contain a summary of her sales-comparison methodology for fiscal year 2009.
11 Averill Road Property
Fiscal Year 2009
Sales 1 & 2
|
Subject |
Sale 1 |
Adj ($) |
Sale 2 |
Adj ($) |
|
|
11 Averill Rd Middleton
|
415-417 Winter St No Andover |
36 Cherry St Danvers |
|||
| Proximity (miles) |
8 miles |
6 miles |
|||
| Sale Price (“SP”) |
$575,200* |
$417,000 |
|
$405,000 |
|
| SP/Gross Living |
Area (“LV”)
$165.22
$149.11
Date of Sale
01/01/2008**
08/31/2007
-8,687
11/30/2007
-3,375
Location
Good
Good
Good
View
Neighborhood
Neighborhood
Neighborhood
Site
19,602 SF (useable)
44,431 SF
20,865 SF
Year Built
2004
1974
1900
Condition
Good
Good
Good (+5%)
+20,250
Bedrooms
2 & 2
3 & 2
2 & 3
Baths
1½ & 1½
2 & 1
1 & 1
Finished LA
2,552 SF
2,268 SF
+8,520
2,716
-4,920
Fireplace
No
No
2
Separate Utilities
Yes
Yes
Yes
Amenities-A/C
Yes
No
No
Screened Porch
Yes
Yes
Yes
Garage/Carport
No
2-Car Garage
-10,000
No
Patio/Deck
No
Deck
Porch
Comments
Duplex
Duplex
Net Adjustment ($)
-1,480
+15,330
Adj Sale Price
$415,520***
$420,330***
*Assessed Value
**Valuation Date
***The Board noted that Ms. Kilborn erred in her calculations with respect to Sales 1 & 2. Based on her individual adjustments, the net adjustments and adjusted sale prices should be -$10,167 and $406,833, and +$11,955 and $416,955, respectively.
11 Averill Road Property
Fiscal Year 2009
Sales 3 & 4
|
Subject |
Sale 3 |
Adj ($) |
Sale 4 |
Adj ($) |
|
|
11 Averill Rd Middleton
|
63 Lawrence St Danvers |
12-14 Summit St No Andover |
|||
| Proximity (miles) |
7 miles |
10 miles |
|||
| Sale Price (“SP”) |
$575,200* |
$404,900 |
-5,000*** |
$407,000 |
-5,000*** |
| SP/Gross Living |
Area (“LV”)
$135.70
$139.10
Date of Sale
01/01/2008**
08/31/2007
-8,312
08/31/2007
-8,375
Location
Good
Average
+10,000
Good
View
Neighborhood
Neighborhood
Neighborhood
Site
19,602 SF (useable)
5,000 SF
10,019 SF
Year Built
2004
1920
1976
Condition
Good
Good (+5%)
+19,950
Good
Bedrooms
2 & 2
2 & 2
3 & 2
Baths
1½ & 1½
1 & 1
1 & 1½
Finished LA
2,552 SF
2,947 SF
-11,850
2,890 SF
-10,140
Fireplace
No
No
No
Separate Utilities
Yes
No
Yes
Amenities-A/C
Yes
No
No
Screened Porch
Yes
No
No
Garage/Carport
No
No
1-Car Garage
-5,000
Patio/Deck
No
Porch/Deck
Deck/Patio
Comments
Duplex
Duplex
Net Adjustment ($)
+13,100
-20,140
Adj Sale Price
$418,000****
$386,860****
*Assessed Value
**Valuation Date
***Adjusted for a concession at closing
****The Board noted that Ms. Kilborn erred in her calculations with respect to Sales 3 & 4. Based on her individual adjustments, the net adjustments (exclusive of concessions, which is how she did them) and adjusted sale prices should be +$4,788 and $409,688, and -$28,515 and $378,485, respectively.
Based on this data and placing the most reliance on Sale 1, Ms. Kilborn estimated the value of the 11 Averill Street property at $415,000 for fiscal year 2009.
During cross-examination, Ms. Kilborn acknowledged that she assisted the appellant in preparing at least two of the subject abatement applications and all three of the subject petitions. She also conceded that she signed the fiscal year 2008 and 2009 abatement applications and attempted to negotiate a settlement of these appeals on behalf of the appellant with the appraiser in the assessors’ office. She further admitted that she prepared and submitted supporting documentation to the assessors’ appraiser in furtherance of settlement. Ms. Kilborn also listed herself on the subject petitions as “agent” and contact person for the Board. Her written “Agency Agreement” with the appellant characterizes her relationship with him “as an agent for [Mr. Haynes] in connection with real estate assessment appeal(s) to the Local Tax Assessors or the Appellate Tax Board, regarding [the subject properties].” There was no clear testimony or documentary evidence to show that this Agreement was ever rescinded. The agreement specifically authorizes Ms. Kilborn “to file on behalf of [Mr. Haynes] any documents relating to an appeal of the [subject] assessment[s].” On the basis of these facts, the Board found that, at all material times, including the preparation of her appraisal report for the subject appeals and her testimony before the Board, Ms. Kilborn was acting as the agent of the appellant.
In addition, Ms. Kilborn did not disclose any of her foregoing involvement with the appellant in her summary appraisal reports. Her appraisal report specifically states in her “Certification” section that: “I have no present or prospective interest in the property that is the subject of this report, and no personal interest with respect to the parties involved.” Lastly in this regard, Ms. Kilborn testified that the appellant paid her on an hourly basis for completing the abatement applications and petitions but she charged a set amount for the appraisal report for which, at the time of the hearing, the appellant had not yet paid. There was no evidence pertaining to any fees or payments for her time spent seeking the settlement of, or for testifying in, these appeals. From the record, the Board could not determine if any fees applied for the performance of these activities and services, but inferred from the business setting and the relationship between the appellant and Ms. Kilborn that some fee likely did attach, but that Ms. Kilborn had not been paid for them before testifying.
The parties agreed and the Board found that Ms. Kilborn was similarly involved with the abatement application, settlement, petition, and hearing process for the 9 Averill Road property.
Assessors’ Real Estate Valuation Expert
The assessors’ real estate valuation witness, Mr. McKeen, also determined that the 11 Averill Street property’s highest and best use was its continued use as a two-family residential dwelling. Like Ms. Kilborn, he relied primarily on a sales-comparison approach for estimating the value of the 11 Averill Street property for the fiscal years at issue. Unlike Ms. Kilborn, however, he found and incorporated sales of two-family dwellings from Middleton into his methodology for fiscal years 2008 and 2009. For fiscal year 2007, his six purportedly comparable properties include: three two-family properties located at 12-14 Berkley Street in North Andover (Sale 1), 31 Bradstreet Avenue in Danvers (Sale 2), and 7 Chase Street in Danvers (Sale 3); plus three single-family properties, all of which are located in Middleton at 5 Watkins Way (Sale 4), 234 Essex Street (Sale 5), and 10 Stanley Road (Sale 6). He included certain single-family properties in his methodology because he speculated that they were in competition with hypothetical sales of the subject properties. In other words, buyers considering the purchase of the subject properties would likely compare them to certain nearby single-family properties. The following two tables contain a summary of his sales-comparison methodology for fiscal year 2007.
11 Averill Road Property
Fiscal Year 2007
Sales 1, 2 & 3
|
Feature |
Subject |
Sale 1 |
Adj ($) |
Sale 2 |
Adj ($) |
Sale 3 |
Adj ($) |
|
11 Averill Rd Middleton
|
12-14 Berkley St No Andover |
31 Brad- street St Danvers |
7 Chase St Danvers |
||||
| Proximity (+/-) |
4 miles |
7 miles |
6 miles |
||||
| Sale Price (“SP”) |
$595,600* |
$615,000 |
$530,000 |
$537,000 |
|||
| SP/Gross Bldg Area (“GBA”) |
$193.70/SF |
$212.51/SF |
$184.28/SF |
||||
| Concessions |
None |
None |
None |
||||
| Date of Sale |
01/01/2006** |
06/25/2006 |
10/12/2005 |
05/31/2005 |
|||
| Location |
Good |
Superior |
-25,000 |
Inferior |
+75,000 |
Inferior |
+75,000 |
| Site |
182,005 SF |
10,019 SF |
+50,000 |
11,792 SF |
+50,000 |
9,400 SF |
+50,000 |
| View |
Nbhd*** |
Nbhd |
Nbhd |
Nbhd |
|||
| Design |
2 Family |
2 Family |
2 Family |
2 Family |
|||
| Construction Quality |
Average |
Average |
Average |
Average |
|||
| Age (+/-) |
5 years |
26 years |
55 years |
107 years |
|||
| Condition |
Good |
Inferior |
+25,000 |
Inferior |
+25,000 |
Inferior |
+25,000 |
| GBA |
2,550 SF |
3,175 SF |
-25,000 |
2,494 SF |
2,914 SF |
-14,600 |
|
| Rooms: Total/Bed/Bath |
Total/Bed/Bath
5/2/1.5
5/2/1.5
4/2/1
6/3/2
+3,000
-2,000
8/3/2
4/2/1
-2,000
+3,000
7/4/2
4/2/1
-2,000
+3,000
Basement
Full
Full
Full
Full
Finished Basement
Unfinished
Unfinished
Part/Bath
-20,000
Unfinished
Functional Utility
Adequate
Adequate
Adequate
Adequate
Heating/Cooling
FWA/C-Air
FHW/None
+5,000
FHW/None
+5,000
FHW/None
+5,000
Parking
Driveway
Driveway
Driveway
2-Car Garage
-10,000
Porch/Patio/Deck
Scrn Porch
Deck
+500
Deck
+500
Deck/Porch
-500
Amenities
None
Fireplaces
-3,000
None
None
None
None
None
None
Net Adjustment ($)
+28,500
+136,500
+130,900Adj Sale Price
$643,500
$666,500
$667,900
*Assessed Value
**Valuation Date
***Neighborhood
11 Averill Road Property
Fiscal Year 2007
Sales 4, 5 & 6
|
Feature |
Subject |
Sale 4 |
Adj ($) |
Sale 5 |
Adj ($) |
Sale 6 |
Adj ($) |
|
11 Averill Rd Middleton
|
5 Watkins Way Middleton |
234 Essex St Middleton |
10 Stanley Rd Middleton |
||||
| Proximity (+/-) |
1.5 miles |
1 mile |
0.75 miles |
||||
| Sale Price (“SP”) |
$595,600* |
$660,000 |
$739,000 |
$650,000 |
|||
| SP/Gross Bldg Area (“GBA”) |
$244.44/SF |
$208.23/SF |
$243.45/SF |
||||
| Concessions |
None |
None |
None |
||||
| Date of Sale |
01/01/2006** |
07/27/2005 |
07/14/2005 |
11/23/2005 |
|||
| Location |
Good |
Good |
Good |
Good |
|||
| Site |
182,005 SF |
87,120 SF |
+12,500 |
59,400 SF |
+25,000 |
46,174 SF |
+25,000 |
| View |
Nbhd*** |
Nbhd |
Nbhd |
Nbhd |
|||
| Design |
2 Family |
1 Family |
1 Family |
1 Family |
|||
| Construction Quality |
Average |
Average |
Average |
Average |
|||
| Age (+/-) |
5 years |
11 years |
1 year |
13 years |
|||
| Condition |
Good |
Inferior |
+12,500 |
Good |
Inferior |
+12,500 |
|
| GBA |
2,550 SF |
2,700 SF |
-6,000 |
3,549 SF |
-40,000 |
2,670 SF |
|
| Rooms: Total/Bed/Bath |
Total/Bed/Bath
5/2/1.5
5/2/1.5
9/3/2.5
-5,000
+8,000
9/4/2.5
-5,000
+8,000
8/4/2.5
-5,000
+8,000
Basement
Full
Full
Full
Full
Finished Basement
Unfinished
Unfinished
Unfinished
Unfinished
Functional Utility
Adequate
Adequate
Adequate
Adequate
Heating/Cooling
FWA/C-Air
FWA C/Air
FWA C/Air
FHW/None
Parking
Driveway
2-Car Garage
-10,000
2-Car Garage
-10,000
2-Car Garage
-10,000
Porch/Patio/Deck
Scrn Porch
Deck
+500
Deck
+500
Deck/Porch
-500
Amenities
None
Fireplace
-1,500
2 Fireplaces
-3,000
2 Fireplaces
-3,000
None
None
None
None
Net Adjustment ($)
+11,000
-24,500
+27,000
Adj Sale Price
$671,000
$714,500
$677,000
*Assessed Value
**Valuation Date
***Neighborhood
Based on the adjusted values ascribed to the three sales of two-family properties in the neighboring communities of North Andover and Danvers and the adjusted values assigned to the sales of the single-family properties near the 11 Averill Road property’s neighborhood in Middleton, Mr. McKeen estimated the value of the 11 Averill Road property at $644,000 for fiscal year 2007.
For fiscal year 2008, Mr. McKeen’s six purportedly comparable properties include: two two-family properties located in Middleton at 36 East Street (Sale 1) and 47 Lake Street (Sale 2); another two-family property located in Danvers at 33 Park Street (Sale 3); plus three single-family properties, located in Middleton at 58 Mill Street (Sale 4), 3 Jersey Lane (Sale 5), and 6 Northwood Road (Sale 6). The following two tables contain a summary of his sales-comparison methodology for fiscal year 2008.
11 Averill Road Property
Fiscal Year 2008
Sales 1, 2 & 3
|
Feature |
Subject |
Sale 1 |
Adj $ |
Sale 2 |
Adj $ |
Sale 3 |
Adj $ |
|
11 Averill Rd Middleton
|
36 East St Middleton |
47 Lake St Middleton |
33 Park St Danvers |
||||
| Proximity (+/-) |
1.75 miles |
1.5 miles |
6.5 miles |
||||
| Sale Price (“SP”) |
$687,400* |
$875,000 |
$600,000 |
$499,900 |
|||
| SP/Gross Bldg Area (“GBA”) |
$188.90/SF |
$227.79/SF |
$149.94/SF |
||||
| Concessions |
None |
None |
None |
||||
| Date of Sale |
01/01/2007** |
05/11/2006 |
11/30/2006 |
09/29/2006 |
|||
| Location |
Good |
Traffic |
+25,000 |
Good |
Inferior |
+125,000 |
|
| Site |
182,005 SF |
162,914 SF |
44,867 SF*** |
+50,000 |
6,000 SF |
+50,000 |
|
| View |
Nbhd*** |
Nbhd |
Part Water |
-25,000 |
Nbhd |
||
| Design |
2 Family |
2 Family |
2 Family |
2 Family |
|||
| Construction Quality |
Average |
Average |
Average |
Average |
|||
| Age (+/-) |
5 years |
25 years |
78 years |
107 years |
|||
| Condition |
Good |
Slight Inf |
+12,500 |
Inferior |
+25,000 |
Inferior |
+25,000 |
| GBA |
2,550 SF |
4,632 SF |
-84,600 |
2,634 SF |
3,334 SF |
-32,700 |
|
| Rooms: Total/Bed/Bath |
Total/Bed/Bath
5/2/1.5
5/2/1.5
10/3/3
4/2/2
-7,000
-2,000
4/1/2
7/3/2
-2,000
-2,000
8/5/1.5
6/3/1
+3,000
Basement
Full
Full
Full
Full
Finished Basement
Unfinished
Pt Fin/Bth
-20,000
Part Finish
-15,000
Unfinished
Functional Utility
Adequate
Adequate
Adequate
Adequate
Heating/Cooling
FWA/C-Air
FHW/None
+5,000
FHW/None
+5,000
FHA/None
+5,000
Parking
Driveway
2-Car Garage
-10,000
3-Car Garage
-15,000
2-Car Garage
-10,000
Porch/Patio/Deck
Scrn Porch
Deck/Porch
-500
Decking
+500
Wrap @ Porch
Amenities
None
Fireplace
-1,500
None
None
None
Barn/Pat/IGPI
-35,000
None
None
Net Adjustment ($)
-118,100
+21,500
+165,300
Adj Sale Price
$756,900
$621,500
$665,200
*Assessed Value
**Valuation Date
***Also Steeply Sloped
****Neighborhood
11 Averill Road Property
Fiscal Year 2008
Sales 4, 5 & 6
|
Feature |
Subject |
Sale 4 |
Adj ($) |
Sale 5 |
Adj ($) |
Sale 6 |
Adj ($) |
|
11 Averill Rd Middleton
|
58 Mill St Middleton |
3 Jersey Ln Middleton |
6 Northwood Rd Middleton |
||||
| Proximity (+/-) |
1 mile |
3 miles |
2.75 miles |
||||
| Sale Price (“SP”) |
$687,400* |
690,000 |
685,000 |
679,800 |
|||
| SP/Gross Bldg Area (“GBA”) |
$255.56/SF |
$255.88/SF |
$247.29/SF |
||||
| Concessions |
None |
None |
None |
||||
| Date of Sale |
01/01/2007** |
05/26/2006 |
10/20/2006 |
08/15/2006 |
|||
| Location |
Good |
Good |
Good |
Good |
|||
| Site |
182,005 SF |
40,685 SF |
+25,000 |
43,821 SF |
+25,000 |
43,357 SF |
+25,000 |
| View |
Nbhd*** |
Nbhd |
Nbhd |
Nbhd |
|||
| Design |
2 Family |
1 Family |
1 Family |
1 Family |
|||
| Construction Quality |
Average |
Average |
Average |
Average |
|||
| Age (+/-) |
5 years |
7 years |
11 years |
21 years |
|||
| Condition |
Good |
Good |
Slight Inf |
+12,500 |
Slight Inf |
+12,500 |
|
| GBA |
2,550 SF |
2,700 SF |
2,677 SF |
2,749 SF |
|||
| Rooms: Total/Bed/Bath |
Total/Bed/Bath
5/2/1.5
5/2/1.5
9/4/2.5
-5,000
+8,000
8/4/2.5
-5,000
+8,000
8/4/2.5
-5,000
+8,000
Basement
Full
Full
Full
Full
Finished Basement
Unfinished
Part Finish
-15,000
Part Finish
-15,000
Unfinished
Functional Utility
Adequate
Adequate
Adequate
Adequate
Heating/Cooling
FWA/C-Air
FWA C/Air
FWA C/Air
FWA C/Air
Parking
Driveway
2-Car Garage
-10,000
2-Car Garage
-10,000
2-Car Garage
-10,000
Porch/Patio/Deck
Scrn Porch
Deck
+500
Deck
+500
Deck/Porch
-500
Amenities
None
Fireplace
-1,500
Fireplace
-1,500
Fireplace
-1,500
None
Pat/IGPI
-20,000
None
Pat/IGPI
-20,000
Net Adjustment ($)
-18,000
+14,500
+8,500
Adj Sale Price
$672,000
699,500
688,300
*Assessed Value
**Valuation Date
***Neighborhood
Based on the adjusted values ascribed to the two sales of two-family properties in Middleton and the adjusted value assigned to the sale of the two-family property in Danvers, as well as the adjusted values attributed to the three sales of the single-family properties in Middleton, Mr. McKeen estimated the value of the 11 Averill Road property at $665,000 for fiscal year 2008, $22,400 less than the assessed value of $687,400.
For fiscal year 2009, Mr. McKeen’s five purportedly comparable properties include: three two-family properties located in Middleton at 75 South Main Street (Sale 1), 47 Lake Street (Sale 2), and 36 East Street (Sale 3); plus two single-family properties, also located in Middleton at 6 Averill Road (Sale 4) and 29 Watkins Way (Sale 5). Mr. McKeen had used the two-family properties located at 47 Lake Street and 36 East Street in Middleton in his sales-comparison methodology for fiscal year 2008. The following two tables contain a summary of his sales-comparison methodology for fiscal year 2009.
11 Averill Road Property
Fiscal Year 2009
Sales 1, 2 & 3
|
Feature |
Subject |
Sale 1 |
Adj ($) |
Sale 2 |
Adj ($) |
Sale 3 |
Adj ($) |
|
11 Averill Rd Middleton
|
75 So Main St Middleton |
47 Lake St Middleton |
36 East St Middleton |
||||
| Proximity (+/-) |
2.25 miles |
1.5 miles |
1.75 miles |
||||
| Sale Price (“SP”) |
$575,200* |
$465,000 |
$600,000 |
$875,000 |
|||
| SP/Gross Bldg Area (“GBA”) |
$179.95/SF |
$227.79/SF |
$188.90/SF |
||||
| Concessions |
None |
None |
None |
||||
| Date of Sale |
01/01/2008** |
06/22/2007 |
-23,200 |
11/30/2006 |
-60,000 |
05/11/2006 |
-87,500 |
| Location |
Good |
Inferior |
+75,000 |
Good |
Good/Traffic |
+25,000 |
|
| Site |
182,005 SF |
40,075 SF |
+25,000 |
44,867 SF*** |
+50,000 |
162,914 SF |
|
| View |
Nbhd**** |
Nbhd |
Part Water |
-25,000 |
Nbhd |
||
| Design |
2 Family |
2 Family |
2 Family |
2 family |
|||
| Construction Quality |
Average |
Average |
Average |
Average |
|||
| Age (+/-) |
5 years |
242 years |
78 years |
25 years |
|||
| Condition |
Good |
Inferior |
+25,000 |
Inferior |
+25,000 |
Slight Inf |
+12,500 |
| GBA |
2,550 SF |
2,584 SF |
2,634 SF |
4,632 SF |
-83,300 |
||
| Rooms: Total/Bed/Bath |
Total/Bed/Bath
5/2/1.5
5/2/1.5
5/1/1
6/3/1.5
+3,000
4/1/2
7/3/2
-2,000
-2,000
10/3/3
4/2/2
-7,000
-2,000
Basement
Full
Partial
Nominal
Full
Full
Finished Basement
Unfinished
Unfinished
Part Finish
-15,000
Part/Bath
-20,000
Functional Utility
Adequate
Adequate
Adequate
Adequate
Heating/Cooling
FWA/C-Air
FHW/None
+5,000
FHW/None
+5,000
FHW/None
+5,000
Parking
Driveway
1-Car Barn
-7,500
3-Car Garage
-15,000
2-Car Garage
-10,000
Porch/Patio/Deck
Scrn Porch
Porch
+500
Decking
+500
Deck/Porch
-1,000
Amenities
None
4 Fireplaces
-6,000
None
Fireplace
-1,500
None
Pat/IGPI
-20,000
None
Barn/Pat/IGPI
-35,000
Net Adjustment ($)
+76,800
-38,500
-204,800
Adj Sale Price
$541,800
$561,500
$670,200
*Assessed Value
**Valuation Date
***Also Steeply Sloped
****Neighborhood
11 Averill Road Property
Fiscal Year 2009
Sales 4 & 5
|
Feature |
Subject |
Sale 4 |
Adj ($) |
Sale 5 |
Adj ($) |
|
11 Averill Rd Middleton
|
6 Averill Rd Middleton |
29 Watkins Way Middleton |
|||
| Proximity (+/-) |
0.15 miles |
1.5 miles |
|||
| Sale Price (“SP”) |
$575,200* |
$615,000 |
$670,000 |
||
| SP/Gross Bldg Area (“GBA”) |
$243.66/SF |
$262.54/SF |
|||
| Concessions |
None |
None |
|||
| Date of Sale |
01/01/2008** |
07/26/2007 |
-25,600 |
07/31/2007 |
-27,900 |
| Location |
Good |
Good |
Good |
||
| Site |
182,005 SF |
46,174 SF |
+25,000 |
87,120 SF |
+12,500 |
| View |
Nbhd*** |
Nbhd |
Nbhd |
||
| Design |
2 Family |
1 Family |
1 Family |
||
| Construction Quality |
Average |
Average |
Average |
||
| Age (+/-) |
5 years |
20 years |
18 years |
||
| Condition |
Good |
Slight Inf |
+12,500 |
Slight Inf |
+12,500 |
| GBA |
2,550 SF |
2,524 SF |
2,552 SF |
||
| Rooms: Total/Bed/Bath |
Total/Bed/Bath
5/2/1.5
5/2/1.5
8/4/2.5
-5,000
+8,000
8/4/2.5
-5,000
+8,000
Basement
Full
Full
Full
Finished Basement
Unfinished
Part Finish
-15,000
Part Fin/Bath
-20,000
Functional Utility
Adequate
Adequate
Adequate
Heating/Cooling
FWA/C-Air
FHW/None
+5,000
FWA C/Air
Parking
Driveway
2-Car Garage
-10,000
2-Car Garage
-10,000
Porch/Patio/Deck
Scrn Porch
Deck/Scrn Pch/Pch
-2,000
Deck
+500
Amenities
None
2 Fireplaces
-3,000
Fireplace
-1,500
None
None
None
Net Adjustment ($)
-10,100
-30,900
Adj Sale Price
$604,900
$639,100
*Assessed Value
**Valuation Date
***Neighborhood
Based on the adjusted values ascribed to the three sales of two-family properties in Middleton, as well as the adjusted values attributed to the two sales of the single-family properties in Middleton, Mr. McKeen estimated the value of the 11 Averill Road property at $565,000 for fiscal year 2009, $10,200 less than the assessed value of $575,200.
Assessors’ Other Witnesses
In addition to Mr. McKeen, Bradford Swanson, the assistant assessor in Middleton and Patricia Ohlson, a member of the assessors, testified. They credibly debunked Ms. Kilborn’s purportedly comparable properties and her methodology by pointing out these properties’ many different characteristics compared to the 11 Averill Road property, particularly with respect to neighborhood and other locational features and Ms. Kilborn’s failure to adequately account for these differences in her methodology, assuming comparability.
Summary of Assessments & Estimated Values for 11 Averill Road Property
The following table summarizes the 11 Averill Road property’s assessments and its values as estimated by Ms. Kilborn and Mr. McKeen for the fiscal years at issue.
Assessments & Estimated Values for the 11 Averill Road Property
|
FY 2007 |
FY 2008 |
FY 2009 |
|
| Assessed Values ($) |
595,600 |
687,400 |
575,200 |
| Ms. Kilborn’s Values ($) |
462,000 |
440,000 |
415,000 |
| Mr. McKeen’s Values ($) |
644,000 |
665,000 |
565,000 |
Board’s Analysis
Based on all of the evidence, the Board found that the 11 Averill Road property was not overvalued by the assessors for fiscal year 2007, but was overvalued for fiscal years 2008 and 2009. In making these findings the Board primarily relied on Mr. McKeen’s comparable-sales methodology and his estimates of value. In particular, the Board found that his comparable two-family sales, particularly those located in Middleton, more closely reflected the 11 Averill Road property’s characteristics than Ms. Kilborn’s purportedly comparable two-family properties, situated in predominantly congested locales in area communities. The Board also found that Mr. McKeen’s adjustments and estimates of value were reasonable and sufficiently supported, while Ms. Kilborn’s were not.
The Board further found that Ms. Kilborn’s methodology contained numerous mathematical errors and inconsistencies that detracted from its reliability. Ms. Kilborn also failed to include any sales from Middleton in her analysis, which further diminished her methodology’s reliability. Moreover, the Board found that Ms. Kilborn’s credibility as an independent fee appraiser was compromised by her continuing agency relationship with the appellant, which created bias.
Accordingly, and relying extensively on Mr. McKeen’s data and analysis as the best evidence of value, the Board found that the 11 Averill Road property was not overvalued by the assessors for fiscal year 2007 and decided that appeal for the appellee. The Board further found, however, again principally based on Mr. McKeen’s analysis, that the 11 Averill Road property’s fair cash values for fiscal years 2008 and 2009 were $665,000 and $565,000, respectively, resulting in overvaluations by the assessors of $22,400 for fiscal year 2008 and $10,200 for fiscal year 2009. The Board, therefore, decided those two appeals for the appellant and granted abatements in the amount of $219.23 and $113.22, respectively.[28]
III. 9 Averill Road Property
Description
The 9 Averill Road property’s home, which is similar to the 11 Averill Road property’s home, is a center entrance, two-family, two-story, Colonial-style, side-by-side, duplex house located on 1.86 acres. The appellant built the dwelling on this parcel in 1990. The parcel’s topography slopes slightly from the front to the back, and its configuration is irregular. The area around the duplex has average landscaping and paved parking areas adjacent to each side of the duplex.
The subject duplex contains two equally sized living areas of 1,184 square feet each, plus two twelve-by-fourteen-foot screened porches attached to each side of the duplex in the back of the house, and a 36-square-foot shared front entry. Each side also has an unfinished full basement and an unfinished attic. The duplex’s exterior siding is wood clapboard, and the roof is finished with asphalt shingles. Each unit has an identical layout of an eat-in kitchen with a bar area, a living room, one half bathroom, and a family room on the first floor plus two bedrooms and a full bathroom on the second level. The interior is finished with painted sheetrock walls and ceilings, carpeted floors and stairs, plus some vinyl flooring in the kitchen and bathrooms, and several rooms with recessed lighting. There are no fireplaces, but there is a cathedral ceiling and skylight in the family room on each side. The utilities servicing the duplex include propane gas and private water and septic. The electric line is underground. Each of the two units in the duplex has its own heating, electrical, and air-conditioning systems and meters. The duplex is in overall good condition with no items of deferred maintenance.
Appellant’s Real Estate Valuation Expert
As with the 11 Averill Road property, Ms. Kilborn determined that the highest and best use of the 9 Averill Street property for the fiscal years at issue was its existing use as a two-family residential property. To estimate its fair cash value, she again relied principally on a sales-comparison approach. For fiscal year 2008, she selected, and applied some adjustments to, the same four purportedly comparable properties that she used in her sales-comparison analysis for 11 Averill Road. These properties are located at: 31-33 Phillips Court in North Andover (Sale 1); 50-52 Marblehead Street in North Andover (Sale 2); 25 School Street in Danvers (Sale 3); and 262 Andover Street in North Andover (Sale 4). She did not select any comparable sales from Middleton because she claimed none existed. The following two tables contain a summary of her sales-comparison methodology for fiscal year 2008.
9 Averill Road Property
Fiscal Year 2008
Sales 1 & 2
|
Subject |
Sale 1 |
Adj ($) |
Sale 2 |
Adj ($) |
|
|
9 Averill Rd Middleton
|
31-33 Phillips Ct No Andover |
50-52 Marblehead No Andover |
|||
| Proximity (miles) |
9 miles |
10 miles |
|||
| Sale Price (“SP”) |
$611,500* |
$421,000 |
-10,000*** |
$467,500 |
|
| SP/Gross Living |
Area (“LV”)
$171.32
$136.25
Date of Sale
01/01/2007**
05/22/2006
08/28/2006
Location
Good
Good
Average
+10,000
View
Neighborhood
Neighborhood
Neighborhood
Site
81,022 SF
10,890 SF
10,454 SF
Year Built
1990
1901-updated
1905-updated
Condition
Good
Good (+5%)
+20,550
Good
Bedrooms
2 & 2
3 & 3
3 & 3
Baths
1½ & 1½
2 & 1
2 & 2
Finished LA
2,404 SF
2,399 SF
+3,960
3,431
-30,810
Fireplace
No
No
No
Separate Utilities
Yes
Yes
Yes
Screened Porch
Yes
No
No
Garage/Carport
No
No
2-Car Garage
-10,000
Patio/deck
No
Deck
Porch
Comments
Duplex
Duplex
Duplex
Net Adjustment ($)
+14,510
-30,810
Adj Sale Price
$435,510
$436,690
* Assessed Value
** Valuation Date
***Adjusted for a concession at closing
9 Averill Road
Fiscal Year 2008
Sales 3 & 4
|
Subject |
Sale 3 |
Adj ($) |
Sale 4 |
Adj ($) |
|
|
9 Averill Rd Middleton
|
25 School St Danvers |
262 Andover St No Andover |
|||
| Proximity (miles) |
6 miles |
8 miles |
|||
| Sale Price (“SP”) |
$611,500* |
$465,000 |
$375,000 |
||
| SP/Gross Living |
Area (“LV”)
$196.04
$173.93
Date of Sale
01/01/2007**
09/28/2006
06/08/2007
+6,250
Location
Good
Good
Good
View
Neighborhood
Neighborhood
Neighborhood
Site
81,022 SF
5,012 SF
12,632 SF
Year Built
1990
1905-updated
1978
Condition
Good
Good
Average (+10%)
+37,500
Bedrooms
2 & 2
2 & 3
2 & 2
Baths
1½ & 1½
1 & 2
1½ & 1½
Finished LA
2,404 SF
2,372 SF
+960
2,156 SF
+7,440
Fireplace
No
No
No
Separate Utilities
Yes
Yes
Yes
Screened Porch
Yes
No
No
Garage/Carport
No
2-Car Garage
-10,000
No
Patio/deck
No
Porch
No
Comments
Duplex
Duplex
Net Adjustment ($)
-9,040
+44,940
Adj Sale Price
$455,960
$419,940***
* Assessed Value
** Valuation Date
***The Board noted that Ms. Kilborn erred in her calculations with respect to Sale 4. Based on her individual adjustments, the net adjustment and adjusted sale price should be +$51,190 and $426,190, respectively.
Based on this data and relying on all of these sales, including Sale 4, which was a bank sale, Ms. Kilborn estimated the value of the 9 Averill Street property at $435,000 for fiscal year 2008.
For fiscal year 2009, Ms. Kilborn selected, and applied some adjustments to, the same four purportedly comparable two-family properties that she used in estimating the value for the 11 Averill Road property. These properties are located at: 415-417 Winter Street in North Andover (Sale 1); 36 Cherry Street in Danvers (Sale 2); 63 Lawrence Street in Danvers (Sale 3); and 12-14 Summit Street in North Andover (Sale 4). She did not select any comparable sales from Middleton because she claimed none existed. The following two tables contain a summary of her sales-comparison methodology for fiscal year 2009.
9 Averill Road Property
Fiscal Year 2009
Sales 1 & 2
|
Subject |
Sale 1 |
Adj ($) |
Sale 2 |
Adj ($) |
|
|
9 Averill Rd Middleton
|
415-417 Winter St No Andover |
36 Cherry St Danvers |
|||
| Proximity (miles) |
8 miles |
6 miles |
|||
| Sale Price (“SP”) |
$507,200* |
$417,000 |
|
$405,000 |
|
| SP/Gross Living Area (“LV”) |
$165.22 |
$149.11 |
|||
| Date of Sale |
01/01/2008** |
08/31/2007 |
-8,687 |
11/30/2007 |
-3,375 |
| Location |
Good |
Good |
Good |
||
| View |
Neighborhood |
Neighborhood |
Neighborhood |
||
| Site |
81,022 SF |
44,431 SF |
20,865 SF |
||
| Year Built |
1990 |
1974 |
1900 |
||
| Condition |
Good |
Good |
Good (+5%) |
+20,250 |
|
| Bedrooms |
2 & 2 |
3 & 2 |
2 & 3 |
||
| Baths |
1½ & 1½ |
2 & 1 |
1 & 1 |
||
| Finished LA |
2,404 SF |
2,268 SF |
+4,080 |
2,716 |
-9,360 |
| Fireplace |
No |
No |
2 |
||
| Separate Utilities |
Yes |
Yes |
Yes |
||
| Screened Porch |
Yes |
Yes |
Yes |
||
| Garage/Carport |
No |
2-Car Garage |
-10,000 |
No |
|
| Patio/deck |
No |
Deck |
Porch |
||
| Comments |
Duplex |
Duplex |
|||
| Net Adjustment ($) |
-5,920 |
+10,890 |
|||
| Adj Sale Price |
|
$411,0800*** |
|
$415,890*** |
|
* Assessed Value
** Valuation Date
*** The Board noted that Ms. Kilborn erred in her calculations with respect to Sales 1 & 2. The net adjustments and adjusted sale prices should be -$14,607 and $402,393, and +$7,515 and $412,515, respectively.
9 Averill Road Property
Fiscal Year 2009
Sales 3 & 4
|
Subject |
Sale 3 |
Adj ($) |
Sale 4 |
Adj ($) |
|
|
9 Averill Rd Middleton
|
63 Lawrence St Danvers |
12-14 Summit St No Andover |
|||
| Proximity (miles) |
7 miles |
10 miles |
|||
| Sale Price (“SP”) |
$507,200* |
$404,900 |
-5,000*** |
$407,000 |
-5,000*** |
| SP/Gross Living Area (“LV”) |
$135.70 |
$139.10 |
|||
| Date of Sale |
01/01/2008** |
08/31/2007 |
-8,312 |
08/31/2007 |
-8,375 |
| Location |
Good |
Average |
+10,000 |
Good |
|
| View |
Neighborhood |
Neighborhood |
Neighborhood |
||
| Site |
81,022 SF |
5,000 SF |
10,019 SF |
||
| Year Built |
1990 |
1920 |
1976 |
||
| Condition |
Good |
Good (+5%) |
+19,950 |
Good |
|
| Bedrooms |
2 & 2 |
2 & 2 |
3 & 2 |
||
| Baths |
1½ & 1½ |
1 & 1 |
1 & 1½ |
||
| Finished LA |
2,404 SF |
2,947 SF |
-16,290 |
2,890 SF |
-14,580 |
| Fireplace |
No |
No |
No |
||
| Separate Utilities |
Yes |
No |
Yes |
||
| Screened Porch |
Yes |
No |
No |
||
| Garage/Carport |
No |
No |
1-Car Garage |
-5,000 |
|
| Patio/deck |
No |
Porch/Deck |
Deck/Patio |
||
| Comments |
Duplex |
Duplex |
|||
| Net Adjustment ($) |
+13,660 |
-19,580 |
|||
| Adj Sale Price |
|
$413,560**** |
|
$382,420**** |
|
* Assessed Value
** Valuation Date
***Adjusted for a concession at closing
****The Board noted that Ms. Kilborn erred in her calculations with respect to Sales 3 & 4. Based on her individual adjustments, the net adjustments (exclusive of concessions which is how she calculated them) and adjusted sale prices should be +$5,348 and $405,248, and -$27,955 and $374,045, respectively.
Based on this data and placing the most reliance on Sale 1, Ms. Kilborn estimated the value of the 9 Averill Street property at $415,000 for fiscal year 2009.
Assessors’ Real Estate Valuation Expert
As with the 11 Averill Road property, the assessors’ real estate valuation witness, Mr. McKeen, also determined that the 9 Averill Street property’s highest and best use was its continued use as a two-family residential dwelling. Like Ms. Kilborn, he too relied on essentially the same sales-comparison approach that he used for estimating the value of the 11 Averill Street property to value the 9 Averill Road property for the fiscal years at issue. Unlike Ms. Kilborn, however, he found and incorporated sales of two-family dwellings from Middleton into his methodology for both fiscal years 2008 and 2009.
For fiscal year 2008, Mr. McKeen used the same six purportedly comparable properties that he used to value the 11 Averill Road property. These properties include two two-family properties located in Middleton at 36 East Street (Sale 1) and 47 Lake Street (Sale 2), another two-family property located in Danvers at 33 Park Street (Sale 3), plus three single-family properties, located in Middleton at 58 Mill Street (Sale 4), 3 Jersey Lane (Sale 5), and 6 Northwood Road (Sale 6). The following two tables contain a summary of his sales-comparison methodology for fiscal year 2008.
9 Averill Road Property
Fiscal Year 2008
Sales 1, 2 & 3
|
Feature |
Subject |
Sale 1 |
Adj $ |
Sale 2 |
Adj $ |
Sale 3 |
Adj $ |
|
9 Averill Rd Middleton
|
36 East St Middleton |
47 Lake St Middleton |
33 Park St Danvers |
||||
| Proximity (+/-) |
1.75 miles |
1.5 miles |
6.5 miles |
||||
| Sale Price (“SP”) |
$611,500* |
$875,000 |
$600,000 |
$499,900 |
|||
| SP/Gross Bldg Area (“GBA”) |
$188.90/SF |
$227.79/SF |
$149.94/SF |
||||
| Concessions |
None |
None |
None |
||||
| Date of Sale |
01/01/2007** |
05/11/2006 |
11/30/2006 |
09/29/2006 |
|||
| Location |
Good |
Traffic |
+25,000 |
Good |
Inferior |
+100,000 |
|
| Site |
81,022 SF |
162,914 SF |
-25,000 |
44,867 SF*** |
+37,500 |
6,000 SF |
+50,000 |
| View |
Nbhd**** |
Nbhd |
Part Water |
-25,000 |
Nbhd |
||
| Design |
2 Family |
2 Family |
2 Family |
2 Family |
|||
| Construction Quality |
Average |
Average |
Average |
Average |
|||
| Age (+/-) |
19 years |
25 years |
78 years |
107 years |
|||
| Condition |
Good |
Good |
Inferior |
+25,000 |
Inferior |
+25,000 |
|
| GBA |
2,516 SF |
4,632 SF |
-84,600 |
2,634 SF |
3,334 SF |
-32,700 |
|
| Rooms: Total/Bed/Bath |
Total/Bed/Bath
5/2/1.5
5/2/1.5
10/3/3
4/2/2
-7,000
-2,000
4/1/2
7/3/2
-2,000
-2,000
8/5/1.5
6/3/1
+3,000
Basement
Full
Full
Full
Full
Finished Basement
Unfinished
Pt Fin/Bth
-20,000
Part Finish
-15,000
Unfinished
Functional Utility
Adequate
Adequate
Adequate
Adequate
Heating/Cooling
FWA/C-Air
FHW/None
+5,000
FHW/None
+5,000
FHA/None
+5,000
Parking
Driveway
2-Car Garage
-10,000
3-Car Garage
-15,000
2-Car Garage
-10,000
Porch/Patio/Deck
Scrn Porch
Deck/Porch
-500
Decking
+500
Wrap @ Porch
Amenities
None
Fireplace
-1,500
None
None
None
Barn/Pat/IGPI
-35,000
None
None
Net Adjustment ($)
-155,600
+9,000
+140,300
Adj Sale Price
$719,400
$609,000
$640,200
* Assessed Value
**Valuation Date
*** Also Steeply Sloped
**** Neighborhood
9 Averill Road Property
Fiscal Year 2008
Sales 4, 5 & 6
|
Feature |
Subject |
Sale 4 |
Adj ($) |
Sale 5 |
Adj ($) |
Sale 6 |
Adj ($) |
|
9 Averill Rd Middleton
|
58 Mill St Middleton |
3 Jersey Ln Middleton |
6 Northwood Rd Middleton |
||||
| Proximity (+/-) |
1 mile |
3 miles |
2.75 miles |
||||
| Sale Price (“SP”) |
$611,500* |
690,000 |
685,000 |
679,800 |
|||
| SP/Gross Bldg Area (“GBA”) |
$255.56/SF |
$255.88/SF |
$247.29/SF |
||||
| Concessions |
None |
None |
None |
||||
| Date of Sale |
01/01/2007** |
05/26/2006 |
10/20/2006 |
08/15/2006 |
|||
| Location |
Good |
Good |
Good |
Good |
|||
| Site |
81,022 SF |
40,685 SF |
+12,500 |
43,821 SF |
+12,500 |
43,357 SF |
+12,500 |
| View |
Nbhd*** |
Nbhd |
Nbhd |
Nbhd |
|||
| Design |
2 Family |
1 Family |
1 Family |
1 Family |
|||
| Construction Quality |
Average |
Average |
Average |
Average |
|||
| Age (+/-) |
19 years |
7 years |
11 years |
21 years |
|||
| Condition |
Good |
Superior |
-25,000 |
Superior |
-25,000 |
Good |
|
| GBA |
2,516 SF |
2,700 SF |
2,677 SF |
2,749 SF |
|||
| Rooms: Total/Bed/Bath |
Total/Bed/Bath
5/2/1.5
5/2/1.5
9/4/2.5
-5,000
+8,000
8/4/2.5
-5,000
+8,000
8/4/2.5
-5,000
+8,000
Basement
Full
Full
Full
Full
Finished Basement
Unfinished
Part Finish
-15,000
Part Finish
-15,000
Unfinished
Functional Utility
Adequate
Adequate
Adequate
Adequate
Heating/Cooling
FWA/C-Air
FWA C/Air
FWA C/Air
FWA C/Air
Parking
Driveway
2-Car Garage
-10,000
2-Car Garage
-10,000
2-Car Garage
-10,000
Porch/Patio/Deck
Scrn Porch
Deck
+500
Deck
+500
Deck/Porch
-500
Amenities
None
Fireplace
-1,500
Fireplace
-1,500
Fireplace
-1,500
None
Pat/IGPI
-20,000
None
Pat/IGPI
-20,000
Net Adjustment ($)
-55,500
-35,500
-16,500
Adj Sale Price
$634,500
649,500
663,300
* Assessed Value
** Valuation Date
*** Neighborhood
Based on the adjusted values ascribed to the two sales of two-family properties in Middleton and the adjusted values assigned to the sale of the two-family property in Danvers, as well as the adjusted values attributed to the three sales of the single-family properties in Middleton, Mr. McKeen estimated the value of the 9 Averill Road property at $640,000 for fiscal year 2008.
For fiscal year 2009, Mr. McKeen’s five purportedly comparable properties are the same properties that he used to estimate the value of the 11 Averill Road property. These properties include three two-family properties located in Middleton at 75 South Main Street (Sale 1), 47 Lake Street (Sale 2), and 36 East Street (Sale 3), plus two single-family properties, also located in Middleton at 6 Averill Road (Sale 4) and 29 Watkins Way (Sale 5). Mr. McKeen also used here the two-family properties located at 47 Lake Street and 36 East Street in Middleton that he had used in his sales-comparison methodology for fiscal year 2008. The following two tables contain a summary of his sales-comparison methodology for fiscal year 2009.
9 Averill Road Property
Fiscal Year 2009
Sales 1, 2 & 3
|
Feature |
Subject |
Sale 1 |
Adj ($) |
Sale 2 |
Adj ($) |
Sale 3 |
Adj ($) |
|
9 Averill Rd Middleton
|
75 So Main St Middleton |
47 Lake St Middleton |
36 East St Middleton |
||||
| Proximity (+/-) |
2.25 miles |
1.5 miles |
1.75 miles |
||||
| Sale Price (“SP”) |
$507,200* |
$465,000 |
$600,000 |
$875,000 |
|||
| SP/Gross Bldg Area (“GBA”) |
$179.95/SF |
$227.79/SF |
$188.90/SF |
||||
| Concessions |
None |
None |
None |
||||
| Date of Sale |
01/01/2008** |
06/22/2007 |
-23,000 |
11/30/2006 |
-60,000 |
05/11/2006 |
-87,500 |
| Location |
Good |
Inferior |
+75,000 |
Good |
Good/Traffic |
+25,000 |
|
| Site |
81,022 SF |
40,075 SF |
+12,500 |
44,867 SF*** |
+37,500 |
162,914 SF |
-25,000 |
| View |
Nbhd**** |
Nbhd |
Part Water |
-25,000 |
Nbhd |
||
| Design |
2 Family |
2 Family |
2 Family |
2 Family |
|||
| Construction Quality |
Average |
Average |
Average |
Average |
|||
| Age (+/-) |
19 years |
242 years |
78 years |
25 years |
|||
| Condition |
Good |
Inferior |
+25,000 |
Inferior |
+25,000 |
Good |
|
| GBA |
2,516 SF |
2,584 SF |
2,634 SF |
4,632 SF |
-84,600 |
||
| Rooms: Total/Bed/Bath |
Total/Bed/Bath
5/2/1.5
5/2/1.5
5/1/1
6/3/1.5
+3,000
4/1/2
7/3/2
-2,000
-2,000
10/3/3
4/2/2
-7,000
-2,000
Basement
Full
Partial
Full
Full
Finished Basement
Unfinished
Unfinished
Part Finish
-15,000
Part/Bath
-20,000
Functional Utility
Adequate
Adequate
Adequate
Adequate
Heating/Cooling
FWA/C-Air
FHW/None
+5,000
FHW/None
+5,000
FHW/None
+5,000
Parking
Driveway
1-Car Barn
-7,500
3-Car Garage
-15,000
2-Car Garage
-10,000
Porch/Patio/Deck
Scrn Porch
Porch
+500
Decking
+500
Deck/Porch
-500
Amenities
None
4 Fireplaces
-6,000
None
Fireplace
-1,500
None
Pat/IGPI
-20,000
None
Barn/Pat/IGPI
-35,000
Net Adjustment ($)
+64,500
-51,000
-243,100
Adj Sale Price
$529,500
$549,000
$631,900
* Assessed Value
** Valuation Date
*** Also Steeply Sloped
**** Neighborhood
9 Averill Road Property
Fiscal Year 2009
Sales 4 & 5
|
Feature |
Subject |
Sale 4 |
Adj ($) |
Sale 5 |
Adj ($) |
|
9 Averill Rd Middleton
|
6 Averill Rd Middleton |
29 Watkins Way Middleton |
|||
| Proximity (+/-) |
0.15 miles |
1.5 miles |
|||
| Sale Price (“SP”) |
$507,200* |
$615,000 |
$670,000 |
||
| SP/Gross Bldg Area (“GBA”) |
$243.66/SF |
$262.54/SF |
|||
| Concessions |
None |
None |
|||
| Date of Sale |
01/01/2008** |
07/26/2007 |
-25,600 |
07/31/2007 |
-27,900 |
| Location |
Good |
Good |
Good |
||
| Site |
81,022 SF |
46,174 SF |
+12,500 |
87,120 SF |
|
| View |
Nbhd*** |
Nbhd |
Nbhd |
||
| Design |
2 Family |
1 Family |
1 Family |
||
| Construction Quality |
Average |
Average |
Average |
||
| Age (+/-) |
19 years |
20 years |
18 years |
||
| Condition |
Good |
Good |
Good |
||
| GBA |
2,516 SF |
2,524 SF |
2,552 SF |
||
| Rooms: Total/Bed/Bath |
Total/Bed/Bath
5/2/1.5
5/2/1.5
8/4/2.5
-5,000
+8,000
8/4/2.5
-5,000
+8,000
Basement
Full
Full
Full
Finished Basement
Unfinished
Part Finish
-15,000
Part Fin/Bath
-20,000
Functional Utility
Adequate
Adequate
Adequate
Heating/Cooling
FWA/C-Air
FHW/None
+5,000
FWA C/Air
Parking
Driveway
2-Car Garage
-10,000
2-Car Garage
-10,000
Porch/Patio/Deck
Scrn Porch
Deck/Scrn Pch/Pch
-2,000
Deck
+500
Amenities
None
2 Fireplaces
-3,000
Fireplace
-1,500
None
None
None
Net Adjustment ($)
-35,100
-55,900
Adj Sale Price
$579,900
$614,100
* Assessed Value
** Valuation Date
*** Neighborhood
Based on the adjusted values ascribed to the three sales of two-family properties in Middleton, as well as the adjusted values attributed to the two sales of the single-family properties in Middleton, Mr. McKeen estimated the value of the 9 Averill Road property at $550,000 for fiscal year 2009.
Assessors’ Other Witnesses
The parties stipulated that Mr. Swanson’s and Ms. Ohlson’s testimony during the hearing of the 11 Averill Road property also applied to the 9 Averill Road property. The parties further agreed that the cross examination of Ms. Kilborn during the hearing for the 11 Averill Road property also pertained to the hearing for the 9 Averill Road property.
Summary of Assessments & Estimated Values for 9 Averill Road Property
The following table summarizes the 9 Averill Road property’s assessments and its values as estimated by Ms. Kilborn and Mr. McKeen for the fiscal years at issue.
Assessments & Estimated Values for the 9 Averill Road Property
|
FY 2008 |
FY 2009 |
|
| Assessed Values ($) |
611,500 |
507,200 |
| Ms. Kilborn’s Values ($) |
435,000 |
415,000 |
| Mr. McKeen’s Values ($) |
640,000 |
550,000 |
Board’s Analysis
Based on all of the evidence, the Board found that the appellant failed to prove that the 9 Averill Road property was overvalued by the assessors for fiscal years 2008 and 2009. In making this finding, the Board found that Ms. Kilborn’s purportedly comparable properties were not sufficiently comparable to the 9 Averill Road property. These properties did not exhibit sufficiently similar characteristics to the 9 Averill Road property, particularly with respect to neighborhood and other locational traits. The Board also found that Mr. McKeen’s comparable two-family properties, particularly those located in Middleton, more closely reflected the 9 Averhill Road property’s characteristics than Ms. Kilborn’s purportedly comparable two-family properties that were situated in congested locales in area communities. In addition, the Board found that Mr. McKeen’s adjustments and estimates of value were reasonable and sufficiently supported, while Ms. Kilborn’s were not.
The Board further found that Ms. Kilborn’s methodology contained numerous mathematical errors and inconsistencies that detracted from its reliability. Ms. Kilborn also failed to include any sales from Middleton in her analysis which further diminished her methodology’s reliability. Moreover, the Board found that Ms. Kilborn’s credibility as an independent fee appraiser was compromised by her continuing agency relationship with the appellant, which created bias.
Accordingly, the Board found that the 9 Averill Road property was not overvalued by the assessors for fiscal years 2008 and 2009 and decided those appeals for the appellee.
OPINION
The assessors are required to assess real estate at its fair cash value. G.L. c. 59, § 38. Fair cash value is defined as the price on which a willing seller and a willing buyer in a free and open market will agree if both of them are fully informed and under no compulsion. Boston Gas Co. v. Assessors of Boston, 334 Mass. 549, 566 (1956).
The appellants have the burden of proving that the property has a lower value than that assessed. “‘The burden of proof is upon the petitioner to make out its right as [a] matter of law to [an] abatement of the tax.’” Schlaiker v. Assessors of Great Barrington, 365 Mass. 243, 245 (1974) (quoting Judson Freight Forwarding Co. v. Commonwealth, 242 Mass. 47, 55 (1922)). “[T]he board is entitled to ‘presume that the valuation made by the assessors [is] valid unless the taxpayers . . . prov[e] the contrary.’” General Electric Co. v. Assessors of Lynn, 393 Mass. 591, 598 (1984) (quoting Schlaiker, 365 Mass. at 245).
The fair cash value of property may be determined by recent sales of comparable properties in the market. Actual sales generally “furnish strong evidence of market value, provided they are arm’s-length transactions and thus fairly represent what a buyer has been willing to pay for the property to a willing seller.” Foxboro Associates v. Assessors of Foxborough, 385 Mass. 679, 682 (1982); New Boston Garden Corp. v. Assessors of Boston, 383 Mass. 456, 469 (1981); First National Stores, Inc. v. Assessors of Somerville, 358 Mass. 554, 560 (1971). When comparable sales are used, however, allowance must be made for various factors which would otherwise cause disparities in the comparable prices. See Pembroke Industrial Park Co., Inc. v. Assessors of the Town of Pembroke, Mass. ATB Findings of Facts and Reports 1998-1072, 1082-83. “Adjustments for differences in the elements of comparison are made to the price of each comparable property. . . . The magnitude of the adjustment made for each element of comparison depends on how much that characteristic of the comparable property differs from the subject property.” Appraisal Institute, The Appraisal of Real Estate 322 (13th ed. 2008).
Based on all of the evidence, the Board found that the 11 Averill Road property was not overvalued by the assessors for fiscal year 2007, but was overvalued for fiscal years 2008 and 2009. In making these findings the Board primarily relied on Mr. McKeen’s comparable-sales methodology and his estimates of value. In particular, the Board found that his comparable two-family sales, particularly those located in Middleton, more closely reflected the 11 Averill Road property’s characteristics than Ms. Kilborn’s purportedly comparable two-family properties, situated in predominantly congested locales in area communities. Ms. Kilborn failed to include any sales from Middleton in her analysis which, in the Board’s view, diminished her methodology’s reliability. The Board also found that Mr. McKeen’s adjustments and estimates of value were reasonable and sufficiently supported, while Ms. Kilborn’s were not. Because Mr. McKeen’s opinions of value for fiscal years 2008 and 2009 were less than the assessed values for those years, the Board found that the appellant was entitled to an abatement for those years. See General Electric Co., 393 Mass. at 600, 608 (holding that the Board is entitled to rely on all of the evidence, and not just that presented by the appellant, to determine whether there is overvaluation); see also Boston Edison Co. v. Assessors of Watertown, 387 Mass. 298, 302 (1982) (“The board’s decision must be supported by substantial evidence considering the entire record before the board.”).
Based on all of the evidence, the Board found that the appellant failed to prove that the 9 Averill Road property was overvalued by the assessors for fiscal years 2008 and 2009. In making this finding, the Board found that Ms. Kilborn’s purportedly comparable properties were not sufficiently comparable to the 9 Averill Road property. These properties did not exhibit sufficiently similar characteristics to the 9 Averill Road property, particularly with respect to neighborhood and other locational traits. The Board also found that Mr. McKeen’s comparable two-family properties, particularly those located in Middleton, more closely reflected the 9 Averhill Road property’s characteristics than Ms. Kilborn’s purportedly comparable two-family properties that were situated in congested locales in area communities. In addition, the Board found that Mr. McKeen’s adjustments and estimates of value were reasonable and sufficiently supported, while Ms. Kilborn’s were not. Ms. Kilborn also failed to include any sales from Middleton in her analysis which, in the Board’s view, diminished her methodology’s reliability.
Moreover, the Board found that the methodology that Ms. Kilborn employed to estimate the values of both subject properties contained numerous mathematical errors and inconsistencies that detracted from its reliability. See May Department Store Co v. Assessors of Newton, Mass. ATB Findings of Facts and Reports 2009-153, 174 (“[T]he Board found that [the real estate valuation expert’s] overall methodology, report, and testimony contained many underlying inconsistencies, errors, and omissions, which, when taken as a whole, seriously compromised the credibility of his estimates of the subject property’s values [for the fiscal years at issue]”).[29]
Evidence of sales may be considered “only if they are free and not under compulsion.” Congregation of the Mission of St. Vincent dePaul v. Commonwealth, 336 Mass. 357, 360 (1957). “A foreclosure sale inherently suggests a compulsion to sell; a proponent of evidence of such sale must show circumstances rebutting the suggestion of compulsion.” DSM Realty, Inc. v. Assessors of Andover, 391 Mass. 1014 (1984). Similarly, a sale by a bank which acquired the property by foreclosure or a deed in lieu of foreclosure also carries indicia of compulsion. G.F. Springfield Management v. Assessors of West Springfield, Mass. ATB Findings of Facts and Reports 2000-228, 242, 251 and the cases cited therein. In these appeals, the Board found and ruled that the bank sales which Ms. Kilborn used in her analyses were inherently suspect and diminished the reliability of her methodology and the estimates of value that she derived from that methodology.
Furthermore, the Board found that Ms. Kilborn’s status as an agent of the appellant undercut her credibility as an independent valuation witness. The evidence clearly established the existence of an agency relationship between Ms. Kilborn and the appellant defined as a “fiduciary relationship that arises when one person (a “principal”) manifests assent to another person (an “agent”) that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents so to act.” the Restatement (Third) of Agency (2006) § 1.01; see also Appraisal Institute, The Dictionary of Real Estate Appraisal 8 (4th ed., 2002)(defining “agency” as “[a] fiduciary relationship in which one party, the agent, acts as a representative of the other, the principal, in matters specified in a contract between them.”); Black’s Law Dictionary 72 (9th ed. 2009)(defining “agent” as “[o]ne who is authorized to act for and in place of another; a representative.”). Considering her status as the agent of the appellant, the Board found that, in these appeals, Ms. Kilborn’s credibility as an independent fee appraiser was compromised by her continuing agency relationship with the appellant. See Turners Falls, L.P. v. Assessors of Montague, 54 Mass. App. Ct. 732, 738 (2002)(holding that an expert witness must not be “a party or an agent for the party that employ[s] the expert . . . . [or] under the control of the party . . . [because the expert must] testif[y] impartially to assist the trier of fact about matters not in common knowledge.”).
In addition, the USPAP Ethics Rule (“Rule”) provides that “an appraiser must perform assignments with impartiality, objectivity, and independence, and without accommodation of personal interests.” The Rule also cautions appraisers not to “perform an assignment with bias” and not to “advocate the cause or interest of any party or issue.” The Rule requires an appraiser to “disclose . . . in the . . . report certification any current or prospective interest in the subject property or parties involved.” Ms. Kilborn’s appraisal reports specifically state in her “Certification” section that: “I have no present or prospective interest in the property that is the subject of this report, and no personal interest with respect to the parties involved.” The Board found that Ms. Kilborn, as an agent, had a fiduciary duty to advocate the interest of her principal, namely the appellant here, which undermined her role as an independent fee appraiser. The Board further found that she did not disclose this relationship in her appraisal reports and actually certified the opposite.
On these bases, the Board ruled that an agent, like Ms. Kilborn, could not simultaneously act as agent for her principal, the appellant here, and maintain her independent judgment as an independent fee appraiser. Because Ms. Kilborn attempted to do just that, the Board found and ruled that her testimony and report were imbued with bias which adversely impacted her credibility and rendered her estimates of value less reliable. Cf. Pappas v. Assessors of Ipswich, Mass. ATB Findings of Facts and Reports, 1997-599, 629-30 (ruling that, in that case, Ms. Kilborn’s testimony was not tainted or biased because she had demonstrated to the Board that she was no longer acting as that appellant’s agent and did not have a potential interest in that case).
In reaching its opinion of fair cash value, the Board was not required to believe the testimony of any particular witness or to adopt any particular method of valuation that an expert witness suggested. Rather, the Board could accept those portions of the evidence that the Board determined had more convincing weight. Foxboro Associates, 385 Mass. at 682; New Boston Garden Corp., 383 Mass. at 469. “The credibility of witnesses, the weight of evidence, the inferences to be drawn from the evidence are matters for the Board.” Cummington School of the Arts, Inc. v. Assessors of Cummington, 373 Mass. 597, 605 (1977).
Based on all of the evidence and its subsidiary findings above, the Board found and ruled that the 11 Averill Road property was not overvalued by the assessors for fiscal year 2007 (docket no. F291427). The Board, therefore, decided that appeal for the appellee. The Board further found and ruled, however, that the 11 Averill Road property’s fair cash values for fiscal years 2008 and 2009 were $665,000 and $565,000, respectively, resulting in overvaluations by the assessors of $22,400 for fiscal year 2008 (docket no. F294631) and $10,200 for fiscal year 2009 (docket no. F303547). The Board, therefore, decided those two appeals for the appellant and granted abatements in the amount of $219.23 and $113.22, respectively.[30]
The Board also found and ruled that the 9 Averill Road property was not overvalued by the assessors for fiscal years 2008 (docket no. F294630) and 2009 (docket no. F303548) and, therefore, decided those appeals for the appellee.
APPELLATE TAX BOARD
By: ________________________________
Thomas W. Hammond, Jr., Chairman
COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD
HILLSIDE COUNTRY CLUB v. COMMISSIONER OF REVENUE
PARTNERSHIP, INC.
Docket No. C304547 Promulgated:
April 4, 2011
This is an appeal filed under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 62C, § 39 from the refusal of the appellee, Commissioner of Revenue (“Commissioner”), to abate sales taxes assessed against the appellant, Hillside Country Club Partnership, Inc. (“Hillside” or “appellant”) for the monthly tax periods ending December, 2004 through and including December, 2006 (“tax periods at issue”).
Chairman Hammond heard this appeal and was joined by Commissioners Scharaffa, Egan, Rose, and Mulhern in a decision for the appellee.
These findings of fact and report are made pursuant to requests by the appellant and the appellee under G.L. c. 58A, § 13 and 831 CMR 1.32.
Albert H. Thornton, Jr., Esq. for the appellant.
David T. Mazzuchelli, Esq. and Timothy R. Stille, Esq. for the appellee.
FINDINGS OF FACT AND REPORT
On the basis of the testimony and exhibits offered into evidence at the hearing of this appeal, the Appellate Tax Board (“Board”) made the following findings of fact.
At all times relevant to this appeal, Hillside was a Massachusetts entity in the business of operating a country club. The appellant timely filed Massachusetts sales/use tax returns for each of the tax periods at issue and paid in full the taxes due as reflected on those returns. During calendar year 2007, the Massachusetts Department of Revenue (“DOR”) audited Hillside for unpaid sales tax on meals from the monthly tax periods January, 2004 through February, 2007. The DOR subsequently expanded its audit to include other sales and use taxes. At the time of the audit, George Cardono, President of Hillside, had sold the business and was no longer involved with Hillside. At the conclusion of the audit, the Commissioner determined that there was a deficiency for meals taxes for the months of December, 2006 and January, 2007, which the appellant does not contest. The Commissioner determined that sales taxes were due on the rentals of golf carts by Hillside to its customers during the tax periods at issue.
On November 11, 2008, the Commissioner assessed against the appellant $5,943.12 in sales taxes, which she claimed should have been collected on the rental of golf carts to Hillside’s customers, plus interest and penalties. The appellant filed its abatement application with the Commissioner on March 30, 2009. By Notice of Abatement Determination dated June 2, 2009, the Commissioner notified the appellant that she had denied the appellant’s abatement application. On July 29, 2009, the appellant timely filed its Petition Under Formal Procedure with the Board. On the basis of these facts, the Board found and ruled that it had jurisdiction over the instant appeal.
The appellant does not dispute that it did not collect and remit any sales taxes on the rentals of golf carts to Hillside customers during the periods at issue. Instead, the appellant advances equity arguments, claiming that the duty to collect and remit sales tax on the rental of golf carts “has not been adequately publicized” to country club taxpayers, that the DOR is “responsible for educating taxpayers as to their tax obligations,” that the DOR failed in its duty to educate as evidenced by the fact that other Massachusetts country club taxpayers known by Mr. Cardono “are also unaware that they are required to charge sales/use tax on golf cart rentals,” and that Mr. Cardono was “ambushed” after his sale of the business by the liability for “a tax he had no knowledge existed, even after 20 years in business.” Mr. Cardono claims that, when he first became owner of the appellant, he went to the DOR office in Fall River “to be advised and instructed as to his tax reporting requirements” but at no time did the DOR inform him of a sales tax liability on golf cart rentals. Finally, the appellant claims that, by accepting its returns as filed for an almost-20-year period, and by not assessing other country club taxpayers, the DOR has failed to enforce uniformly the sales tax on golf cart rentals.
Regardless of whether the DOR adequately educated the appellant or other taxpayers on their tax obligations or whether other Massachusetts country club taxpayers collected and remitted sales taxes on golf cart rentals during the tax periods at issue, the Board, for the reasons explained in the following Opinion, found and ruled that the appellant was liable for the contested sales taxes as assessed based on the plain meaning of the statute. The Board accordingly issued a decision for the appellee.
OPINION
The rental of a golf cart is subject to the sales tax under G.L. c. 64H, § 1, defining “sale” for purposes of the tax as “any transfer of title or possession or both” for a consideration. (emphasis added). The appellant did not argue that golf cart rentals are not subject to the sales tax; instead, it contended that “DOR is responsible for educating taxpayers as to their tax obligations.” The appellant points out that the Commissioner made no specific statement to the appellant regarding the appellant’s obligation to collect and remit sales taxes on the rental of golf carts, even after the DOR processed the appellant’s sales/use tax returns for nearly twenty years. In essence, the appellant is contending that the Commissioner’s silence should be interpreted as acquiescence with the appellant’s noncompliance with its tax obligations.
There is no precedent to support the appellant’s assertion. The duty to collect and remit sales tax on golf cart rentals falls within the explicit language of the tax statutes. “Statutory authority (like an easement in land) is not subject to atrophy or abandonment merely from nonuse.” Polaroid Corp. v. Commissioner of Revenue, 393 Mass. 490, 496 (1984). The Commissioner’s past failure to assess a tax against the appellant thus does not forever bar future assessment where the item is subject to tax under the applicable statutory provision. See, e.g., Bell Atlantic Mobile of Massachusetts Corporation, LTD. D/B/A Verizon Wireless v. Assessors of Boston, Newton, Springfield and Westborough, Mass. ATB Findings of Fact and Reports 2010-897 (ruling that, contrary to long-standing erroneous practice, corporate cell-phone providers were not entitled to corporate utility exemption).
The appellant further contends that, since it was unaware of its tax obligation, an unfair burden has now been laid upon Mr. Cardono, because with his business closed, the tax obligation now falls upon him personally. In Commissioner of Revenue v. Marr Scaffolding, 414 Mass. 489 (1993), the Supreme Judicial Court ruled that the Board lacks the authority to grant an abatement based on principles of equitable estoppel. In its decision, the Court noted that, “[a]n administrative agency has no inherent or common law authority to do anything. An administrative board may act only to the extent that it has express or implied statutory authority to do so.” Marr Scaffolding, 414 Mass. at 493. Thus, the “board may act only to the extent it has express or implied statutory authority to do so” and may grant an abatement “only if ‘the person making the appeal was entitled to an abatement.’” Id. at 493-94 (quoting G.L. c. 62C, § 39 (c)). In the instant appeal, the Board ruled that it has no express or implied statutory authority to grant an abatement of sales tax on golf cart rentals based on any unfairness or burden imposed on the appellant or on Mr. Cardono. Instead, the Board must uphold the law as written. The duty to collect and remit sales tax on golf cart rentals is imposed by statute, and the Board thus found and ruled that the Commissioner’s assessment was proper.
The Board accordingly issued a decision for the appellee, upholding the assessment.
APPELLATE TAX BOARD
By: _________________________________
Thomas W. Hammond, Jr., Chairman
A true copy,
Attest: ________________________
Clerk of the Board
COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD
TSISSA, INC. v. BOARD OF ASSESSORS OF
THE TOWN OF WEST TISBURY
Docket Nos. F298159 Promulgated:
F304179 April 4, 2011
These are appeals filed under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 59, §§ 64 and 65, from the refusal of the appellee, Board of Assessors of the Town of West Tisbury (“assessors”), to abate taxes on certain real estate located in the Town of West Tisbury, owned by and assessed to the appellant under G.L. c. 59, §§ 11 and 38, for fiscal years 2008 and 2009 (“fiscal years at issue”).
Commissioner Mulhern heard these appeals. He was joined by Chairman Hammond and Commissioners Scharaffa, Egan, and Rose in decisions for the appellee.
These findings of fact and report are made pursuant to a request by the appellant under G.L. c. 58A, § 13 and 831 CMR 1.32.
Donald Quinn, Esq., Danielle Justo, Esq. and Dennis P. Crimmins, Esq. for the appellant.
Ellen M. Hutchinson, Esq. for the appellee.
FINDINGS OF FACT AND REPORT
On January 1, 2007 and January 1, 2008, the appellant was the assessed owner of a certain parcel of real estate located at 200 Deep Bottom Road in the Town of West Tisbury (“subject property”). As of the relevant valuation dates for the fiscal years at issue, the appellant, Tsissa, Inc. (“Tsissa” or “appellant”), owned an approximately 193-acre lot of land in the southern section of West Tisbury. The 193-acre lot is divided into 5 taxable parcels. Four parcels are separately assessed and taxed to each of the four individual shareholders of appellant who each are leasees of one of the four parcels. The subject property is the remaining 123.08-acre parcel, which is assessed to the appellant.
For fiscal year 2008, the assessors valued the subject property at $10,299,300 and assessed a tax thereon, at the rate of $4.10 per $1,000, in the total amount of $43,481.64.[31] The appellant timely paid the tax in full without incurring interest. On January 31, 2008, the appellant timely applied to the appellee for an abatement, claiming that the subject property was overvalued. By a vote on June 24, 2008, pursuant to an agreement extending its decision date, the appellee granted a partial abatement reducing the valuation to $7,773,200 and abating tax in the amount of $10,836.64.[32] The appellant seasonably filed its petition with the Board on July 22, 2008. On the basis of these facts, the Board found and ruled that it had jurisdiction to hear and decide the appeal for fiscal year 2008.
For fiscal year 2009, the assessors valued the subject property at $7,735,300 and assessed a tax thereon, at the rate of $4.28 per thousand, in the total amount of $34,084.40.[33] The appellant timely paid the tax in full without incurring interest. On January 27, 2009, the appellant timely applied to the appellee for an abatement, claiming that the subject property was overvalued. The abatement application was deemed denied on April 27, 2009. The appellant seasonably filed its petition with the Appellate Tax Board (“Board”) on July 23, 2009. On the basis of these facts, the Board found and ruled that it had jurisdiction to hear and decide the appeal for fiscal year 2009.
The appellant is a domestic corporation duly organized in 1971 under the laws of the Commonwealth of Massachusetts to hold title to land in the Town of West Tisbury, a lightly populated community located on Martha’s Vineyard, that consists of peninsulas jutting into Tisbury Great Pond. Homes in West Tisbury range from modest to substantial. The subject property is a largely unimproved 123.08±-acre parcel of land located at 200 Deep Bottom Road. Its only improvements are a small barn, a small seasonal loft cottage and a tennis court, which together were assessed at $35,000[34] for fiscal year 2008 and at $37,100 for fiscal year 2009. The property record card on file with the appellee reflects the division for assessment purposes of the subject property from the larger 193.08±-acre parcel of land owned by the appellant. However, the subject property is not separately described by recording or endorsement, has never been separately surveyed, and cannot be subdivided without Town approvals. The subject property has never been mapped on the appellee’s maps but was hand drawn by the lessees and the appellant within the body of each of the four leases. The subject property is characterized as a “hypothetical” parcel by the appellant’s own experts.
The subject property is generally bordered to the south by West Tisbury Great Pond, a barrier beach and the Atlantic Ocean; to the east by Long Point Wildlife Refuge; to the west by the Town of Chilmark; and to the north by Edgartown-West Tisbury Road. The subject property is located off Tiah’s Cove Road, approximately three miles away from the West Tisbury village center. The subject property has water frontage and access; it is bordered on the far northeast corner by Deep Bottom Cove for approximately 400 feet and on the far southwest corner by Tsissa Cove for approximately 700 feet. The northern edge of the subject property straddles Deerfield Road, which runs from west to east, for approximately 1,200 linear feet, and the eastern portion of the property straddles Deep Bottom Road for approximately 3,200 linear feet. Deerfield and Deep Bottom Roads are mostly paved, private ways, which serve as the access roads for the five parcels that make up the peninsula upon which the subject property is situated. Immediately adjacent to the west of the subject property is an extensive wildlife preserve owned by the Martha’s Vineyard Land Bank.
The subject property is irregular in shape, and its vast majority consists of rolling woodlands and local vegetation, with a gentle north-to-south slope to Tsissa Cove in the southwest. The subject property is crisscrossed in several locations by dirt roads and footpaths. There is a plot of approximately 5 acres of land along the northern border that has been cleared and is used for farming. On average, the subject property is about thirty feet above sea level in most places, and the subject property is serviced by an underground power line that runs southwest to southeast across the top section of the parcel. The subject property is zoned “RU” for Rural District. Permitted uses in the RU district include: single-family dwelling; two-family dwelling; subordinate dwelling; open space development; preservation of natural areas; and agriculture, fishing, and forestry.[35] The minimum lot area in the RU district is three acres, with minimum lot frontage of between 100 to 200 linear feet. The Town of West Tisbury zoning bylaws state that the purpose of the RU district is to maintain the town’s pattern of rural settlement, which historically has been characterized by large expanses of open space and unspoiled views from the road, a scattering of residences and small businesses, and clustered development surrounded by open space.
At the hearing, the appellant presented its case-in-chief through the testimony of Paul J. Hartel, whom the Board qualified as an expert in the area of real estate valuation, and Douglas R. Hoehn, whom the Board qualified as an expert in the area of land surveying, with an expertise in land planning on Martha’s Vineyard. The appellee did not present witnesses but instead offered exhibits and challenged the appellant’s witnesses on cross-examination.
The appellant’s first witness, Mr. Hartel, testified and presented an appraisal report for each fiscal year at issue. Mr. Hartel presented his opinion as to factors which, he believed, would negatively affect the fair cash value of the subject property. He testified that the subject property was heavily wooded and that this terrain obstructed water views as well as frontage to the water. He also claimed that substantial sandbars impeded boat access to and from Tisbury Great Pond. Mr. Hartel also cited the poor infrastructure of unpaved and gravel roads as a factor affecting fair market value. In his appraisal reports, Mr. Hartel also described the various obstacles to valuing the subject property, several of which are detailed below.
Because it is located in an RU district, development of the subject property is subject to approval by the Martha’s Vineyard Commission (“MVC”), the regional planning agency for Duke’s County. The MVC’s stated goal, according to Chapter 637 of the Acts of 1974, is to manage growth on Martha’s Vineyard so as to “preserve[] and conserve[] for the enjoyment of present and future generations the unique natural, historical, ecological, scientific, and cultural values of Martha’s Vineyard . . . .” The MVC meets this goal by creating Districts of Critical Planning Concern (“DCPC”) and regulating Developments of Regional Impact (“DRI”). West Tisbury has several DCPCs. Two areas of the subject property fall within West Tisbury’s Coastal DCPC. These are the areas within 500 feet of Tsissa Cove and Deep Bottom Cove. Any development in the Coastal DCPC requires a site plan review by the West Tisbury Planning Board. Concerns to be addressed would be permitted uses in the shore zone and the inland zone,[36] and the height of buildings.[37] Further, a potential subdivision of the subject property would prompt its regulation as a DRI on multiple criteria, including that the subject property has been listed by the Commonwealth of Massachusetts Division of Fisheries and Wildlife, Natural Heritage and Endangered Species Program (“NHESP”) as an area of special concern. DRIs must undergo an extensive review process, which includes a public hearing and deliberation by the MVC and final approval by the MVC and the West Tisbury Planning Board. Subdivision of the subject property would be subject to review by the NHESP, as the subject property has been categorized as an area of “Priority Habitat of Rare Species” and an “Estimated and Priority Habitat of Rare Wildlife.” As Mr. Hartel explained in his report, the problem with this designation is that “it can take many months (mating seasons, etc.)” to resolve issues surrounding the potential impact of protected species caused by development of the subject property.
Moreover, based on his visual inspection of the subject property, Mr. Hartel believed, and the appellee did not contest, that the subject property most likely contained some wetlands. West Tisbury’s Conservation Commission would thus require a complete survey and delineation of the wetlands before any development could be undertaken, adding another layer of municipal review.
Mr. Hartel also cited multiple peripheral issues, which would also add uncertainty to valuation, including: (1) the possibility of further archeological study if a review of the shellfish middens on the peninsula uncovers archaeological finds; (2) the uncertainty to a prospective buyer of a view from any development, since tree clearing is limited by the MVC; and (3) the uncertainty as to whether existing roadways are sufficient to support a development or whether upwards of 3,500 linear feet of roadway would need to be enhanced.
In his analysis, Mr. Hartel first struggled with the “highest and best use” analysis for the subject property. Mr. Hartel’s report detailed the four components of a highest and best use analysis: (1) physically possible; (2) legally permissible; (3) financially feasible; and (4) maximally productive. Mr. Hartel was unable to determine any of these criteria. His reports detail the following: (1) he mused that possible uses could include conservation, fishing, and residential, but “[w]ithout a wetland determination, archaeological and National Heritage studies, one has no idea as to the potential physical development footprint.”; (2) legal use is “[c]ompletely undetermined as of the date of valuation, given the jurisdiction of the MVC and the lack of any permitting”; (3) it is “[h]ard to test financial viability if you do not know what you are testing”; and (4) “Given the uncertainty of the Physical and Legal uses, and the time frame to ultimately effectuate said use, although it is likely to be some form of residential development, it is impossible to speculate as to the maximally productive use as of [the relevant assessment dates].” In conclusion, “[i]n the subject’s case, the Highest and Best Use is likely to be some level of residential development; however, the details of which were yet to be determined and as such, a prospective buyer would base their investment decision on a personally established worst case scenario.” (Emphasis in original).
While admitting his inability to affirmatively determine the exact highest and best use, Mr. Hartel premised his appraisal on his assumption that the highest and best use of the subject property was subdivision and development possibly into five lots. Mr. Hartel proposed that each lot would be approximately 24 acres in size, with four “estate lots” each possibly containing a main house and also a guest house, and the fifth “junior lot” containing only the main house. Mr. Hartel based this conjecture on the fact that MVC review and requirement for affordable housing units would be triggered at ten dwelling units for a development.
From here, Mr. Hartel employed a “project development/discounted cash flow analysis” to value the subject property. This technique incorporates certain elements of both the income-capitalization and sales-comparison valuation methodologies. For his analysis, Mr. Hartel performed a sales-comparison analysis employing sales of land. All of Mr. Hartel’s purportedly comparable properties consisted of buildable lots.
Mr. Hartel first used sales of land that did not have significant water influence; he deemed these properties to be reflective of all but the premium subject property lot. Mr. Hartel’s analysis for fiscal year 2008 included twenty-one land sales in West Tisbury from 2004, eleven land sales in West Tisbury from 2005, and seven West Tisbury land sales from 2006. Mr. Hartel’s analysis for fiscal year 2009 used the eleven land sales from 2005, the seven land sales from 2006 and nine West Tisbury land sales from 2007. The median lot sizes for these sales were: 1.70 acres in 2004; 3.01 acres in 2005; 1.69 acres in 2006; and 3.19 acres in 2007. The average sale prices were $397,119 for 2004; $662,818 for 2005; $415,143 for 2006; and $1,101,389 for 2007.
Mr. Hartel then expanded his analysis to include more premium lots. For his fiscal year 2008 analysis, he included two Chilmark land sales with frontage on Tisbury Great Pond. For his fiscal year 2009 analysis, Mr. Hartel again considered the two Chilmark land sales and an additional land sale in Aquinnah with frontage on Menemsha Pond. Mr. Hartel’s analysis listed the sale price and price per acre for his comparable-sales properties. He did not provide adjustments for any of his comparable-sale properties. Mr. Hartel then resolved all of his data and estimated price ranges for the individual lots as follows: the best of the five lots (based on its proximity to Tsissa Cove) would sell between $2.0 and $2.5 million; the second best would sell between $1.25 and $1.75 million; and the three remaining lots would sell between $750,000 and $1.250 million.
Mr. Hartel relied upon several key assumptions in his analysis. For example, he assumed that it would take a developer one year to receive all regulatory approvals for the 5-lot subdivision. He also assumed a 40% open space factor, meaning that the MVC would require at least 40% of the subject property to remain as restricted open space. He next assumed that, for the fiscal year 2008 analysis, the prices of the subject property’s lots would increase by 3% annually, and for the fiscal year 2009 analysis, the prices would increase by 1% annually. He applied a discount rate of 9%, which he calculated based on the risk rate and opportunity costs associated with the project. He also estimated construction costs that the developer would incur, including site preparation, roadway preparation, installation of electric and other utilities, and landscaping. Mr. Hartel’s report stated in general that he had contacted “appropriate real estate brokers, developers, managers and appraisers” as well as reviewed his own files, to identify construction costs. With these assumptions, Mr. Hartel’s discounted cash flow analysis yielded fair cash values of $4,800,000 for fiscal year 2008 and $4,500,000 for fiscal year 2009.
The appellee challenged Mr. Hartel on cross examination as to his inability to determine the legally permissible uses for the subject property. The appellee contended that Mr. Hartel’s inability to make this determination made it impossible for him to determine the highest and best use for the subject property. The appellee pointed out that Mr. Hartel’s appraisal reports themselves classify the highest and best use of the subject property as “undetermined.” The appellee also challenged the method by which Mr. Hartel merely relied on MV LINK, the Martha’s Vineyard equivalent to Multiple Listing Service, for his sales information. Mr. Hartel admitted that he did not review actual sales deeds in creating his analysis and he confirmed the sales only “[i]n some cases.” On cross-examination, Mr. Hartel also acknowledged several mistakes in his comparable-sale listings, including the wrong address, wrong acreage and wrong sales prices for many of the parcels.
The appellant’s next witness was Douglas Hoehn, a land surveyor whom the Board qualified as an expert with respect to the procedures that would be involved in gaining regulatory approvals from the MVC and the West Tisbury Planning Board for subdivision of the subject property. Mr. Hoehn confirmed Mr. Hartel’s testimony that the MVC‘s affordable housing requirement would apply once a development reaches ten units. However, Mr. Hoehn then offered further testimony that “West Tisbury also has an affordable housing component in their bylaws and it is triggered where there is a subdivision of three or more lots.” Further, when asked on direct examination what the “optimal” configuration would be for the 123-acre subject property, Mr. Hoehn testified that the MVC would possibly approve an eleven-dwelling-unit subdivision plan with one of these units being reserved for affordable housing. Mr. Hoehn also testified that Mr. Hartel’s assumption of a 40% open space factor would very likely not be sufficient for the MVC and that the MVC would most likely require at least 75% of the subject property to remain permanently restricted open space. However, Mr. Hoehn’s testimony on this point was somewhat confusing, as he also indicated that the MVC would make exception to this rule to accommodate for the affordable-housing requirement. Finally, Mr. Hoehn testified that Mr. Hartel’s estimate of 12 months to obtain regulatory approval for the subdivision plan was “overly optimistic.” Mr. Hoehn’s opinion was that regulatory approval would actually take at least twice this time, between two to two and one-half years.
Based on the evidence presented, the Board found several flaws in Mr. Hartel’s valuation method. First, the Board found that the 5-lot subdivision plan, upon which the appraisal reports were based, was a purely speculative valuation assumption that lacked proper foundation. Mr. Hartel admitted that he was unable to resolve the issue of the highest and best use of the subject property, and thus, he could not substantiate whether his subdivision plan reflected the optimal use of the subject property. In fact, the appellant’s other expert witness, Mr. Hoehn, undercut Mr. Hartel’s determination that a 5-lot subdivision plan was the highest and best use, when in response to a question regarding an “optimal” plan, he offered a different configuration, an eleven-unit subdivision plan with one affordable-housing unit. As will be explained in the Opinion, the Board thus found that Mr. Hartel’s appraisal lacked the proper foundation to be credible evidence of the subject property’s fair market value.
Second, Mr. Hartel’s valuation was founded upon several premises which were contradicted by Mr. Hoehn. For example, Mr. Hartel believed that the appellant could avoid the additional hurdles required with respect to offering affordable housing by keeping the number of units below ten. However, the appellant’s own expert surveyor, Mr. Hoehn, contradicted this assumption, suggesting that West Tisbury’s affordable housing bylaws may be triggered at a three or four lot subdivision. Mr. Hoehn further contradicted Mr. Hartel’s opinions with respect to the amount of open space required for the subdivision plan, and therefore, the size and configuration of the subject property’s units, and the amount of time likely required to gain approval for the subdivision plan. The Board also found that, because Mr. Hartel was not an engineer, he was not qualified to offer evidence on costs of construction, a critical component of his valuation methodology.
Finally, the Board recognizes that Mr. Hartel’s comparable-sales analysis was based solely on sales of small, developable, single-lot properties, which may be appropriate for a “project development/discounted cash flow analysis.” However, as applied to the subject property, his analysis included no sales of properties like the subject that were large and unpermitted, thus undercutting both the comparability of his comparable-sales properties and the application of the “project development/discounted cash flow analysis” to a large, unpermitted property like the subject. Moreover, Mr. Hartel’s analysis was devoid of adjustments indicating how he arrived at his projected sale prices for the subject property’s projected finished lots. Mr. Hartel failed to specify adjustments for any of his comparable-sales properties where adjustments would have been warranted, particularly for date of sale, location and size of the property. Because Mr. Hartel did not use sales of land that were sufficiently comparable to the subject property, and because he made no adjustments to account for differences between the subject property and the purportedly comparable properties, the Board found that the appellant’s comparable-sales evidence did not constitute persuasive, credible evidence that the subject property was overvalued.
On the basis of the evidence presented, the Board found that the appellant failed to meet its burden of proving that the subject property was overvalued. Accordingly, the Board issued a decision for the appellee in these appeals.
OPINION
Assessors are required to assess all real property at its full and fair cash value. G.L. c. 59, § 38; Coomey v. Assessors of Sandwich, 367 Mass. 836, 837 (1975). Fair cash value is defined as the price on which a willing seller and a willing buyer will agree if both of them are fully informed and under no compulsion. Boston Gas Co. v. Assessors of Boston, 334 Mass. 549, 566 (1954).
An assessment is presumed valid unless the taxpayer sustains its burden of proving otherwise. Schlaiker v. Board of Assessors of Great Barrington, 356 Mass. 243, 245 (1974). Accordingly, the burden of proof is upon the appellant to make out its right as a matter of law to an abatement of the tax. Id. The appellant must show that the assessed valuation of its property was improper. See Foxboro Associates v. Board of Assessors of Foxborough, 385 Mass. 679, 691 (1982).
“Prior to valuing the subject property, its highest and best use must be ascertained, which has been defined as the use for which the property would bring the most.” Tennessee Gas Pipeline Co. v. Assessors of Agawam, Mass. ATB Findings of Fact and Reports 2000-859, 874 (citing Conness v. Commonwealth, 184 Mass. 541, 542-43 (1903)); see also Irving Saunders Trust v. Assessors of Boston, 26 Mass. App. Ct. 838, 843 (1989) (and the cases cited therein). A property’s highest and best use must be legally permissible, physically possible, financially feasible, and maximally productive. Appraisal Institute, The Appraisal of Real Estate 279 (13th ed., 2008). See also Skyline Homes, Inc. v. Commonwealth, 362 Mass. 684, 687 (1972). “In determining the property’s highest and best use, consideration should be given to the purpose for which the property is adapted.” Northshore Mall Limited Partnership et al. v. Board of Assessors of the City of Peabody, Mass. ATB Findings of Fact and Reports 2004-195, 247 (citing Appraisal Institute, The Appraisal of Real Estate at 315-16 (12th ed., 2001) and Tennessee Gas Pipeline Co., Mass. ATB Findings of Fact and Reports at 2000-875), aff’d, 63 Mass. App. Ct. 1116 (2005).
In the present appeals, the appellant’s valuation expert, Mr. Hartel, could not affirmatively determine that his hypothetical five-lot subdivision plan constituted its highest and best use. In fact, the appellant’s other expert, Mr. Hoehn, seemed to contradict its valuation expert when, in response to the question regarding the optimal use of the subject property, Mr. Hoehn proposed an eleven-unit subdivision plan which included affordable housing. The opinion of an expert must be based on a proper foundation. State Tax Commission v. Assessors of Springfield, 331 Mass. 677, 684 (1954). Because a highest-and-best-use determination is a prerequisite to establishing a foundation for a determination of fair market value, the Board found and ruled that Mr. Hartel’s opinions of value, which were based on a proposed five-lot subdivision plan, lacked proper foundation.
Assuming, arguendo, that the five-lot subdivision plan was the highest and best use of the subject property, the Board found that Mr. Hartel’s sales data did not support the appellant’s valuation claims. In appeals before this Board, a taxpayer “‘may present persuasive evidence of overvaluation either by exposing flaws or errors in the assessors’ method of valuation, or by introducing affirmative evidence of value which undermines the assessors’ valuation.’” General Electric Co. v. Assessors of Lynn, 393 Mass. 591, 600 (1984)(quoting Donlon v. Assessors of Holliston, 389 Mass. 848, 855 (1983)).
Generally, real estate valuation experts, the Massachusetts courts, and this Board rely upon three approaches to determine the fair cash value of property: income capitalization, sales comparison, and cost reproductions. See Correia v. New Bedford Redevelopment Authority, 375 Mass. 360, 362 (1978). Sales of comparable realty in the same geographic area and within a reasonable time of the assessment date generally contain probative evidence for determining the value of the property at issue. Graham v. Assessors of West Tisbury, Mass. ATB Findings of Fact and Reports 2008-321, 400 (citing McCabe v. Chelsea, 265 Mass. 494, 496 (1929)), aff’d, 73 Mass. App. Ct. 1107 (2008). The properties used in a comparable-sales analysis must be comparable to the subject property in order to be probative of the fair cash value. See Anne B. Sroka v. Assessors of Monson, Mass. ATB Findings of Fact and Reports 2009-835, 846 (citing Lattuca v. Robsham, 442 Mass. 205, 216 (2004)).
The appellant bears the burden of “establishing the comparability of . . . properties [used for comparison] to the subject property.” Fleet Bank of Mass. v. Assessors of Manchester, Mass. ATB Findings of Fact and Reports 1998-546, 554. Accord New Boston Garden Corp. v. Assessors of Boston, 383 Mass. 456, 470 (1981). “Once basic comparability is established, it is then necessary to make adjustments for the differences, looking primarily to the relative quality of the properties, to develop a market indicator of value.” Id.
In the instant appeals, the appellant’s expert introduced a comparable-sales analysis based upon data from a number of property sales in West Tisbury, as well as in Chilmark and Aquinnah. Mr. Hartel compared these purportedly comparable properties with the five hypothetical 24-acre lots as envisioned by his proposed subdivision plan. However, none of Mr. Hartel’s purportedly comparable properties was an undeveloped and unpermitted lot like the subject property, nor were any equivalent in size. The Board found that, because Mr. Hartel’s analysis failed to include property sufficiently comparable to the subject property, his analysis was not probative of the subject property’s valuation. See, e.g., Diamond Ledge Properties Corp. v. Assessors of Swansea, Mass. ATB Findings of Fact and Reports 2009-1185, 1192.
Moreover, Mr. Hartel’s comparable-sales properties were diverse in size, location and date of sale, and differed from one another as well as from the subject property in these respects. In fact, all but one of the comparable-sales properties were less than half the size of the proposed 24-acre lots,[38] with the vast majority of these properties being about one-quarter or less the size of Mr. Hartel’s proposed lots. Yet, Mr. Hartel failed to make adjustments to these properties’ sales prices to account for key differences between them and the subject property. Instead, he simply relied upon the unadjusted sales prices of the purportedly comparable properties to form his opinion of value for the subject property. Mr. Hartel also failed to identify other key differences between his purportedly comparable properties and the subject property, such as topography, shape, zoning and available utilities. His report simply gave a generic listing of address, size and sale price. “[G]eneric summaries” of groups of sales, with no adjustment for specific comparison to the subject property, are “devoid of persuasive value” for determining a subject property’s fair market value. Andreozzi v. Assessors of Seekonk, Mass. ATB Findings of Fact and Reports 2010-800, 810.
Because Mr. Hartel’s appraisal reports and testimony failed to employ properties that were sufficiently comparable to the subject property, and because they were devoid of any adjustments to account for obvious differences between the subject property and his comparison properties, the Board placed no weight on Mr. Hartel’s opinion of value.
Furthermore, the testimony and appraisal report of Mr. Hartel estimated costs associated with developing the subject property. However, “[t]he Courts and this Board have found and ruled consistently that only qualified engineers, architects, or contractors should present cost estimates in most circumstances.” Cnossen v. Assessors of Uxbridge, Mass. ATB Findings of Fact and Reports 2002-675, 690 (citing Tiger v. Mystic River Bridge Authority, 329 Mass. 514, 519 (1952) and Maryland Cup Corp. v. Assessors of Wilmington, Mass. ATB Findings of Fact and Reports 1988-169). Mr. Hartel is not a licensed engineer, architect, or contractor. The Board thus found and ruled that Mr. Hartel was not competent to offer evidence of construction costs. See Cnossen, Mass. ATB Findings of Fact and Reports at 2002-690 (finding that the witnesses’ lack of qualifications substantially diminished the probative value of their testimony relating to the reproduction-cost approach); see also Andreozzi, Mass. ATB Findings of Fact and Reports at 2010-808-10; Mason v. Assessors of Winchester, Mass. ATB Findings of Fact and Reports 2004-110, 143.
The Board is guided by the principle that “‘evidence of a party having the burden of proof may not be disbelieved without an explicit and objectively adequate reason.’” New Boston Garden v. Assessors of Boston, 383 Mass. 456, 473 (1981) (quoting L.L. Jaffe, Judicial Control of Administrative Action 607 (1968)). However, the Board has also ruled that the mere qualification of a person as an expert does not endow his testimony with any magic qualities (Boston Gas Co. v. Assessors of Boston, 334 Mass. at 579), particularly where the expert speaks to issues beyond his realm of expertise. See, e.g., Khan and Zasky, Trustees v. Assessors of Brookline, Mass. ATB Findings of Fact and Reports 2004-403, 435-6 (finding that, because the assessors’ real estate valuation expert lacked the expertise to estimate certain development costs, his approach to valuing the property based on those costs lacked merit). In the instant appeal, the Board found objective reasons for disregarding the value that Mr. Hartel derived for the subject property for the fiscal year at issue, namely: Mr. Hartel’s failure to determine whether his hypothetical five-lot subdivision plan was the highest and best use for the subject property; his lack of qualification to offer construction costs for the potential development of the subject property; his failure to offer for comparison sales of sufficiently large, unpermitted and unapproved land more akin to the subject property and thus sufficiently comparable to the subject property; and the generic unadjusted nature of his comparable-sales analysis.
Moreover, the appellant’s other witness, Mr. Hoehn, contradicted the appellant’s valuation expert with respect to key features of the hypothetical subdivision, including the amount of open space required for the subdivision plan (and therefore, the size and configuration of the subject property’s units); the amount of time likely required to gain approval for the subdivision plan; and the requirement for affordable housing units. The Board thus ruled that Mr. Hartel’s opinion of value lacked adequate foundation or persuasive value.
On the basis of the evidence provided, the Board found and ruled that the appellant failed to meet its burden of proving a fair market value for the subject property that was lower than that assessed for the fiscal years at issue. The Board therefore decided these appeals for the appellee.
APPELLATE TAX BOARD
By: _________________________________
Thomas W. Hammond, Jr., Chairman
A true copy,
Attest: ________________________
Clerk of the Board
COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD
FARMHOUSE LANE REALTY TRUST, v. BOARD OF ASSESSORS OF
JOHN R. SERAFINI, JR. AND THE TOWN OF ROWLEY
JOHN E. DARLING, TRUSTEES
Docket Nos. F294842-F294854, Promulgated:
F299674-F299686 April 5, 2011
These are appeals filed under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 59, §§ 64 and 65, from the refusal of the appellee, Board of Assessors of the Town of Rowley (“assessors” or “appellee”), to abate taxes on certain real estate located in the Town of Rowley, owned by and assessed to the appellant, Farmhouse Lane Realty Trust (“Trust” or “appellant”) under G.L. c. 59, §§ 11 and 38, for fiscal years 2008 and 2009 (“fiscal years at issue”).
Commissioner Egan heard these appeals. Chairman Hammond and Commissioners Scharaffa, Rose and Mulhern joined her in decisions for the appellee.
These findings of fact and report are made pursuant to a request by the appellant under G.L. c. 58A, § 13 and 831 CMR 1.32.
John R. Serafini, Jr., Esq. for the appellant.
Gary S. Brackett, Esq. for the appellee.
FINDINGS OF FACT AND REPORT
On the basis of the testimony and exhibits offered into evidence at the hearing of these appeals, the Appellate Tax Board (“Board”) made the following findings of fact.
On January 1, 2007 and January 1, 2008, the appellant was the assessed owner of a 53.8-acre parcel of real estate located in the Town of Rowley, which was separately assessed and taxed as thirteen residential building lots (collectively, the “subject property”). For fiscal year 2008, the assessors separately assessed the subject property’s individual lots in the total amount of $2,801,200.00 and assessed a tax thereon, at the rate of $10.38 per $1,000, in the total amount of $29,948.75.[39] The appellant timely paid the tax in full without incurring interest. On January 31, 2008, the appellant timely applied to the assessors for abatement, claiming that the subject property was overvalued. By a vote on February 11, 2008, the assessors granted a partial abatement reducing the subject property’s valuation to $1,038,100.00, resulting in final taxes of $11,098.78.[40] By written notice dated February 12, 2008, the assessors notified the appellant of their decision. The appellant seasonably filed petitions with the Board on May 8, 2008. On the basis of these facts, the Board found and ruled that it had jurisdiction to hear and decide the appeals for fiscal year 2008.
For fiscal year 2009, the assessors separately assessed the subject property’s thirteen individual lots in the total amount of $972,200.00 and assessed a tax thereon, at the rate of $11.34 per thousand, in the total amount of $11,355.50.[41] The appellant timely paid the tax in full without incurring interest. On January 30, 2009, the appellant timely applied to the assessors for abatement, claiming that the subject property was overvalued. By notice dated February 9, 2009, the assessors informed the appellant that its abatement application had been denied by vote on that same day. The appellant seasonably filed petitions with the Board on April 30, 2009. On the basis of these facts, the Board found and ruled that it had jurisdiction to hear and decide the appeals for fiscal year 2009.
The appellant presented its case-in-chief through the testimony of the following witnesses: Charles Wear, a Massachusetts Registered Professional Engineer and Vice President of Meridian Associates, Inc., whom the Board qualified as an expert in the field of civil engineering and subdivision and land-use planning; Ann Marton, Director of Ecological Services and President of LEC Environmental Consultants, Inc., whom the Board qualified as an expert in the areas of wetlands and rare species covered under the Massachusetts Endangered Species Act (“MESA”) as these subjects affect land development; and Robert Noone, Appraiser and Chairman of the Board of Assessors of Peabody, Massachusetts, whom the Board qualified as an expert in the field of real estate valuation.
The parties agreed that the subject property had previously received approval for a 4-lot subdivision plan in 1994, the year that the appellant acquired the property. On September 13, 2000, the Rowley Planning Board (“Planning Board”) granted subdivision approval, under G.L. c. 41, § 81L et seq., for the subject property to be divided into thirteen separate residential building lots (“13-lot subdivision plan”). The appellant filed Notices of Intent under the Massachusetts Wetlands Protection Act, G.L. c. 131, § 40, with the Rowley Conservation Commission (“Conservation Commission”) for the roads and subdivision lots, but the Conservation Commission never approved them. Rowley subsequently adopted its own set of wetlands bylaws in 2004 (“Rowley Wetlands Bylaws”).
As a result of the concerns raised by the Conservation Commission with respect to wetlands surrounding the access point at Wilson Pond Road, the appellant sought amendment of the 13-lot subdivision plan. In the fall of 2000, the Planning Board approved the amendment, which shifted the internal access road, known as “Road A” or “Farmhouse Lane,” about twenty feet to the south near the Wilson Pond crossing, in order to use part of the historic location of Meetinghouse Road. However, an abutter to the subject property appealed the amendment to the Land Court.
The 13-lot subdivision plan expired in September, 2006, and the appellant filed at the Land Court for an extension of the plan. However, after the abutter’s appeal, the appellant withdrew the Notices of Intent from the Conservation Commission and never pursued any other permits. The Planning Board refused to extend endorsement of the 13-lot subdivision plan by letter dated October 2, 2006. The abutter’s appeal at the Land Court was still active as of the date of the hearing of these appeals.
The subject property is assessed and taxed as 13 separate lots, each classified as class 131 “potentially developable” property. It is undisputed that the 13-lot subdivision plan has expired and its appeal is pending at the Land Court. The appellant contends that the subject property is overvalued, because given the history of the appellant’s efforts to develop the subject property, as well as the application of regulations under MESA, the appellant would not be able to obtain permits to develop the subject property at any time in the foreseeable future. Therefore, the argument continues, the subject property should be assessed as equivalent in value to conservation land, regardless of its designation. The appellant does not challenge the subject property’s designation as class 131 “potentially developable.”
The appellant’s first witness, Mr. Wear, testified to the history and challenges surrounding development of the subject property. Mr. Wear opined that the expired 13-lot subdivision plan could not be duplicated as of the subject assessment dates, because the current zoning, wetlands and MESA regulations were different or did not originally apply to the subject property at the time of the 13-lot plan’s development. He also detailed the multiple permits that would be required to cross Wilson Pond, including a “Chapter 91 License” to be issued by the Massachusetts Department of Environmental Protection (“DEP”) under G.L. c. 91, a “Section 401 water quality certification” to be issued by DEP, an additional permit to be issued by the U.S. Army Corps. of Engineers, a permit to be issued under MESA, and one under the Massachusetts Environmental Protection Act (“MEPA”). Mr. Wear projected that the many permits required at the local, state and federal levels would be nearly impossible to obtain and, even if they were approved, the project would be very expensive. He further opined that accessing the subject property from alternate directions posed additional challenges, including the refusal of an abutting owner to grant a right to pass over adjoining property, steep grade changes in the subject property, and the requirement for a dimensional variance from the Rowley Board of Appeals. He further testified that access from Cindy Lane was not viable, because it was a private way.
Mr. Wear detailed further issues, including: the requirement that a subdivision plan meet the Rowley Wetlands Bylaw, which is more restrictive than the standards under the Massachusetts Wetlands Protection Act; physical changes to Wilson Pond caused by extensive beaver activity, resulting in the expansion of the wetlands area as part of the subject property has become submerged; changes to the Rowley zoning bylaws, which, at the time of the original 13-lot subdivision’s approval, required 125 feet of frontage and 60,000 feet of lot area but now require 150 feet of frontage and 40,000 feet of lot area; issues relating to septic systems, including the percolation tests which revealed that Title V septic system requirements are not met in some areas of the subject property; and finally, the MESA restriction on development of the subject property to protect the habitat of the blue-spotted salamander, which has been discovered on the property. Mr. Wear acknowledged, however, that the Trust never proceeded with the Notices of Intent before the Commission nor with any of the permits required for development of the subdivision.
Ms. Marton next testified with respect to the permitting procedures that applied to development of the subject property. She explained that extensive procedures would apply to development, including at least six permits from the Conservation Commission, the DEP, and the Army Corps. of Engineers to cross Wilson Pond to provide access to the subject property, as well as three other permits with respect to interior wetlands. Ms. Marton opined that permitting requirements have become more complex with the adoption of the Rowley Wetlands Bylaw in 2004 and the inclusion of the property under MESA. Like Mr. Wear, Ms. Marton explained that in 2006, the subject property was designated as a priority habitat for the blue-spotted salamander under MESA, and this designation has a direct impact on permitting processes before the Conservation Commission and under MESA. She testified that the planned areas for the road crossing of Wilson Pond and the cul-de-sac were closest to a vernal pool where a blue-spotted salamander breeding area was located.
Ms. Marton acknowledged on cross-examination that, while the subject property’s MESA designation presents permitting issues, the application of MESA would not necessarily result in the inability to develop the site, and in fact, it is not common for there to be a disqualification of development for an entire site. Ms. Marton also admitted that she had not measured the size of the vernal pool on the subject property. Documentation from the Conservation Commission admitted into evidence reveals that the size of the certified vernal pool occupied only 0.19 acres out of the 53-acre site. Ms. Marton also admitted that the Division of Fisheries and Wildlife has never made a determination of a “take” (a potential destruction) of an endangered species on the subject property. With respect to the extensive permitting procedures, Ms. Marton admitted that the Trust did not seek the permits which would be needed for completion of the crossing at Wilson Pond Road, and further, that the Conservation Commission never stated that it would deny the permit for the wetlands but only that it wanted the Trust to propose a means of access to the site other than Wilson Pond Road. Like Mr. Wear, Ms. Marton testified that Cindy Lane was not a viable means of access to the site, because it was a private way. Finally, Ms. Marton acknowledged that she had not been asked by the Trust to consider the development of the subject property as an Open Space Residential District.
The appellant’s third witness, Mr. Noone, prepared an appraisal report for the subject property for each fiscal year at issue. Mr. Noone opined that the subject property’s development potential was speculative and remote, because of the many restrictions on the land. He cited the restrictions imposed by MESA, because of the subject property’s classification as a habitat for endangered species, as particularly limiting. Therefore, in his opinion, the “highest and best use” of the subject property was as one large parcel of residentially zoned land having a possible, but speculative, potential for development as a residential subdivision with an undetermined number of lots. Accordingly, Mr. Noone regarded the subject property as equivalent in value to conservation land, even though it had been classified as potentially developable.
Mr. Noone’s appraisal reports for both tax years at issue each included an identical comparable-sales analysis. The comparable-sales analysis did not include any sales of land located in Rowley because Mr. Noone could not find any such comparable sales. Instead, the analysis included four sales of land in neighboring communities –Ipswich, Salisbury, Newbury, and Newburyport at the Newbury/Newburyport line.
Sale One in Ipswich is comprised of two contiguous parcels of land that contain a total of 44.2 acres, which were purchased by Ipswich for conservation purposes on December 20, 2006. The total sale price for both parcels was $110,000, which yields a price of $2,489 per acre. The land features some wetland and some areas of upland. The land is not equipped with utilities, and it has no street frontage. It is zoned for residential use.
Sale Two is comprised of 43.39 acres located in Salisbury. Sale Two was actually a two-part sale, made from a family group of grantors to a private developer. The various sales occurred on June 22, 2006 and July 12, 2006, for a total sale price of $46,593, which yields a price of $1,074 per acre. The land has about 118 feet of frontage along Forest Road and also abuts the Little River. The land near the river features salt marsh, while the upland portions are rolling and are covered with heavy scrub and tree vegetation. Available utilities are water, electric, telephone and cable. The land is zoned for Residential/Agricultural uses. Mr. Noone testified that this comparable-sales property was “generally very inferior” to the subject in overall location, features and amenities and thus required “a substantial plus adjustment” for comparison with the subject property. Mr. Noone did not specify any particular adjustments that he made with respect to Sale Two’s sale price.
Sales Three and Four were both part of a large parcel of vacant land that is within both Newbury and Newburyport. The total area of the large parcel is 170.168 acres, 46.734 acres of which are in Newbury and the remaining 123.434 acres of which are in Newburyport. Mr. Noone describes the tract as a “wet meadow,” a term of art referring to a meadow that is a wetland for much of the time, as large portions of the property feature wetlands. The land was purchased on December 29, 2006 for conservation purposes. Water, electric and telephone are available in certain portions of the property. Sale Three, the 46.734-acre parcel in Newbury, was purchased by the Essex County Greenbelt Association, Inc. for $113,700, which yields a price of $2,861 per acre. Sale Three has no road frontage and is zoned for residential/agricultural purposes. Sale Four, the 123.434-acre parcel in Newburyport, was purchased by the City of Newburyport’s Conservation Commission for $366,300, which yields a price of $2,968 per acre. Sale Four has 451.62 feet of street frontage and is zoned for agricultural/open space purposes.
Mr. Noone’s report noted that the comparable-sales properties had sale prices ranging from $1,074 per acre to $2,968 per acre. After applying his adjustments, which he did not detail, Mr. Noone’s comparable sales yielded adjusted-sale values between $2,500 and $3,000 per acre. He settled on $2,750 per acre and applying this value to the subject’s 52.91 acres, his comparable-sales analysis yielded a fair market value of $145,503, which he rounded to $145,500. Mr. Noone’s final estimate of value was $145,500 for the subject property for both fiscal years at issue.
Mr. Noone acknowledged on cross-examination that his comparable-sales properties were conservation properties having as their highest and best use being held as conservation land; only Sale Two was sold for the potential of future development, but he admitted that that property was “very inferior” to the subject. Mr. Noone also admitted that the decision of the Planning Board denying the extension of the 13-lot subdivision was still being appealed before the Land Court and therefore was not final. He further admitted that the subject property had sufficient frontage along Wilson Pond Lane and it satisfied the lot size requirement for a single building lot. Finally, Mr. Noone was unaware of the existence of a so-called “tripartite agreement,” detailed in a letter from the Chairman of the Planning Board to the Chairman of the Conservation Commission, by which a developer of a subdivision called Meetinghouse Village was required to extend Cindy Lane (referred to in the tripartite agreement as “Road A”) to the boundary of the subject property, thereby providing an alternative access to the subject property. This letter, admitted into evidence, continues as follows:
In the Planning Board’s opinion, Road A could be used as a means of accessing the Farmhouse site, regardless of whether access from Tenney Road would be feasible or economical. Moreover, while the Planning Board’s rules and regulations limit the length of a cul-de-sac to 500 feet, the [Planning] Board can grant a waiver of this limitation if the property is developed as an Open Space Residential Subdivision under section 6.4 of the Rowley Protective Zoning Bylaw.
Mr. Noone ultimately admitted that, although it may be “a long time coming,” “the land at some point in time could be developed.”
The appellee presented its case-in-chief through the testimony of Sean McFadden, Principal Assessor for Rowley. Mr. McFadden first testified to the method by which the assessors abated the subject property for fiscal year 2008. He explained that he considered the subject property to be potentially developable property, which qualified for a 30% reduction from the assessors’ previously determined fair cash value, but upon receiving the appellant’s abatement request, he decided to adjust the subject’s taxable value to approximately 70% of its fair cash value, in consideration of the appellant’s arguments regarding the constraints on development. However, Mr. McFadden rejected Mr. Noone’s claim that the subject property should be valued on the basis of a highest-and-best use as conservation land. He explained that the 13-lot subdivision plan and the earlier 4-lot subdivision plan would never have been filed if the 53-acre subject property were completely incapable of being developed. He surmised that, at the very least, the subject property could be developed as a single-lot plan with Tenney Road as an access point.
Mr. McFadden based the abatement for fiscal year 2009 on his own research, which included a comparable-sales analysis using eleven sales of individual residential lots, occurring during 2006 and 2007, which, collectively, he determined were comparable to the 13-lot subject property. Mr. McFadden submitted a spreadsheet listing: the map/block/lot and address of each of his comparable properties; the size, date of sale, sale price and class of the properties; and the properties’ assessments for fiscal years 2008 and 2009. His spreadsheet did not include any adjustments. As a result of his analysis, Mr. McFadden determined that property values had declined by about 3% from fiscal year 2008 to fiscal year 2009. He thus decided to reduce the subject property’s fiscal year 2009 assessment to $972,200.00.
On the basis of the evidence, the Board found that the appellant failed to prove that subject property could not be developed. After the abutter’s appeal, the Trust never proceeded with the Notices of Intent before the Commission, and it never pursued any of the several other permits which were required for the development of the subdivision. All three of the appellant’s witnesses were mistaken in their assumptions that Cindy Lane was a private road and unable to be used to access the subject property; as evidenced by the tripartite agreement, the use of Cindy Lane as an access point was, at the very least, a possibility. Furthermore, Mr. Wear never developed a conceptual plan for development of the subject property based upon the changes to the Rowley Zoning Bylaw. The Board thus found that he was not in a position to state definitively that development under those new guidelines was prohibited. Moreover, Mr. Wear acknowledged that he thought it was still possible to reconfigure the thirteen lots on the site, or at the very least, to develop the subject property with at least one residential lot. In addition, the prior 4-lot development supported the conclusion that the subject property has development potential.
Ms. Marton also did not establish that the subject property was unbuildable. She, in fact, acknowledged that it was not common to disqualify development of an entire site under MESA requirements. Like Mr. Wear, Ms. Marton also conceded that the Trust never sought the permits needed to develop the subject property. She further admitted that no application was filed with MESA regarding the subject property and that Massachusetts Fisheries and Wildlife never made a determination of a “take” of an endangered species on the subject property. Ms. Marton also acknowledged that the Commission never stated that it would deny the wetlands permit for the subject property, but only that it wanted the Trust to propose a means of access to the site other than Wilson Pond Road. Finally, Ms. Marton conceded that she was never asked by the Trust to consider the development of the subject property as an Open Space Residential District under the Rowley Zoning Bylaw.
On the basis of these findings, the Board found that the appellant failed to prove that the subject property was unbuildable and thus should be valued as conservation land.
Additionally, the Board was not persuaded by the appellant’s valuation evidence, specifically Mr. Noone’s comparable-sales analysis. The Board found that three of Mr. Noone’s four purportedly comparable properties were purchased specifically for conservation purposes, with one of the properties, Sale One, being land-locked. Only one property, Sale Two, was purchased for future development, and Mr. Noone admitted that that property was “very inferior” to the subject property and required substantial adjustment. Moreover, Mr. Noone did not specify any of his adjustments to his purportedly comparable-sales properties for size, topography, frontage and other factors. Because Mr. Noone did not use sales of land that were sufficiently comparable to the subject property, and because he failed to specify adjustments to account for differences between the subject property and the purportedly comparable properties, the Board found that the appellant’s comparable-sales evidence did not constitute persuasive, credible evidence that the subject property was overvalued.
On the basis of the evidence presented, the Board found that the appellant failed to meet its burden of proving that the subject property was overvalued. Accordingly, the Board issued a decision for the appellee in these appeals.
OPINION
Assessors are required to assess real estate at its fair cash value as of the first day of January preceding the fiscal year at issue. G.L. c. 59, §§ 11 and 38. The fair cash value of a property is defined as the price upon which a willing buyer and a willing seller would agree if both are fully informed and under no compulsion. Boston Gas. Co. v. Assessors of Boston, 334 Mass. 549, 566 (1956).
An assessment is presumed valid unless the taxpayer sustains its burden of proving otherwise. Schlaiker v. Board of Assessors of Great Barrington, 356 Mass. 243, 245 (1974). Accordingly, the burden of proof is upon the appellant to make out its right as a matter of law to an abatement of the tax. Id. The appellant must show that the assessed valuation of its property was improper. See Foxboro Associates v. Board of Assessors of Foxborough, 385 Mass. 679, 691 (1982). In appeals before this Board, a taxpayer “‘may present persuasive evidence of overvaluation either by exposing flaws or errors in the assessors’ method of valuation, or by introducing affirmative evidence of value which undermines the assessors’ valuation.’” General Electric Co. v. Assessors of Lynn, 393 Mass. 591, 600 (1984)(quoting Donlon v. Assessors of Holliston, 389 Mass. 848, 855 (1983)).
“Prior to valuing the subject property, its highest and best use must be ascertained, which has been defined as the use for which the property would bring the most.” Tennessee Gas Pipeline Co. v. Assessors of Agawam, Mass. ATB Findings of Fact and Reports 2000-859, 874 (citing Conness v. Commonwealth, 184 Mass. 541, 542-43 (1903)); see also Irving Saunders Trust v. Assessors of Boston, 26 Mass. App. Ct. 838, 843 (1989) (and the cases cited therein). A property’s highest and best use is one that is legally permissible, physically possible, financially feasible, and maximally productive. Appraisal Institute, The Appraisal of Real Estate 279 (13th ed., 2008). See also Skyline Homes, Inc. v. Commonwealth, 362 Mass. 684, 687 (1972); Northshore Mall Limited Partnership et al. v. Board of Assessors of the City of Peabody, Mass. ATB Findings of Fact and Reports 2004-195, 247 (“In determining the property’s highest and best use, consideration should be given to the purpose for which the property is adapted.”) (citing Appraisal Institute, The Appraisal of Real Estate at 315-16 (12th ed., 2001); Tennessee Gas Pipeline Co., Mass. ATB Findings of Fact and Reports at 2000-875).
In the instant appeals, the appellant, while not challenging the subject property’s classification as potentially developable, nonetheless contended that the subject property should be valued as akin to conservation property. However, the Trust did not establish that the Commission definitively denied its 13-lot subdivision plan, much less any development of the subject property; it established only that the Trust needed to draw up a plan with an alternative point of access. All three of the appellant’s witnesses were mistaken in their belief that Cindy Lane could not be used as a point of access, yet as evidenced by the tripartite agreement, the use of Cindy Lane for access was at least a possibility. Furthermore, after the abutter’s appeal, the Trust never pursued the permits required for development of the subject property, and apparently never considered alternative development plans, like reconfiguration of the 13-lot development, revisiting the prior 4-lot subdivision plan, a one-lot residential development, or an Open Space Residential District. The Board thus found and ruled that the appellant failed to meet its burden of proving that the subject property was in fact incapable of development and thus should be valued as akin to conservation land.
The appellant’s valuation evidence was also deficient. Generally, real estate valuation experts, the Massachusetts courts, and this Board rely upon three approaches to determine the fair cash value of property: income capitalization, sales comparison, and cost reproduction. Correia v. New Bedford Redevelopment Authority, 375 Mass. 360, 362 (1978). Sales of comparable realty in the same geographic area and within a reasonable time of the assessment date generally contain probative evidence for determining the value of the property at issue. Graham v. Assessors of West Tisbury, Mass. ATB Findings of Fact and Reports 2008-321, 400 (citing McCabe v. Chelsea, 265 Mass. 494, 496 (1929)), aff’d, 73 Mass. App. Ct. 1107 (2008). The properties used in a comparable-sales analysis must be comparable to the subject property in order to be probative of the fair cash value. See Anne B. Sroka v. Assessors of Monson, Mass. ATB Findings of Fact and Reports 2009-835, 846 (citing Lattuca v. Robsham, 442 Mass. 205, 216 (2004)). The appellant bears the burden of “establishing the comparability of . . . properties [used for comparison] to the subject property.” Fleet Bank of Mass. v. Assessors of Manchester, Mass. ATB Findings of Fact and Reports 1998-546, 554. Accord New Boston Garden Corp. v. Assessors of Boston, 383 Mass. 456, 470 (1981). “Once basic comparability is established, it is then necessary to make adjustments for the differences, looking primarily to the relative quality of the properties, to develop a market indicator of value.” Id.
In the instant appeals, Mr. Noone performed a comparable-sales analysis. Three of Mr. Noone’s four comparable-sales properties were conservation lands with no potential for development. Yet, Mr. Noone admitted at the hearing that the 13-lot subdivision was still being appealed and therefore, denial was not final. Mr. Wear also admitted that the subject property had sufficient frontage along Wilson Pond Lane and satisfied the lot size requirement for a one-lot development. As for Mr. Wear’s only potentially developable comparable-sales property, Sale Two, that property was, in his own words, “very inferior” to the subject property. Therefore, the Board found and ruled that Mr. Noone’s analysis failed to include a property sufficiently comparable to the subject property. Moreover, Mr. Noone’s analysis failed to specify adjustments to account for obvious differences between the subject property and its comparison properties where adjustments would have been required for meaningful comparison. The Board thus found and ruled that Mr. Noone’s comparable-sales analysis was not probative evidence of the subject property’s valuation. See, e.g., Diamond Ledge Properties Corp. v. Assessors of the Town of Swansea, Mass. ATB Findings of Fact and Reports 2009-1185, 1192.
On the basis of the evidence provided, the Board found and ruled that the appellant failed to meet its burden of proving a fair market value for the subject property that was lower than that assessed for the fiscal years at issue. The Board therefore decided these appeals for the appellee.
APPELLATE TAX BOARD
By: __________________________________
Thomas W. Hammond, Jr., Chairman
A true copy,
Attest: ________________________
Clerk of the Board
COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD
KARL W. & ISABEL S. RYAVEC v. BOARD OF ASSESSORS OF
THE TOWN OF PELHAM
Docket No. F306085 Promulgated:
April 6, 2011
This is an appeal filed under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 59, §§ 64 and 65 from the refusal of the Board of Assessors of the Town of Pelham (“assessors” or “appellee”) to abate taxes on certain real estate owned by and assessed to Karl W. & Isabel S. Ryavec (“appellants”) under G.L. c. 59, §§ 11 and 38, for fiscal year 2010.
Commissioner Rose (“Presiding Commissioner”) heard this appeal under G.L. c. 58A, § 1A and 831 CMR 1.20 and issued a single-member decision for the appellee.
These findings of fact and report are made pursuant to a request by the appellee under G.L. c. 58A, § 13 and 831 CMR 1.32.
Isabel S. Ryavec, pro se, for the appellants.
Martha Leamy, assistant assessor, for the appellee.
FINDINGS OF FACT AND REPORT
On January 1, 2009, the appellants were the assessed owners of a 4.01-acre parcel of land improved with a Cape Cod-style dwelling located at 29 South Valley Road, Pelham (“subject property”). The subject dwelling has a total of six rooms, including four bedrooms and also two full bathrooms and one half bathroom, with a total finished living area of 1,917 square feet. The exterior is clapboard with an asphalt-shingled, gable roof. The home is heated by radiant, electric heat. Additional features of the home include two fireplaces, an attached two-car garage, and also an unfinished basement.
For the fiscal year at issue, the assessors valued the subject property at $341,000 and assessed a tax thereon, at the rate of $18.34 per thousand, in the amount of $6,253.94. In accordance with G.L. c. 59, § 57C, the appellants paid the tax due without incurring interest. On January 19, 2010, in accordance with G.L. c. 59, § 59, the appellants timely filed an Application for Abatement with the assessors, which the assessors denied on March 3, 2010. In accordance with G.L. c. 59, §§ 64 and 65, the appellants seasonably filed an appeal with the Appellate Tax Board (“Board”) on May 19, 2010. On the basis of these facts, the Presiding Commissioner found and ruled that the Board had jurisdiction to hear and decide this appeal.
The appellants presented their case through the testimony of Ms. Ryavec, an appraisal report prepared by a professional appraiser, Lisa Lopuk, who was not present and therefore did not testify at the hearing of this appeal, and also a listing of the fiscal year 2008 and fiscal year 2009 assessed values of other properties located in Pelham. Ms. Lopuk’s appraisal report, which was prepared for mortgage refinancing purposes, cited sales of six comparable properties that are located between one-half mile and 1.74-miles away from the subject property. After making adjustments for differences between her purportedly comparable properties and the subject property, Ms. Lopuk arrived at a final estimate of value of $319,000 as of December 2, 2009. The appellants also offered into evidence a listing of the fiscal year 2008 and fiscal year 2009 assessed values of other properties located in Pelham. The assessors offered no evidence of value but instead rested on their assessment.
On the basis of the evidence presented, the Presiding Commissioner found and ruled that the appellants failed to meet their burden of proving that the subject property was overvalued for fiscal year 2010. Because the appellants’ real estate appraiser was not present at the hearing and was, therefore, unavailable for cross-examination by the assessors, the Presiding Commissioner gave no weight to Ms. Lopuk’s opinion of value. Moreover, the Presiding Commissioner found that Ms. Lopuk’s appraisal report contained serious errors and flaws and therefore was unreliable. First, Ms. Lopuk failed to provide the listing of adjustments made and the adjusted sale prices for comparables number one, two and three. Next, Ms. Lopuk failed to provide the sale dates for comparables number five and six. Lastly, Ms. Lopuk failed to include in her appraisal report copies of deeds of her purportedly comparable properties.
Further, the Presiding Commissioner found that the appellants’ listing of the fiscal years 2008 and 2009 assessed values of other Pelham properties lacked any descriptive evidence to establish basic comparability with the subject property. Moreover, the assessed values were not for the fiscal year at issue in this appeal.
The Presiding Commissioner thus found and ruled that the appellants failed to meet their burden of proving that the subject assessment was excessive. Accordingly, the Presiding Commissioner issued a decision for the appellee in this appeal.
OPINION
The assessors are required to assess real estate at its fair cash value. G.L. c. 59, § 38. Fair cash value is defined as the price on which a willing seller and a willing buyer will agree if both of them are fully informed and under no compulsion. Boston Gas Co. v. Assessors of Boston, 334 Mass. 549, 566 (1956).
The appellant has the burden of proving that the property has a lower value than that assessed. “‛The burden of proof is upon the petitioner to make out its right as [a] matter of law to [an] abatement of the tax.’” Schlaiker v. Assessors of Great Barrington, 365 Mass. 243, 245 (1974) (quoting Judson Freight Forwarding Co. v. Commonwealth, 242 Mass. 47, 55 (1922)). “[T]he board is entitled to ‛presume that the valuation made by the assessors [is] valid unless the taxpayers . . . prov[e] the contrary.’” General Electric Co. v. Assessors of Lynn, 393 Mass. 591, 598 (1984) (quoting Schlaiker, 365 Mass. at 245).
In appeals before this Board, a taxpayer “‛may present persuasive evidence of overvaluation either by exposing flaws or errors in the assessors’ method of valuation, or by introducing affirmative evidence of value which undermines the assessors’ valuation.’” General Electric Co., 393 Mass. at 600 (quoting Donlon v. Assessors of Holliston, 389 Mass. 848, 855 (1983)).
“[S]ales of property usually furnish strong evidence of market value, provided they are arm’s-length transactions and thus fairly represent what a buyer has been willing to pay for the property to a willing seller.” Foxboro Associates v. Board of Assessors of Foxborough, 385 Mass. 679, 682 (1982). Sales of comparable realty should be within the same geographic area and within a reasonable time of the assessment date to be probative evidence for determining the value of the property at issue. Graham v. Assessors of West Tisbury, Mass. ATB Findings of Fact and Reports 2008-321, 400 (citing McCabe v. Chelsea, 265 Mass. 494, 496 (1929)), aff’d, 73 Mass. App. Ct. 1107 (2008). Moreover, when comparable sales are used, allowances must be made for various factors which would otherwise cause disparities in the comparable properties’ sale prices. See Pembroke Industrial Park Co., Inc. v. Assessors of Pembroke, Mass. ATB Findings of Fact and Reports 1998-1072, 1082 (and the cases cited therein).
In the present appeal, the Presiding Commissioner found that the comparable sales analysis presented in Ms. Lopuk’s appraisal report did not provide reliable or credible evidence of overvaluation. First, she was not present at the hearing and as a result she was not subject to cross-examination. The Presiding Commissioner therefore gave no weight to her opinion of value. See John D. & Jean A. Walachy v. Assessors of Holyoke, Mass. ATB Findings of Fact and Reports 2009-620, 624. Further, the Presiding Commissioner found that the facts contained in Ms. Lopuk’s appraisal report were materially flawed. The Presiding Commissioner found that in her appraisal report Ms. Lopuk failed to provide the sales dates of two of her purportedly comparable properties and also failed to provide copies of the deeds for any of her purportedly comparable properties. Further, Ms. Lopuk’s report failed to include an adjustment analysis for comparable sales number one, two and three. The Presiding Commissioner also found that the appellants’ listing of assessments of other properties for the prior two fiscal year lacked probative weight, both because they failed to provide a sufficient description of the properties to establish basic comparability and because the assessed values were not for the fiscal year at issue.
After evaluating all of the evidence, the Presiding Commissioner found and ruled that the appellants failed to meet their burden of proving that the subject assessment exceeded its fair cash value. Accordingly, the Presiding Commissioner issued a single-member decision for the appellee in this appeal.
APPELLATE TAX BOARD
By: __ James D. Rose, Commissioner
A true copy,
Attest:
Clerk of the Board
COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD
S. ALTON SMYTH, III & v. BOARD OF ASSESSORS OF
SUSAN C. SMYTH THE TOWN OF UXBRIDGE
Docket No. F307071 Promulgated:
April 13, 2011
This is an appeal filed under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 59, §§ 64 and 65 from the refusal of the Board of Assessors of the Town of Uxbridge (“assessors” or “appellee”) to abate taxes on certain real estate owned by and assessed to S. Alton & Susan C. Smyth (“appellants”) under G.L. c. 59, §§ 11 and 38, for fiscal year 2010 (“fiscal year at issue”).
Chairman Hammond (“Presiding Commissioner”) heard this appeal under G.L. c. 58A, § 1A and 831 CMR 1.20 and issued a single-member decision for the appellants.
These findings of fact and report are made pursuant to a request by the appellants under G.L. c. 58A, § 13 and 831 CMR 1.32.
S. Alton Smyth, pro se, for the appellants.
Paula Dumont, assessor, for the appellee.
FINDINGS OF FACT AND REPORT
Based on the testimony and exhibits offered into evidence at the hearing of this appeal, the Presiding Commissioner made the following findings of fact.
On January 1, 2009, the appellants were the assessed owners of a 15.24-acre parcel of real estate, improved with a ranch-style residential dwelling located at 594 Blackstone Street in the Town of Uxbridge (“subject property”). For fiscal year 2010 (“fiscal year at issue”), the assessors valued the subject property at $443,900 and assessed a tax thereon, at the rate of $12.55 per thousand, in the amount of $5,570.95. In accordance with G.L. c. 59, § 57C, the appellants paid the tax due without incurring interest. On February 18, 2010, in accordance with G.L. c. 59, § 69, the appellants filed an Application for Abatement with the assessors, which the assessors denied on March 10, 2010. In accordance with G.L. c. 59, §§ 64 and 65, the appellants seasonably filed their appeal with the Appellate Tax Board (“Board”) on June 1, 2010. On the basis of these facts, the Presiding Commissioner found that the Board had jurisdiction to hear and decide this appeal.
The subject property consists of an approximately 15.24-acre parcel, which is almost rectangular in shape with approximately 299 feet of frontage. The parcel is located at the intersection of Blackstone Street and Millville Road (State Route 122). The parcel is sloping to the rear and is vegetated with grass, shrubs and trees. The parcel is improved with a single-family, one-story, ranch-style home, originally constructed in 1958, with subsequent additions. The subject dwelling has a stone foundation, vinyl siding, and an asphalt-shingle roof. The dwelling has a total of eight rooms, including three bedrooms, as well as two full bathrooms, with a total finished living area of 2,676 square feet. The home also has one fireplace, a one-car attached garage, a full, unfinished basement, and a 432-square-foot porch. The home is heated by an oil-fired, forced hot-air system, and there is also a central air-conditioning system. Electric and telephone utilities are available to the site and the property is served by a private well and septic system. The subject property is also improved with a 936-square-foot free-standing garage building, and also a 2,800-square-foot “Quonset” hut.
The appellants presented their case through the testimony of Mr. Smyth and also the testimony and appraisal report of William F. Curley, whom the Presiding Commissioner qualified as a real estate valuation expert. Mr. Curley’s appraisal report included a comparable-sales analysis using four properties that he deemed comparable to the subject property. Sale number one, located at 73 Ironstone Road, is a 1.4-acre parcel improved with a split-entry style dwelling with a total of six rooms, including three bedrooms and also two bathrooms, with a total living area of 1,445 square feet. There is a two-car under garage. The remainder of the basement is finished and includes a workshop and also a full bathroom. This property sold on April 16, 2008 for $261,000.
Sale number two, located at 139 Oak Street, is a 5.5-acre parcel improved with a Colonial-style home built circa 1880. The dwelling has a total of seven rooms, including four bedrooms and one bathroom, with a total living area of 1,954 square feet. There is a one-car detached garage. This property sold in an estate sale on December 31, 2007 for $290,000.
Sale number three, located at 234 Douglas Street, is a 3.68-acre parcel improved with a gambrel-style log cabin. The dwelling has a total of seven rooms, including four bedrooms and also one full bathroom, with a total living area of 1,760 square feet. There is a two-car detached garage. The property, which was bank owned, sold for $307,500 on June 13, 2008.
Finally, sale number four, located at 580 Blackstone Street, is a 2.04-acre parcel improved with a Colonial-style home, which contains approximately 2,799 square feet of finished living area. The dwelling has a total of nine rooms, including three bedrooms and also two full bathrooms and one half bathroom. There are five fireplaces, a two-car attached garage, and also an in-ground swimming pool and storage shed. The lower level is finished with “in-law” potential and includes a second kitchen, a large family room with a fieldstone fireplace, and a full bathroom. The property sold on March 11, 2009 for $279,000.
Mr. Curley made adjustments to his chosen comparables for various factors including time of sale, living area, age, condition, and number of bedrooms and bathrooms. Having taken these factors into consideration, Mr. Curley arrived at adjusted sale prices for the properties ranging from $265,050 to $322,875, and an indicated value for the subject property of $290,000.
In support of their assessment, the assessors relied on the testimony of Paula Dumont, chief assessor for Uxbridge. Ms. Dumont offered into evidence a list of seven sales of ranch-style homes that sold during 2008 with sale prices that ranged from $188,500 to $440,000. The finished living areas for these properties ranged from 960 square feet to 1,240 square feet. No other information, such as lot size or additional features, was provided. The assessors also offered into evidence a sales-comparison analysis of three ranch-style properties that sold during the period January 25, 2008 through July 29, 2010. These properties ranged in size from 2.16 acres to 7.45 acres, with finished living areas that ranged from 1,240 square feet to 2,916 square feet. The purportedly comparable properties’ sale prices ranged from $315,000 to $440,000, with assessed values that ranged from $336,100 to $504,700.
Based on the evidence presented, the Presiding Commissioner found that the appellants met their burden of proving that the subject property was overvalued for the fiscal year at issue. The Presiding Commissioner found that the best evidence of the subject property’s fair market value as of January 1, 2009, was the March 11, 2009 sale of 580 Blackstone Street. The Presiding Commissioner found that this property, which is located adjacent to the subject property, has a similar location and, although the dwelling is a different style, the condition and finished living area are similar to that of the subject property. The Presiding Commissioner further found, however, that the subject property’s excess acreage and the additional garage and “Quonset” hut warranted an upward adjustment to the sale price.
Accordingly, the Presiding Commissioner determined that the fair cash value of the subject property for the fiscal year at issue was $365,500. The Presiding Commissioner therefore issued a decision for the appellants in this appeal and granted an abatement of $983.92.
OPINION
Assessors are required to assess real estate at its fair cash value as of the first day of January preceding the fiscal year at issue. G.L. c. 59, § 38. The fair cash value of a property is defined as the price upon which a willing buyer and a willing seller would agree if both were fully informed and under no compulsion. Boston Gas Co. v. Assessors of Boston, 334 Mass. 549, 566 (1956).
The burden of proof is upon the taxpayer to make out a right to an abatement. Schlaiker v. Assessors of Great Barrington, 365 Mass. 243, 245 (1974). The assessment is considered to be valid unless the taxpayer meets its burden and proves otherwise. Id. A taxpayer “‘may present persuasive evidence of overvaluation either by exposing flaws or errors in the assessors’ method of valuation, or by introducing affirmative evidence of value which undermines the assessors’ valuation.’” General Electric Co. v. Assessors of Lynn, 393 Mass. 591, 600 (1984) (quoting Donlon v. Assessors of Holliston, 389 Mass. 848, 855 (1983).
Generally, real estate valuation experts and the Massachusetts courts rely upon three approaches to determine the fair cash value of property: income capitalization, sales comparison, and cost reproduction. Correia v. New Bedford Redevelopment, 375 Mass. 360, 362 (1978). “The board is not required to adopt any particular method of valuation.” Pepsi-Cola Bottling Co. v. Assessors of Boston, 397 Mass. 447, 449 (1986).
Sales of comparable realty in the same geographic area and within a reasonable time of the assessment date generally contain probative evidence for determining the value of the property at issue. Graham v. Assessors of West Tisbury, Mass. ATB Findings of Fact and Reports 2008-321, 400 (citing McCabe v. Chelsea, 265 Mass. 494, 496 (1929)), aff’d, 73 Mass. App. Ct. 1107 (2008). When comparable sales are used, however, allowances must be made for various factors which would otherwise cause disparities in the comparable-sales properties’ sale prices. See Pembroke Industrial Park Co., Inc. v. Assessors of Pembroke, Mass. ATB Findings of Fact and Reports 1998-1072, 1082 (and the cases cited therein); Appraisal Institute, The Appraisal Of Real Estate 307 (13th ed., 2008) (“After researching and verifying transactional data and selecting the appropriate unit of comparison, the appraiser adjusts for any differences.”)
Based on the evidence presented, the Presiding Commissioner found that the appellants met their burden of proving that the subject property was overvalued for the fiscal year at issue. The Presiding Commissioner found that the best evidence of the subject property’s fair market value as of January 1, 2009, was the March 11, 2009 sale of 580 Blackstone Street. The Presiding Commissioner found that both the location and finished living area of the dwelling are similar to the subject property. The Presiding Commissioner further found, however, that the subject property’s excess acreage and the additional garage and “Quonset” hut warranted an upward adjustment to the sale price.
“The board [is] not required to believe the testimony of any particular witness but [may] accept such portions of the evidence as appear to have the more convincing weight. Assessors of Quincy v. Boston Consol. Gas Co., 309 Mass. 60, 72 (1941). “The credibility of witnesses, the weight of evidence, and inferences to be drawn from the evidence are matters for the board.” Cummington School of the Arts, Inc. v. Assessors of Cummington, 373 Mass. 597, 605 (1977).
After evaluating all of the evidence, the Presiding Commissioner found and ruled that the fair cash value of the subject property for the fiscal year at issue was $365,500. Accordingly, the Presiding Commissioner found that the appellants met their burden of proving that the subject property was overvalued for fiscal year 2010. The Presiding Commissioner therefore issued a single-member decision for the appellants in this appeal and granted an abatement in the amount of $983.92.
APPELLATE TAX BOARD
By: _________________________________
Thomas W. Hammond, Jr., Chairman
A true copy,
Attest: __________ _____
Clerk of the Board
COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD
BOSTON GAS COMPANY d/b/a v. THE BOARD OF ASSESSORS
KEYSPAN ENERGY DELIVERY OF THE CITY OF BOSTON
NEW ENGLAND
Docket Nos. Promulgated:
F275055, F275056 April 21, 2011
These Findings of Fact and Report are promulgated simultaneously with the reinstated decision of the Appellate Tax Board (“Board”) on remand pursuant to G.L. c. 58A, §13 and 831 CMR 1.32. These appeals were originally filed under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 59, §§ 64 and 65, from the refusal of the Board of Assessors of the City of Boston (“assessors” or “appellee”) to abate taxes on certain real estate and personal property in the City of Boston owned by and assessed to Boston Gas Company d/b/a Keyspan Energy Delivery New England (“appellant”) under G.L. c. 59, §§ 11, 18 and 38, for fiscal year 2004.
Chairman Hammond heard the appeals and was joined in the original decisions for the appellee by Commissioners Scharaffa, Egan, Rose and Mulhern. The appellant appealed the decisions and the Supreme Judicial Court granted an application for direct appellate review. Following the Court’s remand in part, Chairman Hammond and Commissioners Scharaffa, Egan, Rose and Mulhern join in the reinstated decision for the appellee.
John M. Lynch, Esq. and Stephen W. DeCourcey, Esq. for the appellant.
David L. Klebanoff, Esq. for the appellee.
FINDINGS OF FACT AND REPORT
Background
The subject of these appeals is virtually all of the appellant’s personal and real property comprising its natural gas storage and distribution system located within the City of Boston as of January 1, 2003. On December 16, 2009, simultaneously with the issuance of decisions for the assessors, the Board promulgated its initial Findings of Fact and Report relating to the appeals (“Initial Findings”), which are incorporated herein by reference. In so doing, the Board found and ruled that:
the appellant failed to demonstrate that the fair cash value of the property considered in [the] appeals was limited to its net book value, or to sustain its burden of establishing that the property’s value was less than its assessed value for fiscal year 2004; the assessors presented substantial evidence demonstrating that a potential buyer would pay more than net book value for the personal property at issue in [the] appeals; [assessors’] adjusted RCNLD[42] valuation methodology and net book value, at a one-to-one ratio, provided an appropriate method to value the personal property; based on the combination of RCNLD and net book value, the fair cash value of the personal property as of January 1, 2003 . . . exceeded its assessed value; and the evidence of record did not provide a sufficient basis to estimate the fair cash value of the [real] property.
Boston Gas Company d/b/a Keyspan Energy Delivery New England v. Assessors of Boston, Mass. ATB Findings of Fact and Reports, 2009-1195, 1273.
The Supreme Judicial Court affirmed the Board’s findings and rulings relating to the real property at issue and the Board’s consequent “decision to leave the assessed value undisturbed.”[43] Boston Gas Company v. Board of Assessors of Boston, 458 Mass. 715, 740 (2011). The Court also rejected the appellant’s central assertion that the fair cash value of the property at issue was less than or equal to its net book value, and affirmed, in substantial measure, the Board’s findings and rulings relating to the personal property. Finally, the Court, rejecting several other arguments presented by the appellant, held that:
[t]he board did not err in using a valuation method that equally weighted net book value and RCNLD. Further, the board did not err in taking account of evidence from after the assessment date, or in its weighing of evidence related to the assessors’ expert’s credibility, the impact of cast-iron replacement regulations, or the assessments of other utility properties in Massachusetts.
Id.
The Court remanded the personal property appeal with respect to three discrete elements of the assessors’ income-capitalization methodology, which the Board had adopted for the limited purpose of deriving the economic obsolescence component of the RCLND methodology. In particular, the matter was remanded for further consideration, consistent with the Court’s opinion, of the Board’s:
(1) . . . decision not to use a tax factor to account for property taxes in the income capitalization analysis; (2) . . . exclusion of 2001 EBITDA[44] from the average EBITDA generated by the company’s personal property; and (3) the assessors’ expert’s alleged failure to account for Colonial Gas’s EBITDA in Keyspan Corporation’s acquisition of Eastern Enterprises.
Id.
OPINION
Use of a Tax Factor
Having observed that the Board made no reference in the Initial Findings to the absence of a tax factor in the income-capitalization analysis presented by George Sansoucy, the assessors’ valuation expert, the Court noted its prior discussions regarding incorporation of a tax factor in an income-capitalization analysis and made specific reference to “the logic underlying its use.” Id. at 735. While the Court declined to hold that a tax factor must be employed in income-capitalization analyses, the Court concluded that “[g]iven the board’s expressed preference for the use of a tax factor, the frequent use of a tax factor in income capitalization analyses, the consideration of its use by this court, and its potential importance in this case, we conclude that the board should have addressed this issue.” Id.
Although not discussed in the Initial Findings, the Board eschewed the use of a tax factor for several reasons. As a threshold matter, and consistent with its decisions in recent utility company appeals, the Board recognizes here “the inherent difficulty in quantifying economic obsolescence” when estimating the value of utility property using an RCNLD approach. Verizon New England, Inc., Consolidated Central Valuation Appeals, Mass. ATB Findings of Fact and Reports, 2009-851,937; see also MCI Consolidated Central Valuation Appeals, Mass. ATB Findings of Fact and Reports, 2008-855; aff’d in relevant part, 454 Mass. 635 (2009). Over the years, appellants and appellees alike have presented numerous and frequently disparate methodologies in their attempts to quantify this elusive measure. See Verizon New England, Inc., Mass. ATB Findings of Fact and Reports at 2009-882,883, 885-887; MCI, Mass. ATB Findings of Fact and Reports at 2008-301-303, 308-310; Tennessee Gas Pipeline Company v. Assessors of Agawam, Mass. ATB Findings of Fact and Reports, 2000-859, 867.
In the present appeal, to arrive at an estimate of economic obsolescence, the Board adopted the approach used by Mr. Sansoucy, in which he derived an “EBITDA multiplier” from six market sales, which he then applied to an “average” EBITDA associated with the subject property. Mr. Sansoucy then used the product of that calculation, which represented his value under the income-capitalization approach, to determine the percentage difference between his income value and his higher RCNLD value (before economic obsolescence). The difference quantified the amount of external obsolescence that he applied in his RCNLD methodology. For each of the years used to arrive at the average EBITDA, Mr. Sansoucy accounted for the appellant’s property tax expense as a deduction, and his multiplier did not include a tax factor.
When using an income approach to value property for ad valorem tax purposes, it is ordinarily desirable to load the cap rate or multiplier with a tax factor instead of “expensing” the ad valorem tax. This practice is based on the premise that ad valorem taxes are determined by the value of the property at issue. Therefore, it would not be proper to include the disputed tax assessment in the expenses leading to the net income or earnings that are used to estimate the subject property’s value. See Boston Gas Company, 458 Mass at 734, 735 (citations omitted).
In its methodology, the Board did not use an income-capitalization approach to directly value the subject property. Rather, the Board adopted the income method to attempt to quantify one category in its RCNLD methodology – economic obsolescence. Because the Board did not directly value the subject property using an income approach, expensing the personal property taxes was appropriate, particularly where the Board utilized a range of varying EBITDAs over several years, which were coupled with varying personal property ad valorem tax expenses over those same years.
Because the rates that regulated utilities are entitled to charge include reimbursements for previously paid ad valorem personal property taxes, the rate-payers reimburse the appellant for prior years’ taxes. Reducing EBITDA by the ad valorem tax more recently paid adequately accounts for these taxes in a methodology that is intended to quantify economic obsolescence in a RCNLD approach.
Moreover, the economic obsolescence associated with the property’s highly regulated earnings is taken into account by blending the subject property’s net book value with the value derived from the RCNLD approach. Accordingly, if anything, the Board underestimated the value of the subject property by adopting Mr. Sansoucy’s approach to economic obsolescence because Mr. Sansoucy did not use a blended approach, as did the Board, to value the property. Mr. Sansoucy’s sole measure of economic obsolescence was in his RCNLD methodology. The Board used two measures. Consequently, the Board’s estimate of the subject property’s value constitutes a floor.
Exclusion of 2001 EBIDTA
As part of its discussion relating to the development of Mr. Sansoucy’s EBITDA multiplier, the Court observed that:
[r]ather than capitalizing a single year of the company’s EBITDA from the subject property, [Mr. Sansoucy] chose to “smooth” the EBITDA estimate by taking a seven-year sample of the company’s annual EBITDA figures. Those years were calendar years 1997 through 2003. [Mr. Sansoucy] eliminated year 2000, the year for which there was the lowest EBITDA, for reasons that are not challenged by the company. He also eliminated year 2001, the year for which there was the second-lowest EBITDA, on account of the abnormal amounts of deferred income taxes and amortization expenses that were taken that year.
Noting that “neither income taxes nor amortization expenses enter into EBITDA,” a fact that Mr. Sansoucy acknowledged in his testimony, the Court stated that it could “discern no reason from the evidence in the record why abnormal depreciation and amortization expenses [] or a Federal income tax issue . . . should result in the exclusion of the 2001 EBITDA figure, and the board’s statement on the issue does not clarify its decision in that regard.”
While not discussed in the Initial Findings, the Board’s determination was not based on the presence of the anomalous amounts of deferred income taxes and amortization expenses, but by its own observations relating to the company’s figures for 2001, as well as Mr. Sansoucy’s inference that the cited anomalies were indicative of other significant issues which, on balance, rendered the 2001 EBIDTA of no utility in developing the EBITDA multiplier. In particular, the Board was influenced by 2001’s atypical expense ratio, its substantially negative sum relating to income taxes, and perhaps most significantly, the fact that the average EBITDA as a percentage of total operating revenue for the years presented was more than 50% higher than the percentage for 2001. In addition, the Board found that many of the anomalies appeared to be tied to the prior year’s acquisition of Eastern Enterprises. Absent countervailing evidence in the record indicating that the 2001 EBITDA should have been included in the sample, the Board therefore agreed with Mr. Sansoucy’s decision to remove it from his calculation as part of his smoothing process.
Notwithstanding the foregoing, even if the Board had not excluded the 2001 EBITDA from the sample, the subject property’s valuation would still have exceeded its assessed value, as indicated, infra, at p. 278.[45]
EBITDA Ratio
After having discussed the derivation and use of the EBITDA multiplier in Mr. Sansoucy’s income-capitalization analysis, the Court focused on Keyspan Corporation’s acquisition of Eastern Enterprises, one of the six sales used by Mr. Sansoucy to derive the multiplier. Specifically, the Court reiterated the appellant’s assertion that the transaction’s sale price from the year 2000 included the amount paid for Colonial Gas, an entity previously acquired by Eastern Enterprises, but the EBITDA employed by Mr. Sansoucy improperly failed to include the contribution to EBITDA made by Colonial Gas.
The Board agrees with the appellant with respect to this issue. Mr. Sansoucy used an EBITDA of $175,926,000, which related to the year ended 12/31/98. Eastern Enterprises acquired Colonial Gas in August of 1999. Thus, Mr. Sansoucy’s chosen EBITDA failed to appropriately reflect the contribution to earnings of Colonial Gas. The record, however, contains an EBITDA figure for the year ended 12/31/99, which not only reflects the contribution made by Colonial Gas but is proximate in time to the Keyspan/Eastern Enterprises acquisition. The Board thus finds that this sum, $194,812,000, should be employed to calculate the Eastern Enterprises sale price to EBITDA ratio, which reduces the ratio for this transaction from 12.8 to 11.55.[46] In turn, the average of the six ratios used to derive the EBITDA multiplier is reduced from 11.7, which had been adopted by the Board in the Initial Findings, to 11.57.[47]
Incorporation of Adjustment
The product of the EBIDTA multiplier and the adjusted EBITDA yields an indicated value under the income-capitalization approach. In the Initial Findings, as previously noted, the Board adopted $28,791,500 as the adjusted EBITDA and 11.7 as the EBITDA multiplier, the product of which is $336,860,550. The revised EBITDA multiplier of 11.57 multiplied by the adjusted EBITDA of $28,791,500 yields a value of $333,117,655 under the income-capitalization approach. This reduction in value increases the economic obsolescence allowance from 10.2%, as adopted in the Initial Findings, to 11.2%.[48] In turn, the indicated value under the RCNLD approach is reduced from $336,848,000 to the rounded sum of $333,097,000.
The final valuation of the subject property, which affords equal weight to RCNLD and net book value, is $246,127,000,[49] a sum which is slightly less than the $248,000,000 valuation adopted by the Board in the Initial Findings, but which exceeds the subject property’s assessed value of $223,200,000 for fiscal year 2004.[50]
Effect of Blended Valuation Methodology
Lastly, the Board considered the remand an opportunity to review the record anew, as well as its findings relating to its use of economic obsolescence in its RCNLD method. Having done so, the Board now finds that economic obsolescence is likely fully accounted for by including net book value as a 50% component in a blended approach to value, thereby obviating the need to incorporate a category of economic obsolescence in its RCNLD methodology. In fact, on more than one occasion when valuing a regulated utility property using a blended approach that incorporates net book value along with another valuation method which has an economic obsolescence component, the Board has removed the economic obsolescence element from the other valuation method on the theory that the blending of the net book value otherwise and adequately accounts for any economic obsolescence. See, e.g., Tennessee Gas Pipeline Company, Mass. ATB Findings of Facts and Reports at 2000-870-871 & 883; see also Boston Edison Co. v. Board of Assessors of Everett, Mass. ATB Findings of Facts and Reports 1996-759, 808, 810-811 & 849. Had the Board similarly removed the economic obsolescence component in this appeal, the rounded indicated value of the subject property would have been $267,133,000, representing an equal weighting of net book value and $375,109,000, the RCNLD value before incorporation of an allowance for economic obsolescence.
Based on the foregoing, the Board decided this appeal for the appellee.
THE APPELLATE TAX BOARD
By:_______________________________
Thomas W. Hammond, Jr. Chairman
A true copy,
Attest: __________ _____
Clerk of the Board
COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD
GENZYME CORPORATION, et al.[51] BOARD OF ASSESSORS OF
THE CITY OF CAMBRIDGE
Docket Nos. F277284, F282964, Promulgated:
F287968, F294379, May 4, 2011 F299101
These are appeals filed under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 59, §§ 64 and 65 from the refusal of the appellee Board of Assessors of the City of Cambridge (“appellee” or “assessors”) to abate taxes on real estate located at 500 Kendall Street in Cambridge (“subject property”). The fiscal year 2005 and 2006 appeals were brought under G.L. c. 59, § 59 by Genzyme Corporation (“Genzyme”) as a tenant paying rent and under an obligation to pay more than one-half of the taxes assessed. The fiscal year 2007 through 2009 appeals were brought by BMR-500 Kendall Street, (“BMR-500 Kendall”) LLC, which was the assessed owner of the subject property as of January 1, 2006, January 1, 2007, and January 1, 2008. Genzyme and BMR-500 Kendall will hereafter collectively be referred to as the appellants.
Commissioner Mulhern heard these appeals, and was joined by Chairman Hammond and Commissioners Scharaffa, Egan, and Rose in the decisions for the appellants in docket numbers F277284, F282964, F287968, and F294379 and in the decision for the appellee in docket number F299101. On its own motion, the Board issued a revised decision for the appellant in Docket No. F282964, which is promulgated simultaneously with these findings. These findings of fact and report are made at the request of the appellee under G.L. c. 58A, § 13 and 831 CMR 1.32.
John M. Lynch, Esq. and Stephen W. DeCourcey, Esq., for the appellants.
Anthony M. Ambriano, Esq. for the appellee.
FINDINGS OF FACT AND REPORT
The hearing of these appeals took place over ten days, during which numerous exhibits and the testimony of six witnesses were offered into evidence. The appellants’ witnesses were Robert Reardon, Director of Assessment for Cambridge; Lillian Orchard, the commercial review appraiser for the Cambridge Assessing Department; Emmet Logue, President of Hunneman Appraisal & Consulting, Inc. and a licensed real estate appraiser; Joseph P. Flaherty, Executive Vice President of Colliers, Meredith, & Grew, and Steven Moran, Genzyme’s Facilities Operations Manager. The appellee called one witness, Pamela McKinney, President of Byrne McKinney, & Associates and a licensed real estate appraiser. To assist in the fact-finding process, the Appellate Tax Board (“Board”) took a view of the subject property as well as several of the comparable properties selected by the parties’ experts. Based on those views, along with the testimony and exhibits offered at the hearing of these appeals, the Board made the following findings of fact.
The Subject Property
The subject property is a 35,754 square foot parcel of land improved with a 349,325 square foot, 12-story office building, known as Genzyme Center (“Genzyme Center” or “subject building”). It was constructed between 2001 and 2003 to serve as the corporate world headquarters for Genzyme, which has a global work force of approximately 10,000 and is among the world’s foremost biotechnology companies. Genzyme Center was designed to meet the green building standards of the U.S. Green Building Council. That organization has granted Genzyme Center Leadership in Energy and Environmental Design (“LEED”) certification at its highest level, the platinum level. It is one of only 13 buildings in the United States to receive the platinum designation.
Genzyme’s website contains a narrative describing the inspiration for and design of Genzyme Center, and excerpts from that website were entered into evidence. According to the narrative, as Genzyme approached its 20th anniversary, it sought to build a new global headquarters building. Specifically, Genzyme desired “a signature building that would stand as a reflection of its core values and a symbol of its established position . . . a bold building that would make a statement about the values that have driven its success.” Genzyme achieved its goal with the construction of Genzyme Center, which was the winner of the 2008 Boston Society of Architects’ prestigious Parker Medal. The Boston Globe’s architecture critic described Genzyme Center as “the best and most delightful office building, bar none, this writer has seen in the Boston area.”
Genzyme Center features a slab foundation with a steel and reinforced concrete frame. There are tilt-up insulated glass building sidewalls, with some windows featuring operable sashes to allow for fresh air flow. The building’s roof deck is metal and has a rubber membrane cover. There are gardens on the roof, which prevent excessive water run-off and absorb heat, as well as 18 different gardens in the building’s interior.
The doors to the building’s lobby are full view aluminum framed thermal pane revolving units. The building also has loading docks with overhead door entry into a modest shipping and receiving area on the ground floor. Interior finishes include a mix of carpet, hardwoods, concrete pavers, and marmoleum flooring. Interior walls are either sheetrock or glass while the ceilings are predominantly suspended. The first floor contains a large lobby with retail space around its perimeter. The retail area totals 6,325 square feet, and was vacant and in shell condition during the periods at issue. A large formal staircase leads to the second floor, which houses a concierge and building security.
Genzyme Center’s defining interior feature is its large, floor-to-roof core atrium. The atrium is an integral part of the building’s green design. Suspended in the atrium is one of the building’s signature elements, a chandelier-like series of hanging prisms which distribute natural light throughout the building. The atrium’s large size and penetration through the building’s core also promote the circulation of fresh air. As a result of the atrium at the subject building’s core, the upper floors have staggered floor plates, with the center of each floor exposed to the atrium. The interior wall partitions are glass, allowing maximum light within. Floor layouts are primarily open space, with private offices around the perimeter of each floor. Each floor also has a kitchenette and open meeting spaces. There is a company cafeteria on the 12th floor and an amphitheater on the first floor. The subject building is serviced by six passenger elevators, two of which are glass-walled and exposed to the atrium.
Genzyme Center’s mechanical systems are considered state of the art and were designed for maximum energy efficiency. The source of heat for the subject building is steam from a steam plant located adjacent to the subject property. The heating, cooling and lighting systems operate with sensors to minimize use. The roof is equipped with solar panels to help reduce electricity usage. Computer-controlled interior window blinds are located throughout the subject building. They open by day to maximize the use of natural light and close by night to promote the retention of heat and reduce light pollution.
All wood used for the flooring in Genzyme Center was procured from within a 500-mile radius, and concrete used in the subject building contains a substantial amount of recycled materials. Additional green building features include the so-called “smart plumbing” system, which involves low-flow fixtures, waterless urinals, and dual-flush toilets, all of which substantially reduce water use.
Statements published by Genzyme, which were entered into evidence, assert that the subject building’s design, including its atrium, positively impacts the workforce it houses. According to Genzyme’s publications, surveys conducted by Genzyme showed that the vast majority of employees reported that they felt “more alert and productive” while working at Genzyme Center and that the building’s open design increased their “sense of connection with colleagues.”
The subject property is located in Cambridge Research Park (“CRP”), a 1.275 million square-foot mixed-use site that contains six primary development sites. Several of the sites were still under development and were not completed or occupied as of the relevant dates of assessment. CRP is located in East Cambridge, in close proximity to Kendall Square. CRP is a contaminated site, but has been remediated to meet the standards of the Massachusetts Department of Environmental Protection. As a result, the subject property is subject to an Activity and Use Limitation.
CRP is located in a zoning district designated as Office 3A/Planned Unit Development District 3 (“PUD-3”). Development in any PUD-3 area is allowed only by special permit granted by the Planning Board. A copy of the Planning Board’s Final Development Plan Decision (“Decision”) granting a special permit (“special permit”) for the development of CRP was entered into evidence. According to the Decision, approval for the development of CRP was predicated on, among other things, the inclusion of retail uses within the development. This requirement was set to promote the local availability of services and products for people living and working within CRP, which would in turn reduce the overall traffic flow by eliminating the need to procure such products and services off-site. Lillian Orchard of the Cambridge Assessing Department, who testified at the hearing of these appeals, confirmed in her testimony that Cambridge required the subject property to include retail uses. To the extent that it is a finding of fact, the Board found that the special permit required the subject property to have a retail component.
The subject property is an irregularly shaped parcel and is level at grade with the surrounding streets. It has frontage on both Kendall and Athenaeum Streets. Parking for the subject property is located at a nearby underground garage to which the subject property has an easement granting it the right to a number of paid parking spaces. The subject property is also accessible via public transportation, as it is a few blocks from the Kendall Square MBTA stop and approximately one-half mile from the Lechmere MBTA stop, along with various bus routes.
Ownership and Jurisdiction
From 2002 through 2005, the subject property was owned by Kendall Square, LLC or its subsidiary, KS Parcel A/D, LLC, and leased in its entirety by Genzyme. The lease for the subject property was originally signed on August 28, 2000, for commencement on December 1, 2002 for a term of 15 years, with options to extend the lease period. The annual rent paid by Genzyme in accordance with that lease was calculated by dividing the project cost by the total rentable area, and then multiplying that figure by 12%. Genzyme was also responsible for payment of the real estate taxes. The lease was subsequently amended in August of 2003. The terms of the amended lease called for rent to be paid at a rate of approximately $44.00 per square foot for years one through nine of the lease term, increasing to approximately $54.00 per square foot for years ten to 15, with Genzyme again responsible for payment of the real estate taxes.
In May of 2005, the subject property was sold as part of a multi-property portfolio sale to BMR-500 Kendall for an attributed sale price of $191,960,000. Accordingly, on January 1, 2004 and January 1, 2005, Genzyme, was a tenant under obligation to pay 50% or more of the property taxes on the subject property, and on January 1, 2006, January 1, 2007, and January 1, 2008, BMR-500 Kendall was the assessed owner of the subject property.
The following table sets forth the assessed values, tax rates, and total taxes assessed for the subject property for each of the fiscal years at issue.
|
Fiscal Year |
Assessed Value($) |
Tax Rate ($)/$1,000 | Total Taxes Assessed ($)[52] |
|
2005 |
113,843,100 |
18.28 |
2,143,428.59 |
|
2006 |
130,793,100 |
17.86 |
2,405,990.13 |
|
2007 |
130,793,100 |
18.30 |
2,465,264.24 |
|
2008 |
134,544,100 |
17.24 |
2,389,074.77 |
|
2009 |
134,456,100 |
17.97 |
2,488,661.40 |
The appellants timely paid the taxes assessed without incurring interest. The following table sets forth additional relevant jurisdictional information.
|
Fiscal Year |
Abatement Apps. Filed |
Dates of Denials |
Petition Filed with Board |
|
2005 |
12/1/04 |
12/10/04 |
3/10/05 |
|
2006 |
11/14/05 |
12/22/05 |
3/22/06 |
|
2007 |
11/20/06 |
12/14/06 |
3/14/07 |
|
2008 |
11/19/07 |
1/22/08 |
4/22/08 |
|
2009 |
11/24/08 |
12/12/08 |
3/11/09 |
As evidenced by the foregoing, the appellants timely filed their abatement applications with the assessors and also timely filed their petitions with the Board. Accordingly, the Board found and ruled that it had jurisdiction to hear and decide these appeals.
The Appellants’ Valuation Evidence
The appellants subpoenaed Lillian Orchard of the Cambridge Assessing Department to appear and testify. Ms. Orchard prepared the mass appraisal valuation analysis on which the assessors relied in assessing the subject property. She testified that the assessors used the income-capitalization approach to value the subject property.
For fiscal years 2005, 2006, and 2007, the assessors began with a base rent of $35.00 per square foot for the subject property’s office area, but after upward adjustments for such factors as location and condition, they used a rent of $45.15 per square foot, with operating expenses of $8.79 per square foot.[53] For fiscal years 2008 and 2009, the assessors began with a base rent of $36.00 per square foot, but made adjustments for the factors mentioned above, resulting in a rent of $52.70 per square foot for the office portion of the subject property. They used operating expenses of $9.04 per square foot for fiscal year 2008 and $10.51 per square foot for fiscal year 2009.
For the subject building’s retail area, the assessors used a rent of $16.00 per square foot for fiscal years 2005 through 2007, with operating expenses of $2.66 per square foot. For fiscal year 2008, the assessors began with a base rent of $18.00 per square foot, but after adjustments, used a rent of $28.51 per square foot, with operating expenses of $3.31 per square foot. For fiscal year 2009, the assessors began with a base rent of $25.00 per square foot, but after adjustment, they used a rent of $41.25 per square foot, with operating expenses of $5.09 per square foot.
In addition, Ms. Orchard testified that the assessors used a flat vacancy rate of 5%, which was the vacancy rate used across Cambridge for all of the fiscal years at issue.
The appellants’ case-in-chief relied principally on the testimony and self-contained appraisal report of real estate appraiser Emmet Logue, whom the Board qualified as an expert in real estate valuation. At the time of hearing, Mr. Logue had nearly 40 years of experience as an appraiser. A Member and Senior Residential Appraiser of the Appraisal Institute, and also a member of the Counselors of Real Estate, Mr. Logue is the President of Hunneman Appraisal and Consulting Company. During his career, Mr. Logue has appraised numerous office towers in Boston. He also has extensive experience valuing commercial properties in Cambridge. Mr. Logue has conducted appraisals for industrial and research and development properties and more than 30 office properties in Cambridge, some of which have involved fiscal years overlapping with the fiscal years at issue in these appeals.
Mr. Logue inspected the interior of the Genzyme Center on September 22, 2009 and also inspected its exterior on numerous occasions. In addition, to assist in the preparation of his appraisal, Mr. Logue reviewed deeds, site and plot plans, and also consulted with an architect with knowledge of Genzyme Center to assist in estimating its total rentable area. He also reviewed local zoning requirements and conducted discussions with local brokers and property managers.
Mr. Logue considered Genzyme Center to be class A office space and in excellent condition. Based on its size, design, and other salient characteristics, Mr. Logue concluded that the highest and best use of the subject building was its continued use as a single-tenant office building with a small retail component. In so concluding, Mr. Logue noted that Genzyme Center’s large center atrium, its lighting design, and its heating and cooling systems would make it difficult to subdivide for occupancy by multiple tenants. Further, although it is located in an area occupied by labs and other biotechnology companies, in Mr. Logue’s opinion, the subject building was not suited for conversion to lab space because it lacked necessary ventilation and fire protection features and its twelve floors had lower ceiling heights than are generally suitable for housing the mechanical and electrical equipment associated with laboratory operations.
Mr. Logue considered the three basic approaches to value. Although the subject building was essentially new as of the first date of valuation, the relevant dates of valuation followed periods of declining rents, substantial vacancy, and increasing construction costs, making it difficult to estimate economic obsolescence. Mr. Logue therefore ruled out the cost reproduction approach, because it was not, in his opinion, likely to yield a reliable estimate of the subject property’s fair cash value. In reaching this conclusion, Mr. Logue noted that the plans and lease terms for the subject property were established in late 2000, which was the peak of the office/lab market in Cambridge.
Mr. Logue also rejected the sales-comparison approach because he concluded that most of the sales of comparable properties occurring within the relevant time period were sales of properties which were encumbered by leases, and thus involved the transfer of leased-fee interests, rather than fee-simple interests. Mr. Logue therefore concluded that the sales of those properties were not useful in determining fee-simple values for office properties in Cambridge. Similarly, Mr. Logue declined to place weight on the actual sale of the subject property, which sold in May of 2005 as part of a multi-property portfolio sale. Mr. Logue ultimately utilized the income-capitalization method to derive estimates of fair cash value for the subject property.
In applying the income-capitalization methodology, Mr. Logue separately estimated market rents for the retail and office portions of the subject property. To estimate market rent for the 6,325 square feet of retail space at Genzyme Center, Mr. Logue selected seven retail leases from five properties in East Cambridge. Six of the retail leases he reviewed were signed in 2004 while one was signed in 2005. They involved spaces ranging in size from 681 to 3,900 square feet, with rents ranging from $20.39 to $33.50 per square foot.[54] Five of the seven retail leases were triple-net leases.[55] Based upon these rents, and the limited demand for the retail space at the subject property, Mr. Logue estimated the fair market rent of the subject property’s retail space to be $21.00 per square foot, on a triple-net basis. It was Mr. Logue’s opinion that this rent would apply to each of the fiscal years at issue because the retail market in East Cambridge remained fairly stable during that period.
In order to estimate the market rents for the office portion of the subject property, Mr. Logue selected a total of 27 leases for office properties in East Cambridge which he deemed comparable to the subject property. Because these appeals span five fiscal years, Mr. Logue separated his market rent data into two groupings. The first set, which appears in his appraisal report as Table A, contained 14 leases in ten different buildings. The leases in Mr. Logue’s Table A were signed between mid-2003 and late 2006. The second set, which appears in his appraisal report as Table B, contained 13 leases in nine different buildings. The leases in Mr. Logue’s Table B were signed between mid-2006 and early 2008.
The leases contained in Table A involved spaces ranging in size from 8,767 to 73,199 square feet. The leases in Table B involved spaces ranging in size from 11,008 to 193,800 square feet. Table A rents ranged from $23.00 to $38.00 per square foot, while Table B rents ranged from $25.96 to $53.00 per square foot.
Based on his review of market reports, his conversations with brokers and property managers, and his own recent appraisal experience, Mr. Logue formed the opinion that rents in Cambridge declined by 5% between 2004 and 2005, but remained stable between 2005 and 2006. He further concluded that rents increased by 15% during 2006 and by 20% during 2007, before stabilizing in early 2008. Mr. Logue therefore adjusted the rent data from his selected comparable leases to account for differences in time.
After adjustment for time, Mr. Logue’s comparable rents ranged from $21.30 to $38.95 per square foot for fiscal year 2005; $20.25 to $37.00 per square foot for fiscal years 2006 and 2007; $28.00 to $42.61 for fiscal year fiscal year 2008; and $33.60 to $51.45 per square foot for fiscal year 2009. Based on this data, Mr. Logue formed a preliminary opinion of market rent for the subject property in the following amounts: $35.00 per square foot for fiscal year 2005; $33.50 per square foot for fiscal years 2006 and 2007; $39.00 per square foot for fiscal year 2008; and $46.50 per square foot for fiscal year 2009.
However, Mr. Logue made a final adjustment to these rents to account for Genzyme Center’s so-called “add on” factor. This “add on” factor, according to Mr. Logue, was attributable to Genzyme Center’s substantial, 12-story atrium, which rendered much of the building’s area unrentable as office space. Mr. Logue opined that, though it had positive aesthetic and functional qualities, the subject building’s atrium was a “significant drawback.” After reviewing Building Owners and Managers Association (“BOMA”) standards as well as calculations created by an architect familiar with Genzyme Center, Mr. Logue concluded that the disparity between rentable and usable area at Genzyme Center was approximately 30%, in contrast to an average of approximately 10% or less in his selected comparable leases. In addition, Mr. Logue’s discussions with local brokers confirmed that rentable areas in the East Cambridge market generally do not include atrium space. Accordingly, Mr. Logue decreased his estimates of market rent by 5% to account for this “add on” factor. Mr. Logue’s final estimates for fair market rent for Genzyme Center’s office space were: $33.25 per square foot for fiscal year 2005; $32.00 per square foot for fiscal years 2006 and 2007; $37.00 per square foot for fiscal year 2008; and $44.25 per square foot for fiscal year 2009.
Mr. Logue next focused on choosing appropriate vacancy and rent loss estimates. To determine these estimates, Mr. Logue consulted market reports, which indicated that East Cambridge office vacancy rates peaked between January 1, 2004 and January 1, 2005, at which time they were as high as 18%. Mr. Logue further testified that vacancy in the East Cambridge office market began to improve thereafter, with vacancy rates from 6.5% to 8% by January 1, 2008. Based upon this data, Mr. Logue concluded that appropriate vacancy rates for the subject property were: 14% for fiscal year 2005; 13% for fiscal year 2006; 11% for fiscal year 2007; 10% for fiscal year 2008; and 9% for fiscal year 2009.
To determine appropriate operating expenses, Mr. Logue reviewed the actual reported expenses for Genzyme Center, including information provided to him by Steven Moran, who was the Facilities Operations Manager for Genzyme, as well as actual reported expenses for several other East Cambridge office properties. The actual expense figures for Genzyme Center obtained by Mr. Logue were in the $10.00 to $12.00 per square foot range, with the exception of 2004, during which the reported expenses were approximately $7.20 per square foot. Mr. Logue considered the 2004 expenses anomalous and did not include them in his considerations because, according to his appraisal report, they did not include expenses for housekeeping, janitorial, and landscaping, among other categories. Mr. Logue stated that Genzyme Center’s reported expenses were considerably higher than other class A office properties in Cambridge, which he attributed to its status as a headquarters building and its unique, green design.
Mr. Logue’s assumptions were confirmed by the testimony of Steven Moran, who testified at the hearing of these appeals. The Board found him to be credible. Mr. Moran testified that he supervises a team of 11 individuals who collectively maintain and manage three facilities for Genzyme in Cambridge. Those three facilities include the subject building, an office at 55 Cambridge Parkway, and an office at 675 West Kendall Street, a property which is adjacent to the subject property.
Mr. Moran testified about the efforts required to clean and maintain Genzyme Center. Rather than traditional walls, Genzyme Center has many interior windows and glass wall partitions, which allow for the open flow of light and air and which create a more open, accessible atmosphere. Mr. Moran testified that his staff is responsible for cleaning the interior windows, and at certain points, there are as many as 14 layers of windows from one side of the building to the other. Mr. Moran further testified that cleaning these interior walls and windows involves rappelling down the interior of the building. Similarly, Mr. Moran stated that his staff is also responsible for cleaning the interior prism chandelier, which requires a staff member to be suspended from the ceiling. Additionally, Mr. Moran testified that Genzyme Center’s 18 interior gardens require considerable maintenance, as do the waterless urinals, which need to be cleaned more extensively on a periodic basis than full-flow fixtures.
Mr. Moran testified that he provided Mr. Logue with expense figures for the cleaning, maintenance and labor costs attributable to Genzyme Center, which had not been reported by the landlord because the landlord is generally not responsible for those expenses.[56] Because he concluded that the operating expenses at Genzyme were higher than the operating expenses at most class A office buildings in Cambridge, Mr. Logue adopted expense figures which were more in line with the market. Those expenses were: $7.00 per square foot for fiscal year 2005; $7.25 per square foot for fiscal year 2006; $7.50 per square foot for fiscal year 2007; $7.75 per square foot for fiscal year 2008; and $8.00 per square foot for fiscal year 2009. He applied these operating expenses to the office area of the subject building, but not the retail area, because of his assumption that the retail area was leased on a triple-net basis.
Because the subject building was essentially new construction and in excellent condition during the fiscal years at issue, Mr. Logue concluded that $0.25 per square foot was a realistic estimate of replacement reserves, which are amounts allocated for the periodic replacement of items such as roofs, HVAC systems, and the like. In addition, Mr. Logue allowed $0.60 per square foot for leasing commissions, which in his opinion, were likely to be annualized expenses absorbed by the landlord.
Although some of Mr. Logue’s chosen comparable leases were “as is” leases, most of the leases involved allowances for tenant improvements (“TIs”). The TIs in the Table A leases ranged from $7.00 to $70.00 per square foot, while the TIs in Table B leases ranged from $11.00 to $45.00 per square foot. Mr. Logue’s assumptions for market rent assumed a TI allowance of $15.00 per square foot, amortized at 6% over the lease term, which he assumed was five years. He further assumed 35% to 50% tenant rollover probability. With these assumptions, Mr. Logue’s calculated TI allowance ranged from $1.25 to $1.75 per square foot. Given the class A quality of the subject property, among other factors, Mr. Logue considered it appropriate to select from the low end of that range, and he therefore applied a TI allowance of $1.25 per square foot for the 343,000 square feet of office space in the subject building. Mr. Logue did not apply a TI to the retail space because he noted that expenses associated with build-out of retail space are usually borne by the tenant.
The final step in Mr. Logue’s income-capitalization analysis was the selection of appropriate capitalization rates. To determine appropriate capitalization rates, Mr. Logue first used the mortgage equity technique, from which he derived the following capitalization rates: 7.6% for fiscal year 2005; 7.1% for fiscal year 2006; 6.9% for fiscal year 2007; 6.7% for fiscal year 2008; and 6.6% for fiscal year 2009. Mr. Logue also consulted the Korpacz Real Estate Investor Survey (“Korpacz Survey”) for the fourth quarter immediately preceding each of the relevant valuation dates. He considered Genzyme Center to be an institutional grade property because of the excellent quality of the building and the strong identity of the East Cambridge office/lab market. According to the Korpacz Survey, capitalization rates declined steadily during the fiscal years at issue, from an average of 9.26% in the fourth quarter of 2003 to an average of 7.21% in the fourth quarter of 2007. Based on the market data and his own appraisal experience, Mr. Logue concluded that realistic capitalization rates for the subject property were: 7.75% for fiscal year 2005; 7.25% for fiscal year 2006; 7.00% for fiscal year 2007; 6.75% for fiscal year 2008; and 6.50% for fiscal year 2009. Mr. Logue noted that these rates were near the low-end of the range of rates suggested by the Korpacz Survey because he took into consideration, among other things, the fact that the net operating incomes which he calculated were capitalized after deductions for leasing commissions and TIs, while the capitalization rates reported in the Korpacz Survey were based on net operating incomes that included leasing commissions and TIs. To each of these rates, Mr. Logue added tax factors, which he prorated to account for his assumption that 1.81% of the building was occupied by retail space leased on a triple-net basis.
The pro forma income and expense analyses offered by Mr. Logue are presented in the following tables:
Logue Income Approach Pro Forma FY 05
Potential Gross Rent: S.F. Rent/S.F. Total
Office 343,000 $33.25 $11,404,750
Retail 6,325 $21.00 $132,825
Total Floor Area 349,325
Total Potential Gross Rent $11,537,575
Vacancy and Collection Loss 14% ($1,615,261)
Effective Gross Rent $9,922,315
Expenses
Operating Expenses $7.00 ($2,401,000)
Leasing Commissions $0.60 ($209,595)
Reserve for Replacement $0.25 ($87,331)
Tenant Improvements $1.25 ($428,750)
Total Operating Expenses ($3,126,676)
Net Operating Income (NOI) $6,795,638
Capitalization
Rate 7.750%
Tax Factor-$18.28/1000*.9819 1.795%
Overall Rate 9.545%
Indicated Value $71,195,791
Rounded $71,200,000
Logue Income Approach Pro Forma FY 06
Potential Gross Rent: S.F. Rent/S.F. Total
Office 343,000 $32.00 $10,976,000
Retail 6,325 $21.00 $132,825
Total Floor Area 349,325
Total Potential Gross Rent $11,108,825
Vacancy and Collection Loss 13% ($1,444,147)
Effective Gross Rent $9,664,678
Expenses
Operating Expenses $7.25 ($2,486,750)
Leasing Commissions $0.60 ($209,595)
Reserve for Replacement $0.25 ($87,331)
Tenant Improvements $1.25 ($428,750)
Total Operating Expenses ($3,212,426)
Net Operating Income (NOI) $6,452,252
Capitalization
Rate 7.250%
Tax Factor-$17.86/1000*.9819 1.735%
Overall Rate 8.985%
Indicated Value $71,808,172
Rounded $71,800,000
Logue Income Approach Pro Forma FY 07
Potential Gross Rent: S.F. Rent/S.F. Total
Office 343,000 $32.00 $10,976,000
Retail 6,325 $21.00 $132,825
Total Floor Area 349,325
Total Potential Gross Rent $11,108,825
Vacancy and Collection Loss 11% ($1,221,971)
Effective Gross Rent $9,886,854
Expenses
Operating Expenses $7.50 ($2,572,500)
Leasing Commissions $0.60 ($209,595)
Reserve for Replacement $0.25 ($87,331)
Tenant Improvements $1.25 ($428,750)
Total Operating Expenses ($3,298,176)
Net Operating Income (NOI) $6,588,678
Capitalization
Rate 7.000%
Tax Factor-$18.30/1000*.9819 1.797%
Overall Rate 8.797%
Indicated Value $74,897,921
Rounded $74,900,000
Logue Income Approach Pro Forma FY 08
Potential Gross Rent: S.F. Rent/S.F. Total
Office 343,000 $37.00 $12,691,000
Retail 6,325 $21.00 $132,825
Total Floor Area 349,325
Total Potential Gross Rent $12,823,825
Vacancy and Collection Loss 10% ($1,282,383)
Effective Gross Rent $11,541,443
Expenses
Operating Expenses $7.75 ($2,658,250)
Leasing Commissions $0.60 ($209,595)
Reserve for Replacement $0.25 ($87,331)
Tenant Improvements $1.25 ($428,750)
Total Operating Expenses ($3,383,926)
Net Operating Income (NOI) $8,157,516
Capitalization
Rate 6.750%
Tax Factor-$17.24/1000*.9819 1.693%
Overall Rate 8.443%
Indicated Value $96,621,032
Rounded $96,600,000
Logue Income Approach Pro Forma FY 09
Potential Gross Rent: S.F. Rent/S.F. Total
Office 343,000 $44.25 $15,177,750
Retail 6,325 $21.00 $132,825
Total Floor Area 349,325
Total Potential Gross Rent $15,310,575
Vacancy and Collection Loss 9% ($1,377,952)
Effective Gross Rent $13,932,623
Expenses
Operating Expenses $8.00 ($2,744,000)
Leasing Commissions $0.60 ($209,595)
Reserve for Replacement $0.25 ($87,331)
Tenant Improvements $1.25 ($428,750)
Total Operating Expenses ($3,469,676)
Net Operating Income (NOI) $10,462,947
Capitalization
Rate 6.500%
Tax Factor-$17.97/1000*.9819 1.764%
Overall Rate 8.264%
Indicated Value $126,601,483
Rounded $126,600,000
As set forth in the above tables, Mr. Logue’s final opinion of the subject property’s fair market value for the fiscal years at issue was: $71,200,000 for fiscal year 2005; $71,800,000 for fiscal year 2006; $74,900,000 for fiscal year 2007; $96,600,000 for fiscal year 2008; and $126,600,000 for fiscal year 2009.
The appellants also offered the testimony of Joseph Flaherty, a commercial real estate broker with extensive experience in, and knowledge of, the Cambridge office market. Mr. Flaherty, who testified not as an expert witness but as a fact witness, largely corroborated Mr. Logue’s testimony that office vacancy rates in Cambridge were extremely high in 2004 and well into 2005, but slowly improved thereafter and continued to improve through January 1, 2008. Likewise, Mr. Flaherty corroborated Mr. Logue’s testimony that office rents in Cambridge declined in 2004 and 2005, before stabilizing and then increasing through the remainder of the periods at issue.
The Appellee’s Valuation Evidence
The assessors presented the testimony and self-contained appraisal report of Pamela McKinney, a licensed appraiser who is the President of Byrne McKinney & Associates. Ms. McKinney is a Member of the Appraisal Institute and also a Member of the Counselors of Real Estate. At the time of the hearing of these appeals, Ms. McKinney had approximately thirty years of appraisal experience. Ms. McKinney has worked for clients in both the public and private sectors, and her diverse appraisal experience includes the appraisal of numerous class A office towers, shopping malls, hotels, apartment buildings, and even the Tobin Bridge. The Board qualified Ms. McKinney as an expert in real estate valuation.
To assist in her appraisal, Ms. McKinney inspected the subject property on June 18, 2009. Ms. McKinney also reviewed a variety of materials, including relevant market data, deeds, building plans, and information gathered from Genzyme’s filings with various governmental entities, as well as Genzyme’s website and that of the architects of the Genzyme Center, Behnisch, Behnisch and Partner.
Like Mr. Logue, Ms. McKinney considered Genzyme Center to be class A office property in excellent condition. Ms. McKinney considered the highest and best use of the subject property to be its continued use as a single-tenant office building. Unlike Mr. Logue, Ms. McKinney opined that the continued use of the retail component of the subject property did not accord with its highest and best use. Rather, she stated that the retail space should be reconfigured and adapted to office uses.
Ms. McKinney considered the three basic approaches to value. Like Mr. Logue, Ms. McKinney relied on the income-capitalization approach to determine the fair cash value of the subject property. Although she did not conduct full cost reproduction or sales-comparison analyses, Ms. McKinney did reference local building sales and the project costs for Genzyme Center to check the reliability of the values which she determined using her income-capitalization approach.
To begin her income-capitalization analysis, Ms. McKinney selected a number of leases from office and lab properties in East Cambridge and elsewhere in Cambridge. To determine fair market rent for fiscal year 2005, Ms. McKinney selected ten commercial leases in nine different buildings in Cambridge. The leases were signed between early 2003 and mid-2004, and were for spaces ranging in size from 21,550 to 98,738 square feet. The average rents in these ten leases ranged from $22.88 to $34.60 per square foot. While some of the leases allowed for TIs, others did not. Where applicable, the TIs ranged from $5.00 to $40.00 per square foot. It was Ms. McKinney’s opinion that TI allowances for the subject property would be comparatively high because of its corporate world headquarters character. Accordingly, for each of the fiscal years at issue, she made adjustments to her selected rents to reflect her assumption of a $50 per square foot TI allowance, amortized over a ten-year lease period. After making this adjustment, and considering all of the relevant information, Ms. McKinney estimated the fair market rent for Genzyme Center to be $40.00 per square foot for fiscal year 2005.
To determine fair market rent for fiscal year 2006, Ms. McKinney selected ten commercial leases from nine different buildings in Cambridge. The leases, which were signed between mid-2004 and mid-2005, were for spaces ranging in size from 19,312 to 124,758 square feet, and had average rents ranging from $29.00 to $36.00 per square foot. TI allowances, where applicable, ranged from $30.00 to $45.00 per square foot. Based on this information, and after making an adjustment to account for TI, Ms. McKinney estimated the fair market rent for Genzyme Center to be $40.00 per square foot for fiscal year 2006.
To determine fair market rent for fiscal year 2007, Ms. McKinney selected six commercial leases from five different buildings in Cambridge. The leases were signed between mid-2005 and early 2006, and were for spaces ranging in size from 17,705 to 81,500 square feet. The average rents ranged from $29.46 to $37.00 per square foot, and the TIs, where applicable, ranged from $20.00 to $70.00 per square foot. Based upon this information, and after making an adjustment to account for TI, Ms. McKinney estimated the fair market rent for Genzyme Center to be $40.00 per square foot for fiscal year 2007.
To determine fair market rent for fiscal year 2008, Ms. McKinney selected ten commercial leases from six different buildings in Cambridge. The leases were signed between mid-2006 and mid-2007, and were for spaces ranging in size from 17,705 to 124,758 square feet. The average rents ranged from $15.83 to $41.04 per square foot, and the TI allowances, where applicable, ranged from $5.00 to $75.00 per square foot. Based on this information, and after making an adjustment to account for TI, Ms. McKinney estimated the fair market rent for the Genzyme Center to be $45.00 per square foot for fiscal year 2008.
Finally, to determine fair market rent for fiscal year 2009, Ms. McKinney selected thirteen commercial leases from twelve different buildings in Cambridge. The leases were signed between mid-2007 and mid-2008 and were for spaces ranging in size from 17,949 to 182,000 square feet. The average rents ranged from $29.00 to $68.00 per square foot and the TI allowances, where applicable, ranged from $5.00 to $60.00 per square foot. Based upon this information, and after making an adjustment to account for TI, Ms. McKinney estimated the fair market rent for Genzyme Center to be $50.00 per square foot for fiscal year 2009.
Unlike Mr. Logue, Ms. McKinney made no adjustment to account for Genzyme Center’s large atrium. Further, Ms. McKinney applied the fair market rents derived from her analysis to all of the subject buildings’ 349,325 square feet because she considered its highest and best use to be office space without a retail component. However, she did make an allowance for extraordinary capital expenses – the cost to convert the space from retail to office – by deducting $300,000 from her initial estimates of the subject property’s fair cash value for each of the fiscal years at issue.
The next step in Ms. McKinney’s income-capitalization analysis was the determination of appropriate vacancy rates. Publications created by CoStar, Inc., an entity which compiles data for the leasing industry, indicated that direct vacancy rates in class A office properties in East Cambridge ranged from 16.2% and 17.4% during the fourth quarters of 2003, 2004, and 2005, but declined to 11.4% by the fourth quarter of 2006 and further decreased to 8.4% by the fourth quarter of 2007. Despite these rates, Ms. McKinney considered it appropriate to use a vacancy and rent loss rate of 5%, due to the excellent quality and condition of the subject property and its character as a single-tenant, headquarters building, for which vacancy rates are likely to be lower.
Ms. McKinney next considered operating expenses. To determine appropriate operating expenses, Ms. McKinney reviewed the actual operating expenses reported for the subject property by its owner pursuant to requests made by the assessors under G.L. c. 59, § 38D (“§ 38D”), as well as BOMA statistics. The actual expenses reported on the § 38D responses ranged from a low of $4.79 per square foot for calendar year 2004 to a high of $6.63 per square foot for calendar year 2007. Because of the subject buildings’ unique, green operating systems, Ms. McKinney considered it appropriate to rely upon the actual operating expenses. However, like Mr. Logue, she opined that the 2004 calendar year expenses were anomalous, and she therefore adjusted them to account for anomalies. Ms. McKinney also made modest adjustments to the reported operating expenses to better reflect the subject building’s “expense curve.” Ultimately, Ms. McKinney selected operating expenses of: $6.00 per square foot for fiscal year 2005; $6.18 per square foot for fiscal year 2006; $6.37 per square foot for fiscal year 2007; $6.63 per square foot for fiscal year 2008; and $6.83 per square foot for fiscal year 2009.
It was Ms. McKinney’s opinion that leasing commissions, replacement reserves, and TI allowances should not be deducted from operating income for purposes of a fee-simple valuation, and she therefore made no deductions for these items in her valuation analyses.
The final step in Ms. McKinney’s income-capitalization analysis was the selection of capitalization rates, which she determined by consulting several sources and using a variety of methodologies. Ms. McKinney conducted a band of investment analysis to determine capitalization rates. Her band of investment analyses yielded the following capitalization rates: 7.76% for fiscal year 2005; 7.15% for fiscal year 2006; 6.86% for fiscal year 2007; 6.87% for fiscal year 2008; and 6.86% for fiscal year 2009. Ms. McKinney also consulted data published by Real Capital Analytics and the Korpacz Survey, which indicated that capitalization rates declined during the fiscal years at issue. Rates published by Real Capital Analytics, for example, ranged from 7.64% to 8.9% in the quarters immediately preceding and following January 1, 2004, but declined to a range between 5.54% and 7.5% in the quarters immediately before and after January 1, 2008. Similarly, the Korpacz Survey reported rates ranging from 6.0% to 11.25% for the quarters immediately before and after January 1, 2004, but reported rates ranging from 4.0% to 10.25% for the quarters immediately prior to and following January 1, 2008. In addition, to assist in the selection of appropriate capitalization rates, Ms. McKinney analyzed local building sales. Ms. McKinney’s local building sale analysis yielded a range of rates – generally between 6.2% and 8.7% – which varied very little over the fiscal years at issue. Ultimately, Ms. McKinney selected the following capitalization rates: 8.0% for fiscal year 2005; 7.5% for fiscal year 2006; 7.0% for fiscal year 2007; 6.5% for fiscal year 2008; and 6.5% for fiscal year 2009. Ms. McKinney also added tax factors to each of her selected capitalization rates.
The pro forma income and expense analyses offered by Ms. McKinney are summarized in the following tables:
McKinney Income Approach Pro Forma FY 05
Area/S.F. Rent/S.F. Total
Potential Gross Rent 349,325 $40.00 $13,973,000
Vacancy and Collection Loss 5% ($698,650)
Effective Gross Rent $38.00 $13,274,350
Total Operating Expenses $6.00 ($2,095,950)
Net Operating Income $32.00 $11,178,400
Capitalization
Rate 8%
Tax Factor 1.828%
Combined Rate 9.828%
Stabilized Value $113,740,334
Rounded Value $113,700,000
McKinney Income Approach Pro Forma FY 06
Area/S.F. Rent/S.F. Total
Potential Gross Rent 349,325 $40.00 $13,973,000
Vacancy and Collection Loss 5% ($698,650)
Effective Gross Rent $38.00 $13,274,350
Total Operating Expenses $6.18 ($2,158,829)
Net Operating Income $31.82 $11,115,522
Capitalization
Rate 7.5%
Tax Factor 1.786%
Combined Rate 9.286%
Stabilized Value $119,701,933
Rounded Value $119,700,000
McKinney Income Approach Pro Forma FY 07
Area/S.F. Rent/S.F. Total
Potential Gross Rent 349,325 $40.00 $13,973,000
Vacancy and Collection Loss 5% ($698,650)
Effective Gross Rent $38.00 $13,274,350
Total Operating Expenses $6.37 ($2,225,200)
Net Operating Income $31.63 $11,049,150
Capitalization
Rate 7.0%
Tax Factor 1.830%
Combined Rate 8.830%
Stabilized Value $125,131,934
Rounded Value $125,100,000
McKinney Income Approach Pro Forma FY 08
Area/S.F. Rent/S.F. Total
Potential Gross Rent 349,325 $45.00 $15,719,625
Vacancy and Collection Loss 5% ($785,981)
Effective Gross Rent $42.75 $14,933,644
Total Operating Expenses $6.63 ($2,316,025)
Net Operating Income $36.12 $12,617,619
Capitalization
Rate 6.5%
Tax Factor 1.724%
Combined Rate 8.224%
Stabilized Value $153,424,356
Rounded Value $153,400,000
McKinney Income Approach Pro Forma FY 09
Area/S.F. Rent/S.F. Total
Potential Gross Rent 349,325 $50.00 $17,466,250
Vacancy and Collection Loss 5% ($873,313)
Effective Gross Rent $47.50 $16,592,938
Total Operating Expenses $6.83 ($2,385,890)
Net Operating Income $40.67 $14,207,048
Capitalization
Market Rate 6.5%
Tax Factor 1.797%
Combined Rate 8.297%
Stabilized Value $171,231,141
Rounded Value $171,200,000
For each of the fiscal years at issue, Ms. McKinney deducted $300,000 from her rounded values to account for the extraordinary capital expenses associated with converting Genzyme Center’s existing retail area to office space. After this deduction, Ms. McKinney’s final opinions of fair cash value for the subject property were: $113,400,000 for fiscal year 2005; $119,400,000 for fiscal year 2006; $124,800,000 for fiscal year 2007; $153,100,000 for fiscal year 2008; and $170,900,000 for fiscal year 2009.
The Board’s Valuation Findings
On the basis of all of the evidence, the Board found that the appellants met their burden of proving that the subject property was overvalued for each of the fiscal years at issue, with the exception of 2009. In making this finding, the Board agreed with Mr. Logue, who opined that the subject property’s highest and best use was its continued use as a single-tenant, class A office building with a small retail component. A property’s highest and best use must be, among other things, legally permissible. The evidence showed that the special permit required the properties in CRP to include retail space. Ms. McKinney’s conclusion that the highest and best use of the subject property was exclusively office space failed to take into consideration the applicable legal restrictions and therefore was not consistent with the principles governing the determination of highest and best use. Accordingly, the Board rejected Ms. McKinney’s opinion of highest and best use and, on the basis of all of the evidence, found that the highest and best use of the subject property was its continued use as a single-tenant office building with a small retail component.
The Board, like the parties, found that the income-capitalization approach was the most reliable method with which to value the subject property. It is the preferred method for valuing income-producing properties such as the subject property. Moreover, the Board concluded that the other two valuation methodologies were less likely to yield reliable estimates of the subject building’s fair market value. The evidence indicated that most of the local sales of comparable office properties which occurred during the relevant period involved the transfer of leased-fee interests, and as such, the Board concluded that they would not provide reliable indicia of the fee-simple value of the subject property. Similarly, the sale of the subject property in 2005 was part of a portfolio sale involving multiple properties, and therefore, did not provide reliable evidence of the subject building’s individual fair cash value. The Board therefore found that the sales-comparison approach was not likely to provide a reliable indication of the subject property’s fair market value.
Further, although the subject building was new construction as of the relevant dates of valuation, as Mr. Logue indicated, there was substantial fluctuation in the market between the commencement of Genzyme Center’s construction and the relevant dates of valuation. Accordingly, the Board found that the cost-reproduction methodology was not likely to yield a reliable indication of the subject property’s fair cash value. Therefore, the Board used the income-capitalization methodology to determine the fair cash value of the subject property.
A major discrepancy between the experts was the treatment of the space consumed by the subject building’s sizeable atrium. Mr. Logue acknowledged that the atrium was an “attractive and desirable feature from the standpoint of natural light, air circulation, aesthetics and other green building elements.” Nevertheless, he concluded that the atrium was a “significant drawback” because of the resultant amount of non-useable space, and accordingly, he discounted his market rents by 5%, the so-called “add on” factor. Ms. McKinney, on the other hand, did not apply an “add on” factor or otherwise reduce her rents to account for the area consumed by the subject property’s atrium.
On the basis of all of the evidence, the Board agreed with Ms. McKinney’s approach on this point. First, it was noteworthy that the lease for the subject property included the atrium space in the total square footage. Further, it was undisputed that the atrium was a key feature in the building’s green design. The atrium’s floor-to-roof penetration facilitated the circulation of air and its elaborate hanging prisms facilitated the distribution of natural light. Genzyme’s own promotional materials touted the subject building’s merits, many of which flow from its core atrium. Moreover, the Board found that the large and dramatic atrium provided the building with its stately world headquarters presence, which is precisely what Genzyme desired when it set out to construct the subject building. While vertical penetrations may be negative factors in multi-tenant office properties, the Board found that Genzyme Center’s atrium served several useful purposes. For these reasons, the Board disagreed with Mr. Logue’s conclusion that the subject building’s atrium was a “drawback.” It therefore declined to adopt his “add on” factor.
The Board found, however, that the appellants’ estimates of market rent were more reliable than the rent estimates offered by the appellee for numerous reasons. First, Mr. Logue’s rent estimates were derived from properties more comparable to the subject property than the properties on which Ms. McKinney relied in her income-capitalization analysis. All of the properties selected by Mr. Logue were located in the East Cambridge area, in close proximity to Genzyme Center, while several of the properties selected by Ms. McKinney were located elsewhere in Cambridge, such as in Harvard Square or the Alewife area. Further, all of Mr. Logue’s leases were leases for class A office space, while Ms. McKinney selected several leases for laboratory space. Additionally, some of Ms. McKinney’s leases were signed many months, and in one case, a full year, from the relevant date of valuation, but Ms. McKinney made no adjustments to her estimates of market rent to account for differences in time, while Mr. Logue made adjustments to account for differences in time where appropriate. For all of these reasons, the Board placed more weight on Mr. Logue’s estimates of market rent because Mr. Logue based those rents on properties more comparable to the subject property and, further, he made appropriate adjustments to account for differences from the subject property.
Second, there were several indicia in the record that the rents used by the assessors and Ms. McKinney were overstated. First, the rents used by both Ms. McKinney and the assessors were significantly greater than the actual rents at One Memorial Drive and 675 West Kendall Street. The former is a class A office building in East Cambridge with stunning views of the Charles River and the Boston skyline. Both Mr. Logue and Mr. Flaherty extolled the virtues of the building located at One Memorial Drive, including its views. Ms. McKinney testified that One Memorial Drive is an “excellent” building, and that, of all of her comparable lease properties, it contained the “attributes . . . most in line with” the subject property. The former property contains office, lab and retail space and is located directly adjacent to the subject property. The evidence contained data from two leases at One Memorial Drive, which were entered into in late 2004 and early 2005, with rents ranging from $30.42 to $32.75 per square foot. Also in 2005, Genzyme itself entered into a sub-lease for 65,070 square feet of class A office space at 675 West Kendall Street for $35.00 per square foot. By contrast, Ms. McKinney’s estimate of the subject property’s market rent for fiscal year 2006 was $40.00 per square foot, while the assessors used a rent of $45.15 per square foot for that year. The Board found that the record did not support such increased rents for Genzyme Center, and further found this disparity in rents to be a persuasive indicator that the rents used by Ms. McKinney and the assessors were overstated.
On the basis of all of the evidence, the Board found that Mr. Logue’s rent estimates provided persuasive evidence of fair market rent for Genzyme Center, and it therefore gave more weight to his opinion of fair market rent. Both experts utilized some of the same leases as comparable leases, and, placing particular reliance on these overlapping leases, the Board found the following fair market rents for the subject property’s office area: $37.50 for fiscal year 2005; $37.00 for fiscal year 2006; $37.00 for fiscal year 2007; $42.00 for fiscal year 2008; and $46.50 for fiscal year 2009.
Because the Board, like Mr. Logue, considered the subject property’s highest and best use to be its continued use as a single-tenant office building with a small retail component, the Board made a separate finding of fair market rent for the subject building’s retail area. The Board found Mr. Logue’s retail rent of $21.00 per square foot on a triple-net basis to be supported by the market data entered into evidence, and it therefore adopted that rent for each of the fiscal years at issue.
The experts differed significantly in their selection of appropriate vacancy rates. Mr. Logue utilized vacancy rates which largely tracked prevailing commercial vacancy rates in Cambridge during the relevant time periods. Ms. McKinney used a lower vacancy rate of 5% across the board, which she believed was realistic for a single-tenant, world headquarters type of property. The assessors also used a 5% vacancy rate for each of the fiscal years at issue. The Board agreed with the assessors and Ms. McKinney as to vacancy rates. The Board found that the subject building’s character as a single-tenant, world headquarters office property made it likely to have lower vacancy rates than the properties from which Mr. Logue derived his vacancy estimates, many of which were multi-tenant properties. Indeed, with the exception of the retail area, the subject building was fully occupied during the fiscal years at issue. The Board therefore adopted the 5% vacancy rate used by Ms. McKinney and the assessors for the subject building’s office areas. However, the retail portion of the subject property was 100% vacant during the fiscal years at issue. The Board therefore found it appropriate to use market vacancy rates for that area, and further, it found that Mr. Logue’s vacancy rates were supported by the evidence. The Board therefore adopted those rates, which were: 14% for fiscal year 2005; 13% for fiscal year 2006; 11% for fiscal year 2007; 10% for fiscal year 2008; and 9% for fiscal year 2009.
Though there was a significant dispute between the experts as to the determination of appropriate operating expenses, there was little discrepancy between the expense figures used by them. Both experts purported to rely, at least in part, on the actual operating expenses reported for Genzyme Center. However, there was a dispute as to exactly what the actual operating expenses were. Ms. McKinney relied on the expense figures reported by the owner of the subject building in the responses it filed with the assessors pursuant to § 38D. The expenses reported by the owner ranged from a low of $4.79 per square foot for calendar year 2004 to a high of $6.63 for calendar year 2007. Ms. McKinney made only minor adjustments to the reported expenses, ultimately utilizing operating expenses ranging from a low of $6.00 per square foot for fiscal year 2005 to a high of $6.83 per square foot for fiscal year 2009. Mr. Logue also purported to rely on the subject building’s actual operating expenses. However, the expenses obtained by Mr. Logue included information provided to him by Mr. Moran, and, ranging from $10.00 to $12.00 per square foot, were higher than the expenses reported by the subject building’s owner in the § 38D responses. Mr. Logue opined that the subject building’s actual expenses were significantly higher than average operating expenses in comparable office properties in Cambridge. Accordingly, Mr. Logue selected operating expenses which were lower than the actual expenses reported to him for the subject property. Mr. Logue’s operating expenses were: $7.00 per square foot for fiscal year 2005, with annual increases of $0.25, ending with expenses of $8.00 per square foot in fiscal year 2009. The assessors for their part calculated expenses as a percentage of income, but the percentages used by them for the subject property’s office areas translated into operating expenses of $8.79 per square foot for fiscal years 2005 through 2007; $9.04 per square foot for fiscal year 2008; and $10.51 per square foot for fiscal year 2009.
On the basis of all of the evidence, the Board found that Mr. Logue’s expenses were the most reliable estimates of the subject building’s operating expenses. The expenses used by Ms. McKinney were lower than the expenses used by the assessors and were also lower than the median operating expenses reflected in the BOMA statistics offered into evidence. Moreover, the subject building is a trophy- caliber property with a substantial amount of open space, qualities which the Board found made it likely to have higher than average cleaning costs. Additionally, the Board found credible Mr. Moran’s testimony that Genzyme’s unique green design and systems actually increased certain expenses because they required additional labor to clean and maintain. Because it found that they were better supported by the evidence, the Board adopted Mr. Logue’s operating expense figures of $7.00 for fiscal year 2005, $7.25 for fiscal year 2006, $7.50 for fiscal year 2007, $7.75 for fiscal year 2008, and $8.00 for fiscal year 2009. The Board applied these expenses to only the office areas of the subject building, and not to the retail area, because operating expenses in retail leases are typically borne by the tenants.
It was Ms. McKinney’s opinion that leasing commissions, replacement reserves, and TI allowances should not be deducted from potential gross income for purposes of a fee-simple valuation, and she therefore made no deductions for these items in her valuation analyses. Mr. Logue, on the other hand, adopted leasing commissions in the amount of $0.60 per square foot, replacement reserves of $0.25 per square foot, and TI in the amount of $1.25 per square foot for each of the fiscal years at issue. On the basis of all of the evidence, the Board found it appropriate to make allowances for these items, consistent with market practices. However, because of the subject building’s single-tenant layout, class A status, and its excellent condition, the Board found that comparatively minimal deductions for these items were appropriate. The Board therefore deducted leasing commissions in the amount of $0.40 per square foot, replacement reserves in the amount of $0.20 per square foot, and TIs in the amount of $1.00 per square foot. The Board applied the leasing commission and replacement reserve figures to the whole building, but applied the TI deduction to only the office areas, not the retail area, because, as Mr. Logue testified, expenses associated with the build out of retail space are usually borne by the tenants.
Lastly, the experts differed very little in their selection of capitalization rates. Ms. McKinney adopted capitalization rates ranging from 6.5% to 8.0%, while Mr. Logue’s selected rates ranged from 6.5% to 7.75%. The assessors, on the other hand, used higher rates, ranging from 7.2% to 8.88%, before the addition of a tax factor. The Board found that both Mr. Logue’s and Ms. McKinney’s capitalization rates were generally supported by the evidence. Considering that it adopted allowances for leasing commissions, replacement reserves, and TIs, the Board found that capitalization rates on the lower end of the range were warranted. The Board therefore adopted Mr. Logue’s selected capitalization rates of 7.75% for fiscal year 2005; 7.25% for fiscal year 2006; 7.0% for fiscal year 2007; and 6.5% for fiscal year 2009. For fiscal year 2008, the Board adopted Ms. McKinney’s selected capitalization rate of 6.5%, which was slightly lower than Mr. Logue’s rate of 6.75% for fiscal year 2008. To these rates the Board added applicable tax factors, which were prorated to apply to only the office areas of the subject property.
On the basis of these subsidiary findings, the Board found the fair cash value of the subject property to be $98,271,000 for fiscal year 2005; $101,429,000 for fiscal year 2006; $102,871,000 for fiscal year 2007; $129,310,000 for fiscal year 2008; and $144,921,000 for fiscal year 2009. The following tables set forth the Board’s valuation findings for each of the fiscal years at issue.
Board Income Approach Valuation Analysis FY 05
Potential Gross Rent: S.F. Rent/S.F. Total
Office 343,000 $37.50 $12,862,500
Retail 6,325 $21.00 $132,825
Total Floor Area 349,325
Total Potential Gross
Rent $12,995,325
Vacancy and Collection Office 5% ($643,125)
Loss Retail 14% ($18,595.50)
Effective Gross Rent $12,333,604.50
Expenses
Operating Expenses 343,000 $7.00 ($2,401,000)
Leasing Commissions 349,325 $0.40 ($139,730)
Reserve for Replacement 349,325 $0.20 ($69,865)
Tenant Improvements 343,000 $1.00 ($343,000)
Total Operating Expenses ($2,953,595)
Net Operating Income (NOI) $9,380,009.50
Capitalization
Rate 7.750%
Tax Factor-$18.28/1000*.9819 1.795%
Overall Rate 9.545%
Indicated Value $98,271,445.78
Rounded Fair Cash Value $98,271,000
Board Income Approach Valuation Analysis FY 06
Potential Gross Rent: S.F. Rent/S.F. Total
Office 343,000 $37.00 $12,691,000
Retail 6,325 $21.00 $132,825
Total Floor Area 349,325
Total Potential Gross
Rent $12,823,825
Vacancy and Collection Office 5% ($634,550)
Loss Retail 13% (17,267.24)
Effective Gross Rent $12,172,007.75
Expenses
Operating Expenses 343,000 $7.25 ($2,486,750)
Leasing Commissions 349,325 $0.40 ($139,730)
Reserve for Replacement 349,325 $0.20 ($69,865)
Tenant Improvements 343,000 $1.00 ($343,000)
Total Operating Expenses ($3,039,345)
Net Operating Income (NOI) $9,132,662.75
Capitalization
Rate 7.25%
Tax Factor-$17.86/1000*.9819 1.7537%
Overall Rate 9.004%
Indicated Value $101,428,951
Rounded Fair Cash Value $101,429,000
Board Income Approach Valuation Analysis FY 07
Potential Gross Rent: S.F. Rent/S.F. Total
Office 343,000 $37.00 $12,691,000
Retail 6,325 $21.00 $132,825
Total Floor Area 349,325
Total Potential Gross
Rent $12,823,825
Vacancy and Collection Office 5% ($634,550)
Loss Retail 11% ($14,610.75)
Effective Gross Rent $12,174,664.25
Expenses
Operating Expenses 343,000 $7.50 ($2,572,500)
Leasing Commissions 349,325 $0.40 ($139,730)
Reserve for Replacement 349,325 $0.20 ($69,865)
Tenant Improvements 343,000 $1.00 ($343,000)
Total Operating Expenses ($3,125,095)
Net Operating Income (NOI) $9,049,569.25
Capitalization
Rate 7.00%
Tax Factor-$18.30/1000*.9819 1.797%
Overall Rate 8.797%
Indicated Value $102,871,083.89
Rounded Fair Cash Value $102,871,000
Board Income Approach Valuation Analysis FY 08
Potential Gross Rent: S.F. Rent/S.F. Total
Office 343,000 $42.00 $14,406,000
Retail 6,325 $21.00 $132,825
Total Floor Area 349,325
Total Potential Gross
Rent $14,538,825
Vacancy and Collection Office 5% ($720,300)
Loss Retail 10% ($13,282.50)
Effective Gross Rent ($13,805,242.50)
Expenses
Operating Expenses 343,000 $7.75 ($2,658,250)
Leasing Commissions 349,325 $0.40 ($139,730)
Reserve for Replacement 349,325 $0.20 ($69,865)
Tenant Improvements 343,000 $1.00 ($343,000)
Total Operating Expenses ($3,210,845)
Net Operating Income (NOI) $10,594,397.50
Capitalization
Rate 6.5%
Tax Factor-$17.24/1000*.9819 1.693%
Overall Rate 8.193%
Indicated Value $129,310,356.40
Rounded Fair Cash Value $129,310,000
Board Income Approach Valuation Analysis FY 09
Potential Gross Rent: S.F. Rent/S.F. Total
Office 343,000 $46.50 $15,949,500
Retail 6,325 $21.00 $132,825
Total Floor Area 349,325
Total Potential Gross
Rent $16,082,325
Vacancy and Collection Office 5% ($797,475)
Loss Retail 9% ($11,954.25)
Effective Gross Rent $15,272,895.75
Expenses
Operating Expenses 343,000 $8.00 $2,744,000
Leasing Commissions 349,325 $0.40 $139,730
Reserve for Replacement 349,325 $0.20 $69,865
Tenant Improvements 343,000 $1.00 $343,000
Total Operating Expenses $3,296,595
Net Operating Income (NOI) $11,976,300.75
Capitalization
Rate 6.50%
Tax Factor-$17.64/1000*.9819 1.693%
Overall Rate 8.193%
Indicated Value $144,921,354.67
Rounded Fair Cash Value $144,921,000
For fiscal years 2005 through 2008, the Board found that the appellants met their burden of proving that the assessed value of the subject property exceeded its fair cash value. Accordingly, the Board issued decisions for the appellants in docket numbers F277284, F282964, F287968, and F294379, and ordered abatements as follows:
|
Fiscal Year |
Assessed Value ($) |
Fair Cash Value ($) |
Over-valuation ($) |
Tax Rate ($/$1,000) |
Abatement ($)[57] |
|
2005 |
113,843,100 |
98,271,000 |
15,572,100 |
18.28 |
293,197.73 |
|
2006 |
130,793,100 |
101,429,000 |
29,364,100 |
17.86 |
540,172.11 |
|
2007 |
130,793,100 |
102,871,000 |
27,922,100 |
18.30 |
526,303.66 |
|
2008 |
134,544,100 |
129,310,000 |
5,234,100 |
17.24 |
92,942.96 |
For fiscal year 2009, the Board found that the fair cash value of the subject property was $144,921,000, an amount which exceeded its assessed value of $134,456,100. The Board therefore issued a decision for the appellee in docket number F299101.
OPINION
Fair cash value is the standard for assessing real property for tax purposes in Massachusetts. See G.L. c. 59, § 38. “Fair cash value is defined as the price on which a willing seller and a willing buyer will agree if both of them are fully informed and under no compulsion . . . . Accordingly, fair cash value means . . . fair market value.” Northshore Mall Limited Partnership v. Assessors of Peabody, Mass. ATB Findings of Fact and Reports 2004-195, 246, (citing Boston Gas Co. v. Assessors of Boston, 334 Mass. 549, 566 (1956)), aff’d 63 Mass. App. Ct. 1116 (2005).
The ascertainment of a property’s highest and best use is a prerequisite to valuation analysis. See Peterson v. Assessors of Boston, 62 Mass. App. Ct. 428, 429 (2004); Irving Saunders Trust v. Assessors of Boston, 26 Mass. App. Ct. 838, 843 (1989). “A property’s highest and best use must be legally permissible, physically possible, financially feasible, and maximally productive.” Northshore Mall Limited Partnership, Mass. ATB Findings of Fact and Report at 2004-246. The Board agreed with the expert witnesses that, because of its design and layout, the subject building was best suited to use by a single-tenant. Further, the Board found that the special permit required the subject building to have dedicated retail space. Accordingly, the Board found and ruled that the highest and best use of the subject property was its continued use as a single-tenant office building with a small retail component.
Generally, real estate valuation experts, the Massachusetts courts, and this Board rely upon three approaches to ascertain the fair cash value of property: income capitalization; sales comparison; and cost of reproduction. Correia v. New Bedford Redevelopment Authority, 375 Mass. 360, 362 (1978). In the present appeals, the Board found and ruled that the cost reproduction approach was not likely to yield a reliable indication of the subject property’s fair market value, given the fluctuation in the market from the commencement of the subject building’s construction through the fiscal years at issue. See Vertex Pharmaceuticals, Inc., v. Assessors of Cambridge, Mass. ATB Findings of Fact and Reports at 2009-1090, 1121. (“Market conditions during the relevant assessment periods . . . made the cost approach an unreliable valuation method.”). Similarly, although sales of property generally “furnish strong evidence of market value,” Foxboro Associates v. Board of Assessors of Foxborough, 385 Mass. 679, 682 (1982), the evidence showed that sales of office properties in the vicinity of the subject property during the relevant time period involved the transfer of leased-fee interests, while the question for decision in these appeals is the value of the fee-simple interest. See Olympia & York State Street Co. v. Assessors of Boston, 428 Mass. 236, 247 (1998) (“The assessors must determine a fair cash value for the property as a fee simple estate, which is to say, they must value an ownership interest in the land and the building as if no leases were in effect.”) As it has in past appeals, the Board found and ruled that such leased-fee sales did not provide probative evidence of fee-simple value. Id. Further, the actual sale of the subject property in 2005 did not provide reliable evidence of its individual fair cash value because it was sold in a portfolio sale involving multiple properties. See Vertex Pharmaceuticals, Inc., Mass. ATB Findings of Fact and Reports at 2008-1136 (citing Northshore Mall Limited Partnership, Mass. ATB Findings of Fact and Reports at 2004-249) (“[T]he most recent sales of the subject properties were part of a portfolio sale of multiple properties and did not present reliable evidence of the fair cash value of the subject properties individually.”) The Board therefore found and ruled that the sales-comparison approach was not a reliable method with which to determine the market value of the subject property.
When reliable sales data are not available and when the subject is income-producing property, the use of the income-capitalization approach is appropriate. Assessors of Weymouth v. Tammy Brook Co., 368 Mass. 807, 881 (1975); Assessors of Lynnfield v. New England Oyster House, 362 Mass. 696, 701-702 (1972); Assessors of Quincy v. Boston Consolidated Gas Co., 309 Mass. 60, 67 (1941). Here, both experts and the assessors used the income-capitalization approach to determine the fair market value of the subject property. The Board agreed with the parties that the subject property’s fair cash value could most reliably be estimated by using the income-capitalization approach, and the Board therefore adopted that approach.
“[T]he direct capitalization of income method analyzes the property’s capacity to generate income over a one-year period and converts the capacity into an indication of fair cash value by capitalizing the income at a rate determined to be appropriate for the investment risk involved.” Olympia & York State Street Co., 428 Mass. at 239. The task of valuing a property based on this methodology requires that “appraisers analyze competitive facilities and determine market rents, market vacancy and credit loss rates, market expenses, market capitalization rates, and general market conditions.” Olympia & York State Street Co., 428 Mass. at 239.
To provide probative evidence of market rent, leases must be from properties similar in location and other qualities to the subject property, and must be signed reasonably close in time to the relevant date of assessment. All of Mr. Logue’s selected leases were leases for class A office space in East Cambridge, like the subject property. Where appropriate, Mr. Logue made adjustments to account for differences in time from the relevant date of assessment. In contrast, Ms. McKinney selected a number of leases from properties that were not in the immediate vicinity of the subject property. Further, unlike Mr. Logue, Ms. McKinney failed to adjust her comparable lease data for time, despite differences between the dates of execution of her chosen leases and the relevant dates of valuation. Moreover, several of Ms. McKinney’s selected leases were leases for lab space, rather than class A office space. The Board therefore found and ruled that Ms. McKinney’s estimates of rent were less persuasive as they were based in part on leases from properties not particularly comparable to the subject property, and, further, she failed to make adjustments to account for critical differences where appropriate. See State Mutual Life Assurance Co. of America v. Assessors of Worcester, Mass. ATB Findings of Fact and Reports 1986-151, 164, aff’d 25 Mass. App. Ct. 1114 (1988) (“failure to properly adjust for the obvious differences in the properties [make] imputation of a market rent from the ‘comparables’ to the subject property devoid of probative worth.”).
In addition, the rents adopted by both the assessors and Ms. McKinney were significantly higher than actual rents at One Memorial Drive, a class A office property in East Cambridge, which several witnesses testified was an excellent building with spectacular skyline and river views. For example, the market rent used by the assessors for fiscal year 2006 exceeded the actual rent in one lease at One Memorial Drive by approximately 50%, and the Board found that the record did not support such an increased rent for Genzyme Center. Likewise, the rents adopted by Ms. McKinney and the assessors far exceeded the actual rent paid by Genzyme for class A office space at 675 West Kendall Street, a building located adjacent to the subject property. The Board found this evidence to be an indication that the rents used by the assessors and Ms. McKinney exceeded the fair market rents for the subject property.
Because they were better supported by the evidence, the Board placed greater weight on Mr. Logue’s estimates of market rent. However, the Board did not adopt Mr. Logue’s estimates of market rent across the board. “That a person qualifies as an expert does not endow his testimony with magic qualities.” Boston Gas Co., 334 Mass. at 579. The Board is “not required to accept the opinion expressed . . . by [an] expert witness,’” and, further, it is “entitled to “‘accept such portions of the evidence as appeared to have the more convincing weight.’” Foxboro Associates, 385 Mass. at 683; Medical Malpractice Underwriting Ass’n of Massachusetts v. Commissioner of Insurance, 395 Mass. 43, 56 (1985)(citations omitted). After considering all of the evidence, placing particular reliance on the leases chosen by Mr. Logue and Ms. McKinney which overlapped, the Board formed its own estimates of market rent for the subject property.
Ms. McKinney and the assessors used a vacancy rate of 5% for each of the years at issue, while Mr. Logue’s vacancy rates were nearly two to three times that rate. Mr. Logue’s rates were based on vacancy and availability rates in Cambridge during the relevant time periods. Although commercial vacancy rates in Cambridge may have been greater than 5%, the Board found and ruled that the vacancy rate used by Ms. McKinney and the assessors was more appropriate for the subject property.
As an initial matter, the subject property was fully occupied during each of the fiscal years at issue. Genzyme’s 15-year lease for the subject property commenced in 2002 and included options to renew. The Board found and ruled that the subject property was unlikely to experience collection loss or significant periods of vacancy during the fiscal years at issue. In addition, in determining an appropriate vacancy rate, the Board considered the subject property’s characteristics as a single-tenant, world headquarters trophy-caliber building. As it has in past appeals, the Board concluded that such buildings are less likely to experience tenant turnover or prolonged periods of vacancy. New England Tel. & Tel. Co. v. Assessors of Framingham, Mass. ATB Findings of Fact and Reports 1988-95, 108 (adopting a 2% vacancy rate for an owner-occupied building built to the owner’s specifications); State Mutual Life Assurance Co. of America, Mass. ATB Findings of Fact and Reports at 1986-173 (finding that a low vacancy rate was appropriate for an opulent corporate headquarters building). The Board found and ruled that the use of a lower vacancy rate, which more “closely corresponded with the actual experience” of the subject property was appropriate, and it therefore declined to apply Mr. Logue’s vacancy rates to the subject building’s office areas. Olympia & York State. St. Co., 428 Mass. at 242. The Board did, however, adopt Mr. Logue’s vacancy rates for the retail portion of the subject property, which remained vacant during the fiscal years at issue.
Further, the Board declined to apply Mr. Logue’s 5% “add on” factor, which supposedly accounted for the reduction in the subject building’s usable area created by its large core atrium. The Board disagreed with Mr. Logue’s conclusion that the subject building’s atrium was a “significant drawback.” The Board found the facts of the present appeals analogous to those in State Mutual Life Assurance Co. of America, Mass. ATB Findings of Fact and Reports at 1986-151. In that appeal, a large corporation approaching a milestone anniversary sought to build a new headquarters building which would “allow employees the easiest practical access to those with whom they work most closely” and provide working conditions which facilitated maximum “workflow, communications, light and comfort.” Id. at 1986-156. To that end, the company commenced the construction of an opulent, multi-story office building, the interior design of which featured multiple lobbies as well as large open areas, aimed at facilitating “rapid workflow and management communication.”[58] Id. In that case, the Board found and ruled that, as indicated by industry publications, calculations based on “usable office space” were “not helpful in determining the value of a single tenant or owner-occupied corporate headquarters.” Id. at 1986-160. The Board found and ruled in that case that the building’s design made it well-suited to its purpose as a corporate headquarters building. Id. at 1986-162. Likewise, in the present appeals, the Board found and ruled that Genzyme Center’s large atrium was not only essential to the building’s green design, but also added considerably to its stately, world headquarters ambience. The Board found that, rather than a “drawback,” the subject property’s large atrium was a feature which made the building well-suited to its use as a corporate world headquarters. For these reasons, the Board declined to apply Mr. Logue’s “add on” factor.
With respect to expenses, the evidence showed that the operating expenses used by Ms. McKinney were understated. Ms. McKinney’s operating expense estimates were lower than the expenses used by the assessors and were also lower than the median market expenses reported by BOMA. Further, the expenses used by Ms. McKinney were reported by the subject building’s owner and did not take into consideration many of the expenses for which Genzyme was responsible, including significant cleaning and maintenance expenses resulting from Genzyme Center’s unique green design. Mr. Logue’s expense estimates adequately accounted for these additional costs and also took into account the relevant market data. Because they were supported by the market data and by credible, testimonial evidence, the Board adopted Mr. Logue’s estimated operating expenses.
The Board also adopted Mr. Logue’s approach in allowing for TIs, replacement reserves and leasing commissions “above the line”, i.e. before arriving at net operating income, because evidence of the relevant market data indicated that making allowances for these items was the prevailing practice in Cambridge during the relevant time periods. As explained in The Appraisal of real estate, “[t]enant improvements are driven by the market—i.e., they are only done if the market dictates it.” Id. at 480. It is appropriate to make “above-the-line” allowances for items like TIs, replacement reserves, and leasing commissions where market data so warrant, and the Board found and ruled that they did so in the present appeals. See Olympia & York State Street Co., 428 Mass. at 243. See also Cambridge Park 125 Realty Corp. v. Assessors of Cambridge, Mass. ATB Findings of Fact and Reports 2008-746, 791, aff’d, 74 Mass. App. Ct. 1119 (2009). Although the Board adopted Mr. Logue’s approach in this respect, it did not adopt his estimates for TIs, replacement reserves, and leasing commissions, which it found were overstated. Given the age and excellent condition of the subject property, and its single-tenant, world headquarters characteristics, the Board found that more conservative estimates for TIs, replacement reserves, and leasing commissions were appropriate. The Board therefore selected its own lower allowances for these items.
The capitalization rates selected by the experts were close and, in some cases, identical, and the Board found their selected capitalization rates to be generally supported by the market data. Mr. Logue’s range of rates was slightly lower than the range of rates selected by Ms. McKinney. Considering that it adopted allowances for leasing commissions, replacement reserves, and TIs “above the line,” the Board found and ruled that capitalization rates on the lower end of the range were warranted. See Cambridge Park 125 Realty Corp., Mass. ATB Findings of Fact and Reports at 2008-779-81. The Board therefore adopted Mr. Logue’s selected capitalization rates, with the exception of fiscal year 2008. Ms. McKinney’s selected rate of 6.5% for fiscal year 2008 was slightly lower than Mr. Logue’s rate of 6.75%, and accordingly, the Board adopted Ms. McKinney’s capitalization rate for that year.
In reaching its opinion of fair cash value in these appeals, the Board was not required to believe the testimony of any particular witness or to adopt any particular method of valuation that an expert witness suggested. Rather, the Board could accept those portions of the evidence that the Board determined had more convincing weight. Foxboro Associates, 385 Mass. at 683; New Boston Garden Corp. v. Assessors of Boston, 383 Mass. 456, 473 (1981); New England Oyster House, Inc., 362 Mass. at 702. In evaluating the evidence before it, the Board selected among the various elements of value and formed its own independent judgment of fair cash value. General Electric v. Assessors of Lynn, 393 Mass. 591, 605 (1984); North American Philips Lighting Corp. v. Assessors of Lynn, 392 Mass. 296, 300 (1984). Moreover, ‘the board is entitled to, and did, give weight to the view of the subject property . . . in determining the fair cash value of the real estate.’” Antonino v. Assessors of Shutesbury, Mass. ATB Findings of Fact and Reports 2008-54, 2008-71 (citation omitted.)
The Board need not specify the exact manner in which it arrived at its valuation. Jordan Marsh v. Assessors of Malden, 359 Mass. 106, 110 (1971). The fair cash value of property cannot be proven with “mathematical certainty and must ultimately rest in the realm of opinion, estimate and judgment.” Assessors of Quincy, 309 Mass. at 72. “The credibility of witnesses, the weight of the evidence, and inferences to be drawn from the evidence are matters for the board.” Cummington School of the Arts, Inc. v. Assessors of Cummington, 373 Mass. 597, 605 (1977). “The essential requirement is that the Board exercise judgment.” New Boston Garden, 383 Mass. at 473.
“‘The burden of proof is upon the [appellant] to make out its right as a matter of law to abatement of the tax.’” Schlaiker v. Board of Assessors of Great Barrington, 365 Mass. 243, 245 (1974), quoting Judson Freight Forwarding Co. v. Commonwealth, 242 Mass. 47, 55 (1922). The appellant must show that it has complied with the statutory prerequisites to its appeal, Cohen v. Assessors of Boston, 344 Mass. 268, 271 (1962), and that the assessed valuation of its property was improper. See Foxboro Associates, 385 Mass. at 691. The assessment is presumed valid until the taxpayer sustains its burden of proving otherwise. Schlaiker, 365 Mass. at 245.
The Board applied these principles in reaching its conclusion that the appellants met their burden of proving that the subject property was overvalued for each of the fiscal years at issue, with the exception of 2009. Accordingly, the Board issued decisions for the appellants in docket numbers F277284, F282964, F287968, and F294379 and granted abatements as follows:
|
Fiscal Year |
Assessed Value ($) |
Fair Cash Value ($) |
Over-valuation ($) |
Tax Rate ($/$1,000) |
Abatement ($)[59] |
|
2005 |
113,843,100 |
98,271,000 |
15,572,100 |
18.28 |
293,197.73 |
|
2006 |
130,793,100 |
101,429,000 |
29,364,100 |
17.86 |
540,172.11 |
|
2007 |
130,793,100 |
102,871,000 |
27,922,100 |
18.30 |
526,303.66 |
|
2008 |
134,544,100 |
129,310,000 |
5,234,100 |
17.24 |
92,942.96 |
Lastly, for fiscal year 2009, the Board found that the fair cash value of the subject property was $144,921,000. As this amount was greater than its assessed value of $134,456,100, the Board decided the fiscal year 2009 appeal for the appellee. Accordingly, the Board issued a decision for the appellee in docket number F299101.
APPELLATE TAX BOARD
By: _________________________________
Thomas W. Hammond, Jr., Chairman
A true copy,
Attest: ____________________________
Clerk of the Board
COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD
JOHN J. GIURLEO v. BOARD OF ASSESSORS OF
THE TOWN OF RAYNHAM
Docket No. F299668 Promulgated:
May 3, 2011
This is an appeal filed under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 59, §§ 64 and 65, from the refusal of the appellee, Board of Assessors of the Town of Raynham (“assessors”), to abate taxes on certain real estate in the Town of Raynham, owned by and assessed to John J. Giurleo (“appellant” or “Mr. Giurleo”) under G.L. c. 59, §§ 11 and 38, for fiscal year 2009 (“fiscal year at issue”).
Commissioner Egan (“Presiding Commissioner”) heard this appeal under G.L. c. 58A, § 1 and 831 CMR 1.20 and issued a single-member decision for the appellant.
These findings of fact and report are made pursuant to a request by the appellant under G.L. c. 58A, § 13 and 831 CMR 1.32.
John J. Giurleo, pro se, for the appellant.
Michael Lalli, assessor, for the appellee.
FINDINGS OF FACT AND REPORT
On the basis of the testimony and exhibits offered into evidence at the hearing of this appeal, the Presiding Commissioner made the following findings of fact.
On January 1, 2008, the appellant was the assessed owner of a 40,050 square-foot parcel of real estate located at 200 Wilbur Street in Raynham (“subject property”). The subject property is improved with a single-family, ranch-style home, which contains 1,082 square feet of living area. The dwelling has a total of five rooms, including three bedrooms. There is also a twelve square-foot front porch, a twenty-four square-foot side porch, and a shed.
For fiscal year 2009, the assessors valued the subject property at $265,700 and assessed taxes thereon, including a district tax, in the total amount of $3,238.88. In accordance with G.L. c. 59, § 57C, the appellant paid the tax due without incurring interest. On January 27, 2009, in accordance with G.L. c. 59, § 59, the appellant timely filed an abatement application with the assessors, which they denied that same day. On April 14, 2009, the appellant timely filed a petition with the County Commissioners. On April 22, 2009, the assessors timely transferred the case to the Appellate Tax Board (“Board”), pursuant to G.L. c. 59, § 64. On May 6, 2009, the appellant seasonably perfected his appeal with the Board by paying the required entry fee under G.L. c. 58A, § 7. On the basis of these facts, the Presiding Commissioner found and ruled that the Board had jurisdiction to hear this appeal.
The issue in this appeal is whether the assessed value of the subject property, $265,700, exceeded its fair cash value as of January 1, 2008, which was the relevant date of assessment for the fiscal year at issue. The subject property has been the topic of several recent appeals. Mr. Giurleo filed appeals with the Board disputing the subject property’s assessment for fiscal years 2005, see John J. Giurleo v. Assessors of Raynham, Mass. ATB Findings of Fact and Reports 2006-449 (“Giurleo I”), and 2006, see John J. Giurleo v. Assessors of Raynham, Mass. ATB Findings of Fact and Reports 2007-615 (“Giurleo II”), but those appeals were dismissed based on Mr. Giurleo’s refusal to comply with the Board’s Orders allowing the assessors to inspect the subject property, as required by G.L. c. 58A, § 8A. Additionally, Mr. Giurleo appealed the subject property’s fiscal year 2008 assessment, but the Presiding Commissioner issued a decision for the appellee in that appeal after finding and ruling that Mr. Giurleo did not meet his burden of proving that the subject property’s assessed value was greater than its fair cash value. See John J. Giurleo v. Assessors of Raynham, Mass. ATB Findings of Fact and Reports 2009-644 (“Giurleo III”). [60]
Following the Board’s decisions in Giurleo I and Giurleo II, Mr. Giurleo allowed an independent third-party appraiser to conduct an inspection of the subject property on behalf of the assessors. That inspection was conducted on September 20, 2009. According to the testimony and documents entered into the record, the independent appraiser measured the subject property and opined that its total square footage was 1,040 square feet, rather than 1082 square feet, as listed on the property record card for the subject property. This reduction in square footage was attributed to a 42-square-foot portion of the subject property which protrudes from the main part of the house and which does not have basement beneath it, unlike the rest of the home. In addition, the independent appraiser suggested other adjustments, such as increasing the depreciation factor to be applied to the dwelling and reducing the value assigned to the shed due to its poor condition.
Through the testimony of Michael Lalli, assessor for Raynham, along with their documentary submissions, the assessors conceded at the hearing of this appeal that the assessed value of the subject property exceeded its fair cash value for the fiscal year at issue. After reviewing the independent inspector’s report, the assessors applied a greater depreciation factor to the subject property, and also decreased the value of the shed by $200 to account for its poor condition. Further, the assessors reclassified the entrance to the subject property’s basement as a shed after taking into consideration its poor condition.
Additionally, the assessors initially decreased the value assigned to the dwelling from $133,600 to $131,100 to account for the 42-square-foot decrease in finished living area with basement beneath. However, they added another category for living area without a basement beneath to account for those 42 square feet, to which they assigned a value of $3,200. In so doing, the assessors actually increased the value assigned to the dwelling from $133,600 to $134,300.
After making these adjustments, the assessors’ final opinion of the subject property’s fair cash value for the fiscal year at issue was $251,200, or $14,500 less than its assessed value for the fiscal year at issue.
Mr. Giurleo, who testified on his own behalf at the hearing of this appeal, detailed various perceived errors made by the assessors, including the fact that two structures designated by the assessors as porches were not, in his opinion, porches but were merely “entrances.” Mr. Giurleo also contested the $5,300 value assigned to the dwelling’s fireplace, which had been boarded up and was located in the dwelling’s basement. In his abatement application, Mr. Giurleo asserted that the fair cash value of the subject property was $232,200. At the hearing, he proposed a fair cash value of $244,240, but he introduced no affirmative evidence of value, such as comparable sales or assessment data, to support his opinion. The evidence offered by Mr. Giurleo consisted exclusively of his testimony, which was truncated when he abruptly left the hearing before it was concluded.
On the basis of all of the evidence, the Presiding Commissioner found that the subject property’s assessed value exceeded its fair cash value for the fiscal year at issue. The Presiding Commissioner found that the evidence presented by the assessors, which reflected adjustments to the subject property’s valuation made by the assessors following the inspection of the subject property by an independent, third-party appraiser, constituted the best evidence of the subject property’s fair cash value. However, the Presiding Commissioner found that the assessors erred when adjusting the value of the dwelling to account for the 42 square feet of living area without an underlying basement. Mr. Lalli testified that the assessors were merely attempting to be more precise in accounting for this area, but in actuality they increased the value of the dwelling from $133,600 to $134,300. The Presiding Commissioner agreed with the assessors that the 42 square feet of space was properly considered living area even though it has no basement beneath it, but she found that there was no support in the record for this $700 increase in value to the dwelling.
The Presiding Commissioner found that Mr. Giurleo, for his part, failed to offer evidence to support his opinion of fair cash value, which he initially expressed to be $232,200, but later asserted was $244,240. Mr. Giurleo’s evidence consisted of his testimony regarding errors made by the assessors in valuing various features of the subject property, including its fireplace and porches. The Presiding Commissioner found that, to the extent that the assessors made errors in their original assessment of the subject property for the fiscal year at issue, those errors were adequately remedied by the subsequent adjustments made by the assessors after they took into consideration the report of the independent appraiser. Specifically, the Presiding Commissioner found that the assessors adequately accounted for the poor overall condition of the subject property by increasing the depreciation value, and more particularly, they accounted for the poor condition of the shed and basement entrance by decreasing the value assigned to those structures. The appellant’s assertions about the valuation of the subject property’s various individual features did little to establish that the fair cash value of the subject property was less than the assessors’ revised opinion of value. Moreover, the appellant offered no recent sales of comparable properties or any comparable assessment data into evidence. Accordingly, the Presiding Commissioner found that there was no support in the record for Mr. Giurleo’s opinions of value for the subject property, which ranged from $232,200 to $244,240.
On the basis of all of the evidence, the Presiding Commissioner found and ruled that the fair cash value of the subject property for the fiscal year at issue was $250,500, an amount which was calculated by adopting the assessors’ revised opinion of fair cash value, which was $251,200, and subtracting therefrom the $700 that was erroneously added by the assessors to the value of the dwelling. Accordingly, the Presiding Commissioner decided this appeal for the appellant, and ordered an abatement of $185.28.[61]
OPINION
“All property, real and personal, situated within the commonwealth . . . shall be subject to taxation.” G.L. c. 59, § 2. Assessors have a statutory obligation to assess real estate at its fair cash value as of the first day of January of the year preceding the fiscal year at issue. G.L. c. 59 §§ 11 and 38. Fair cash value is defined as the price on which a willing seller and a willing buyer in a free and open market will agree if both of them are fully informed and neither is under compulsion. Boston Gas Co. v. Assessors of Boston, 334 Mass. 549, 566 (1956).
The taxpayer has the burden of proving that the subject property has a lower value than that assessed. Schlaiker v. Assessors of Great Barrington, 365 Mass. 243, 245 (1974). The assessment is presumed to be valid unless the taxpayer is able to sustain his or her burden of proving otherwise. General Electric Co. v. Assessors of Lynn, 393 Mass. at 591, 598 (1984) (citing Schlaiker, 365 Mass. at 245). The taxpayer may sustain this burden by introducing evidence of fair cash value, or by proving that the assessors erred in their method of valuation. General Electric, 393 Mass. at 600.
In the present appeal, the assessors conceded that the assessed value of the subject property exceeded its fair cash value for the fiscal year at issue. After taking into consideration the information gathered by an independent appraiser during a recent inspection of the subject property, the assessors’ revised opinion of the subject property’s fair cash value was $251,200, rather than its assessed value of $265,700. The Presiding Commissioner found and ruled that the evidence introduced by the assessors constituted the most reliable evidence of the subject property’s fair cash value, with the exception that they made an error which resulted in the overvaluation of the dwelling by $700.
The Presiding Commissioner found and ruled that the evidence presented by the appellant did little to erode the credibility of the assessors’ revised opinion of value. Mr. Giurleo introduced no affirmative evidence of value, such as comparable sales or assessment data. Mr. Giurleo’s testimony focused primarily on the perceived flaws committed by the assessors in valuing various individual components of the subject property, such as its porches, which he claimed were merely entrances, and its fireplace. Even assuming arguendo that Mr. Giurleo’s assertions about the subject property were true, such facts alone would not establish that the fair cash value of the subject property was less than the assessors’ revised opinion of value. A taxpayer “does not conclusively establish a right to an abatement merely by showing that [individual components of the property are] overvalued.” Assessors of Brookline v. Prudential Insurance Co., 310 Mass. 300, 317 (1941). In abatement proceedings, “the question is whether the assessment for the parcel of real estate, including both the land and the structures thereon, is excessive.” Massachusetts General Hospital v. Belmont, 238 Mass. 396, 403 (1921). Although the value of a property’s component parts “are each open to inquiry,” the ultimate question for the Board is “whether [the] single assessment is excessive.” Massachusetts General Hospital, 238 Mass. at 403; see also Buckley v. Assessors of Duxbury, Mass. ATB Findings of Fact and Reports 1990-110, 119; Jernegan v. Assessors of Duxbury, Mass. ATB Findings of Fact and Reports 1990-39, 44. Accordingly, the Presiding Commissioner found and ruled that there was no evidence in the record to support Mr. Giurleo’s opinions of the subject property’s fair cash value, which ranged from $232,200 to $244,240.
On the basis of all of the evidence, the Presiding Commissioner found and ruled that the fair cash value of the subject property for the fiscal year at issue was $250,500. Accordingly, the Presiding Commissioner issued a single-member decision for the appellant in this appeal, and ordered an abatement of $185.28.
APPELLATE TAX BOARD
By: _____ _______
Nancy T. Egan, Commissioner
A true copy,
Attest: _____________________________
Clerk of the Board
COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD
HOME FOR AGED PEOPLE v. BOARD OF ASSESSORS OF
IN FALL RIVER THE CITY OF FALL RIVER
Docket Nos. F288407 Promulgated:
F296842 May 4, 2011
F300683
These are appeals under the formal procedure, pursuant to G.L. c. 58A, § 7 and G.L. c. 59, §§ 64 and 65, from the refusal of the appellee Board of Assessors of the City of Fall River (“assessors” or “appellee”) to abate real estate taxes on certain real estate located in Fall River, owned by and assessed to the appellant, Home for Aged People in Fall River (“appellant” or “Home”), under G.L. c. 59, §§ 11 and 38 for fiscal years 2007 through 2009 (“fiscal years at issue”).
Commissioner Mulhern heard these appeals. Chairman Hammond and Commissioners Scharaffa, Egan, and Rose joined him in the decisions for the appellant, which are promulgated simultaneously with these findings of fact and report.
These findings of fact and report are made pursuant to a request by the appellant under G.L. c. 58A, § 13 and 831 CMR 1.32.
Stephen W. Kidder, Esq. and Diane C. Tillotson, Esq. for the appellant.
Burton Peltz, Esq. for the appellee.
FINDINGS OF FACT AND REPORT
I. Introduction and Jurisdiction
On the basis of the stipulated facts and documents, testimony and exhibits offered into evidence at the hearings of these appeals, the Appellate Tax Board (“Board”) made the following findings of fact.[62]
At all times relevant to these appeals, the appellant was a Massachusetts non-profit corporation organized under G.L. c. 180. It was exempt from federal income taxes under Internal Revenue Code § 501(c)(3). The appellant’s Articles of Organization stated that its purpose was “to contribute to the well-being and financial security of primarily elderly individuals by providing nursing, housing, health-care, recreational and social services in a charitable manner, in the Greater Fall River area.”
Home was the owner of two parcels of real estate located in Fall River. The first parcel, located at 1168 Highland Avenue, was improved with a facility known as Adams House (“subject property” or “Adams House parcel”). Adams House was a nursing home which was licensed by the Department of Public Health as a Level III/IV long-term care facility.
The second parcel, located at 4380 North Main Street (“Bay View parcel”), was improved with a facility known as Bay View. Bay View was an independent-living community, available to individuals age sixty-two or older, consisting of a forty-six unit apartment building and twenty-two townhouse-style units, referred to as cottages (“cottages”). Residents of Bay View had the option to contract for certain services such as house cleaning, meals, and transportation, but Bay View was not licensed as an assisted-living facility.
For fiscal year 2007, the appellant timely filed with the assessors its Form 3 ABC and a copy of its Form PC and paid the taxes due without incurring interest. The appellant timely filed an Application for Abatement with the assessors on January 31, 2007. The assessors denied the Application for Abatement on February 7, 2007, and the appellant timely filed its petition with the Board on May 4, 2007.
For fiscal year 2008, the appellant timely filed its Form 3 ABC and a copy of its Form PC with the assessors and paid the taxes due without incurring interest. The appellant timely filed an Application for Abatement with the assessors on January 30, 2008. The assessors denied the Application for Abatement on April 17, 2008, and the appellant timely filed its petition with the Board on June 19, 2008.
For fiscal year 2009, the appellant timely filed its Form 3 ABC and a copy of its Form PC with the assessors and paid the taxes due without incurring interest. The appellant timely filed its Application for Abatement on January 29, 2009, and that application was denied by the assessors on March 4, 2009. The appellant timely filed its petition with the Board on May 29, 2009.
On the basis of these facts, the Board found that it had jurisdiction to hear and decide these appeals.
II. Procedural History
There were two issues in these appeals: (1) whether the assessed value of the subject property exceeded its fair cash value and (2) whether the subject property was exempt from tax under G.L. c. 59, § 5, Clause Third (“Clause Third”). Prior to the fiscal years at issue, the assessors considered the Adams House parcel to be exempt under Clause Third and assessed no real estate or personal property taxes upon it. Beginning in fiscal year 2007, the assessors ceased treating the Adams House parcel as an exempt property and assessed taxes based on its fair cash value.
These appeals were originally heard by the Board on June 25, 2008. The Board issued a Decision for the appellee on January 26, 2009. Subsequently, on August 19, 2009, the appellant filed a Motion for Reconsideration of the Board’s decision, following the Appeals Court’s decision in Mary Ann Morse Healthcare Corp. v. Assessors of Framingham, 74 Mass. App. Ct. 701, 705 (2009), which was promulgated on July 27, 2009. In that case, the Appeals Court reversed the Board’s finding that a corporation which operated an assisted-living facility was not a charitable organization for the purposes of Clause Third. In consideration of this development in relevant case law, the Board allowed the appellant’s Motion for Reconsideration and re-opened the hearing of these appeals to receive further evidence and hear additional arguments by the parties. A second hearing was held before the Board on January 20, 2010.
Following that hearing, but before the Board issued its decision, the parties reached an agreement as to the second issue, the valuation of the subject property. The parties stipulated that the subject property’s assessed value for each of the fiscal years at issue exceeded its fair cash value. The parties’ stipulations on the valuation issue are summarized in the following table:
|
Fiscal Year |
Assessed Value ($) |
Fair Cash Value ($) |
Over-valuation ($) |
Tax Rate ($/$1,000) |
Abatement Amount ($) |
|
2007 |
3,794,000 |
2,200,000 |
1,594,000 |
16.37 |
26,093.78 |
|
2008 |
3,784,300 |
2,000,000 |
1,784,300 |
16.31 |
29,101.93 |
|
2009 |
3,771,300 |
1,800,000 |
1,971,300 |
17.49 |
34,478.04 |
III. The Exemption Issue
At the June 25, 2008 hearing, the appellant offered the testimony of David Westgate, a longtime member of Home’s Board of Trustees and Finance and Executive Committee, and the testimony of William Girrier, Home’s Chief Executive Officer. At the January 20, 2010 hearing, the appellant offered the testimony of James H. Kay, who was serving on a volunteer basis as the Chairman of Home’s Board of Trustees. On the basis of the stipulated facts and documents, testimony and exhibits offered into evidence at the hearings of these appeals, the Board made the following subsidiary findings of fact.
A. Adams House
Adams House was established in 1891 and has provided care for the elderly continuously since that time. The current Adams House building was built in 1898, and is a three-story, brick Victorian-style building. At all relevant times, its residential floors were organized by varying levels of care. The first floor housed the most independent residents, those who received some assistance with activities of daily living, but who could “pretty much get along on their own,” according to Mr. Girrier. The second floor housed residents needing more extensive assistance with activities of daily living, and the third floor was home to residents needing the most intensive level of care.
Although Adams House was licensed for up to fifty-nine beds, Mr. Westgate testified that Adams House operated at a fifty-four bed capacity. In 2007, Adams House had forty-one residents. In 2008, it had forty-seven residents.
Mr. Westgate testified that the philosophy of Adams House was “to provide care that is extraordinary in nature and is of the highest quality that we can do.” Part of that “extraordinary” care involved maintaining very low staff-to-resident ratios. Because of the superior staffing ratios which it maintained, Adams House was able to provide on average 4.6 hours of daily care to each resident, in comparison to the statewide average at long-term care facilities of 3.8 hours.
Adams House did not accept Medicaid. Mr. Westgate testified that Adams House declined to participate in the Medicaid program because the low reimbursement rates associated with that program would prevent Adams House from maintaining the level of staffing it wished to maintain.
Mr. Westgate described the admission process at Adams House. Individuals seeking admission to Adams House were screened by an admissions committee to ensure that they were appropriate candidates for admission. The health of the applicant was an important consideration in the admission process. Mr. Westgate explained that health was an important consideration because of the need to ensure that Adams House could provide the appropriate level of care for all residents.
Once it was determined that the applicant was an appropriate candidate for residency at Adams House, Home requested financial information so that it could determine whether the applicant had sufficient assets to pay the fees charged by Adams House. Upon admission to Adams House, residents were required to pay a one-time admission fee of $10,000; after admission, the daily fee at Adams House was $270, or approximately $8,000 per month. Mr. Girrier testified that Adams House tried “to be competitive in the market rate. [Home tried] to make sure that we’re not overpriced so that, you know, we alienate people from coming in who would otherwise go to another nursing home. We feel our rates are competitive.”
Mr. Westgate stated that Adams House generally drew its residents from the greater Fall River area and that the residents came from diverse backgrounds. A roster of residents entered into evidence showed that, during the years at issue, Adams House residents included people retired from a variety of professions.
Home had an endowment totaling nearly $7 million, which allowed it to subsidize the care of those residents whose assets had been depleted and who therefore could not pay the full daily rate. Mr. Westgate testified that Home’s goal was to have thirty-two of its beds occupied by full-paying residents, with the remaining twenty-two beds earmarked for residents needing financial assistance – the so-called “supported” residents.[63] However, no written policy to that effect was introduced into evidence. In 2007, approximately 29% of the care provided at Adams House was supported care. In 2008, approximately 33% of the care provided at Adams House was supported care.
Prior to 2007, the Adams House Admission Agreement (“Admission Agreement”) expressly provided that “once admitted, a Resident will not be discharged for reasons of financial ability.” Mr. Westgate testified that Adams House had never evicted a resident because of an inability to pay. However, in 2007 the Admission Agreement was amended and that language was removed. The language inserted into the Admission Agreement, as amended in 2007, provided: “once admitted to Adams House under this Agreement, a RESIDENT becomes eligible for charitable assistance from [Home] in the event that RESIDENT becomes financially unable to pay for his or her own care for reasons beyond his or her own control and [Home] determines in its sole discretion that sufficient . . . funds for such charitable assistance are available.” The amended Admission Agreement also provided for a right of recovery of funds – with interest – from a resident who received supported care, or the estate of such a resident, in the event that the resident terminated occupancy at Adams House.
Further, Mr. Westgate testified that it was Home’s goal that incoming residents have the financial resources to sustain at least three years worth of living expenses at Adams House. However, no written policy to that effect was offered into evidence. Although Mr. Westgate testified that “there have been times in [Home’s} history” when people with no assets were admitted,” he did not elaborate on this statement, or even approximate how many times in Home’s more than 115-year history that people with no assets were admitted.[64] In addition, no documents evidencing such admissions were introduced into evidence. Both the original and amended Admission Agreements stated that incoming residents should have sufficient resources to pay for their care for their entire life expectancy:
The Resident shall have furnished information to [Home] with respect to the Resident’s financial resources demonstrating that the Resident has the financial ability to pay the nonrefundable Application Fee, the daily Residency Rate for the accommodation provided, charges for additional services, and personal living expenses for the life expectancy of the Resident.
The evidence showed that no residents admitted in 2007 or 2008 received supported care immediately upon admission. The record indicated that the vast majority of Adams House residents had sufficient funds to pay the $10,000 admission fee and $270 daily fee and did not receive financial assistance.
B. Bay View
Bay View was an independent-living community consisting of a forty-six unit apartment building and twenty-two cottages. Residency at Bay View was available to individuals age sixty-two or older.[65]
Home first acquired Bay View’s apartment building in 1991. The apartment building had been a condominium project which failed. Most of the units were two-bedroom, two-bathroom units with approximately 1,300 square feet of gross living area. Mr. Girrier testified that Bay View was conceived as an independent-living community offering limited services to its residents. As its resident population aged, Bay View began to offer a more comprehensive menu of optional services, including meals, transportation, cleaning services and social and recreational activities, for additional fees. However, Bay View was not licensed as an assisted-living facility, and the services that it offered did not include assistance with activities of daily living.
In light of these changes at Bay View, Home decided to expand its offerings to include housing for more active adults. In 2005, Home began construction on twenty-two independent-living units, known as cottages. As of the June 25, 2008 hearing of these appeals, five of the cottages were occupied and a sixth cottage was being utilized as a “model” unit; the remaining sixteen units were not yet completed or occupied.
The entrance fees for the apartment complex at Bay View ranged from $125,000 to $350,000, depending on the unit. The entrance fees for the cottages ranged from $425,000 to $500,000, depending on the unit. Optional services were available for prices ranging from $1,600 to $2,500 per month. A mandatory, monthly fee of $390 was charged for residence in the cottages, which the “Residence and Use Agreement” described as covering concierge services. Utilities were separately metered for each unit, and were not covered by the entrance or monthly fees. Bay View did not accept Medicaid, and it was undisputed by the parties that Bay View was not exempt from tax under Clause Third during the fiscal years at issue.
- C. Home’s Dominant Purposes and Methods Were Not Traditionally Charitable
On the basis of all of the evidence, the Board found that Home provided housing and other services to a variety of individuals in two different settings, Bay View and Adams House. With respect to Adams House, the Board found that Home provided housing and nursing care to the elderly. The Board found that the residents of Adams house had varying levels of need. Some residents were relatively independent and active, while others required considerable support for medical issues and assistance with activities of daily living.[66] The majority of residents had sufficient financial means to pay for their care. A minority of residents received subsidized care from Home, usually after having lived at, and paid full fees to, Adams House for a number of years. Neither Adams House nor Bay View accepted Medicaid, and therefore the population served by Home did not include individuals dependent on Medicaid.
With respect to Bay View, the Board found that it was an independent-living community primarily for independent individuals age sixty-two or older. Bay View was not licensed to operate as an assisted-living facility, and the Board found that it was not an assisted-living facility. Entrance fees at Bay View ranged from $125,000 to $500,000, depending on the unit. Bay View offered to its residents certain services, such as house cleaning, meals, and transportation, but those services were optional and residents were required to pay additional fees for them. The optional services were available for between $1,600 and $2,500 per month. Further, a mandatory, monthly fee of $390 for concierge services was charged to residents of the cottages. Based on the foregoing, the Board found that the accommodations and amenities offered at Bay View made it more akin to a luxury living milieu than a facility which provided assistance with activities of daily living, such as dressing and bathing. Therefore, the Board found that the operation of Bay View was not a traditionally charitable activity.
In making its determination as to Home’s dominant purposes and methods, the Board looked at Home’s overall operations and the population which it served. Bay View was the larger of Home’s two facilities. The apartment building at Bay View contained forty-six apartments and there were twenty-two cottages, for a total of sixty-eight units at Bay View. Adams House, in contrast, operated on a fifty-four bed capacity.[67] Bay View’s residents did not require assistance with activities of daily living or other medical issues, nor did Home offer those services at Bay View. Even within Adams House, the evidence showed that a number of its residents were relatively physically independent, and the majority of its residents were financially independent. Home’s dominant purposes and methods were to provide housing and other services at both Bay View and Adams House, and the Board found that the majority of the persons served by Home were not traditional objects of charity. Rather, the population served by Home largely consisted of comparatively independent persons who paid market-rate fees for Home’s services.[68] Based on these facts, the Board concluded that, although some of the services provided by Home at Adams House may have been traditionally charitable, Home’s dominant purposes and methods were not traditionally charitable.
The Board next considered and weighed the established factors relevant to the determination of an organization’s charitable status in light of its finding that Home’s dominant purposes and methods were not traditionally charitable. Entrance fees for Bay View ranged from $125,000 to $350,000 in the apartment building and $425,000 to $500,000 for the cottages, depending on the unit. In addition, a $390 mandatory monthly fee for concierge services was charged to residents of the cottages. That fee did not cover utilities, which residents were responsible for and which were separately metered for each unit. The Board found that the fees charged at Bay View barred access to individuals of limited financial means, and therefore, it was not accessible to a large and fluid class of people.
In addition, Bay View offered to its residents a menu of optional services, such as meals, transportation, and house cleaning, for prices ranging from $1,600 to $2,500 per month. As stated above, a mandatory monthly fee of $390 was charged for concierge services at the cottages. The Board found that the charging of these fees did not advance a charitable purpose, but instead merely facilitated the delivery of premium lifestyle services akin to services available in a luxury living setting.
Residents at Adams House paid $10,000 for admission and $8,000 per month thereafter. Despite their diverse professional backgrounds, the Board found that the residents at Adams House by and large shared one commonality, i.e., the financial means to pay for their care at Adams House. The vast majority of the individuals on the resident roster had assets totaling hundreds of thousands of dollars upon admission to Adams House. Most residents also had monthly incomes between $1,000 and $3,000. The financial information of some residents listed on the resident roster was omitted and replaced with the notation that their financial resources were adequate or that their family members were paying for their care.
Although Home subsidized the care of a minority of Adams House residents, the evidence indicated that the residents receiving subsidized care at Adams House were not elders of limited financial means upon entry to Adams House. Rather, they were persons who had resided at, and paid full fees to, Adams House for a number of years prior to receiving subsidized care. The Board found that the fact that Home subsidized the care of a minority of residents at Adams House did not prove that its services were accessible to a large and fluid class of persons. In fact, Mr. Girrier essentially conceded in his testimony, excerpted below, that it was not:
[Mr. Peltz]: By placing more emphasis on admitting people with means, hopefully meeting the three-year litmus test that you mentioned, are you not prejudicing admission for people of limited or no means?
[Mr. Girrier]: Yes.
[Mr. Peltz]: You’re then limiting the scope of the community that can be admitted?
[Mr. Girrier]: At that point in time, because of the necessity with the business, we have no other recourse.
Based on all of the evidence, the Board found that the fees charged by Home barred access to elders of limited financial means, and, therefore, its services were not accessible to a large and fluid class of people.
In addition, the Board found that Home did not benefit the public or serve to relieve a burden of government in the manner intended by Clause Third. Neither Bay View nor Adams House accepted Medicaid, and the Board found that they were not accessible to elders dependent on government assistance. The evidence indicated that a majority of the residents at Bay View and Adams House either had sufficient resources to pay for their care and lodging, or had family members who were able to pay for them. The Board found that the residents of Adams House and Bay View were primarily individuals with many options for their care, not individuals who would otherwise be dependent upon government support.
Moreover, the evidence established that the accommodations and fees at Adams House were designed to make it an attractive alternative to other area nursing homes. The Board found that the fees and policies in place at Adams House were guided by a desire to remain competitive with other local nursing homes, rather than to relieve the government of any burden. The Board found that Home operated more like a typical commercial enterprise, by charging market-rate fees for its services, rather than a charitable organization. Only a minority of residents at Adams House received subsidized care, and those residents comprised just a fraction of the overall population served by Home. Furthermore, some of the residents receiving supported care received only modest financial assistance from Home; many of the subsidized residents continued to pay a portion of the daily fee. The record further established that, typically, residents of Adams House were eligible to receive subsidized care only after residing at, and paying full fees to, Adams House for a number of years.
The Board therefore found that any benefit provided to the public by Home was merely incidental to Home’s dominant purposes and methods, which were the provision of housing and services in return for market-rate fees. Accordingly, the Board found that Home did not benefit the public or relieve a burden of government in the manner intended by Clause Third.
IV. The Board’s Ultimate Findings of Fact
After considering and weighing the relevant factors in light of its finding that Home’s dominant purposes and methods were not traditionally charitable, the Board found that Home was not a charitable organization for the purposes of Clause Third. The Board therefore found that the subject property was not exempt under Clause Third for the fiscal years at issue because it was not owned by a charitable organization.
Additionally, as stipulated by the parties, the Board found that the subject property’s assessed value for each of the fiscal years at issue exceeded its fair cash value. The Board’s findings of fair cash value and the corresponding abatement amounts are set forth in the following table:
Fiscal Year
Assessed
Value ($)
Fair Cash Value ($)
Over-valuation ($)
Tax Rate ($/$1,000)
Abatement Amount ($)
2007
3,794,000
2,200,000
1,594,000
16.37
26,093.78
2008
3,784,300
2,000,000
1,784,300
16.31
29,101.93
2009
3,771,300
1,800,000
1,971,300
17.49
34,478.04
Based on the foregoing, the Board decided these appeals for the appellant and granted abatements as set forth above.[69]
OPINION
Clause Third provides an exemption for “real estate owned by or held in trust for a charitable organization and occupied by it or its officers for the purposes for which it is organized or by another charitable organization or organizations or its or their officers for the purposes of such other charitable organization or organizations.” Thus, a taxpayer claiming exemption under Clause Third must prove first that the property is owned by a charitable organization, and second, that a charitable organization occupies it for charitable purposes. See Jewish Geriatric Services, Inc. v. Longmeadow, Mass. ATB Findings of Fact and Reports 2002-337, 351, aff’d, 61 Mass. App. Ct. 73 (2004) (citing Assessors of Hamilton v. Iron Rail Fund of Girls Club of America, 367 Mass. 301, 306 (1975)).
Merely espousing a recognized charitable purpose does not mean that an organization is a charitable organization for the purposes of Clause Third. See American Inst. For Economic Research v. Assessors of Great Barrington, 324 Mass. 509, 513 (1949). The organization “must prove that it is in fact so conducted that in actual operation it is a public charity.” Jacob’s Pillow Dance Festival, Inc. v. Assessors of Becket, 320 Mass. 311, 313 (1946).
I. Home’s Dominant Purposes and Methods Were Not Traditionally Charitable
An organization will be considered a charitable organization for the purposes of Clause Third if
“the dominant purpose of its work is for the public good and the work done for its members is but the means adopted for this purpose. But if the dominant purpose of its work is to benefit its members or a limited class of persons it will not be so classed, even though the public will derive an incidental benefit from such work.”
Harvard Community Health Plan v. Assessors of Cambridge, 384 Mass. 536, 544 (1981) (quoting Mass. Medical Soc’y v. Assessors of Boston 340 Mass. 327, 332 (1960)). For several decades, courts have used the following factors to determine whether an organization is operating as a public charity:
[W]hether the organization provides low-cost or free services to those unable to pay, see New England Legal Found. v. Boston, 423 Mass. 602, 610 (1996); whether it charges fees for its services and how much those fees are, see Assessors of Boston v. Garland Sch. of Home Making, 296 Mass. 378, 390, (1937); whether it offers its services to a large or “fluid” group of beneficiaries and how large and fluid that group is, see New England Legal Found., 423 Mass. at 612; Cummington Sch. of the Arts, Inc. v. Assessors of Cummington, 373 Mass. 597, 601, (1977); whether the organization provides its services to those from all segments of society and from all walks of life, see Harvard Community Health Plan, Inc., 384 Mass. at 544; and whether the organization limits its services to those who fulfil certain qualifications and how those limitations help advance the organization’s charitable purposes, see Western Mass. Lifecare Corp. v. Assessors of Springfield, 434 Mass. 96, 103-104 (2001); Boston Symphony Orchestra, Inc. v. Assessors of Boston, 294 Mass. 248, 256 (1936).
New Habitat, Inc. v. Tax Collector of Cambridge, 451 Mass. 729, 732 (2008).
In 2008, the Supreme Judicial Court decided the New Habitat case, in which it considered whether a non-profit organization providing long-term housing for persons with acquired brain injury was a charitable organization for the purposes of Clause Third. It was undisputed that the residents served by New Habitat, Inc. were unable to care for themselves or live independently, and required 24-hour support. Moreover, there was no question that the provision of housing and services to persons with acquired brain injury was New Habitat, Inc.’s dominant purpose because that was its sole activity. “[I]n light of these facts, [the Court] conclude[d] that New Habitat’s dominant purposes and methods were traditionally charitable.” Id. at 734 (internal citations omitted).
Because New Habitat’s dominant purposes and methods were traditionally charitable, the Court placed less significance on the above-referenced factors in concluding that it qualified for the exemption. Thus, although New Habitat, Inc. served only a small number of individuals and charged considerable fees,[70] the Court held that it was a charitable organization for purposes of Clause Third. Compare Boston Symphony Orchestra, 294 Mass. at 256 (holding that organization which charged significant fees for admission and whose services were not accessible to a large segment of the public was not a charitable organization for purposes of Clause Third).
In 2009, the Appeals Court had its first opportunity to decide a case involving the Clause Third exemption following the New Habitat decision. In Mary Ann Morse Healthcare, the Appeals Court considered whether property owned and used by the taxpayer as an assisted-living facility, a substantial portion of which served Alzheimer’s and dementia residents, was entitled to the Clause Third exemption. Id. at 702. The Appeals Court held that New Habitat provided a new “interpretive lens” with which to view cases arising under Clause Third. Mary Ann Morse Healthcare, 74 Mass. App. Ct. at 703. The Appeals Court noted that, although New Habitat left intact the previously-established factors, it “emphatically condition[ed] the importance of previously established factors on the extent to which the ‘dominant purposes and methods of the organization’ are traditionally charitable.” Mary Ann Morse Healthcare, 74 Mass. App. Ct. at 703 (citing New Habitat, 451 Mass. at 733) (“The closer an organization’s dominant purposes and methods are to traditionally charitable purposes and methods, the less significant these factors will be in our determination of the organization’s charitable status . . . [t]he farther an organization’s dominant purposes and methods are from traditionally charitable purposes and methods, the more significant these factors will be.”). Thus, the Appeals Court in Mary Ann Morse Healthcare ruled that, where the majority of the taxpayer’s activities were dedicated to serving the needs of Alzheimer’s and dementia residents, it was entitled to the Clause Third exemption because it was indisputably performing a “traditional public charitable function.” Id. at 705.
Reviewing the facts of the present appeals in light of the analysis of New Habitat and Mary Ann Morse Healthcare, the Board found and ruled that Home’s dominant purposes and methods were to provide housing and other services to a variety of individuals in two settings, Bay View and Adams House. The larger of the two facilities, Bay View, was an independent-living community, as distinguished from the assisted-living facility at issue in Mary Ann Morse Healthcare. Bay View’s residents did not require assistance with activities of daily living, and Home did not provide such assistance. Rather, Bay View’s residents were relatively healthy and independent persons, age sixty-two and older, who could opt and pay for additional services such as house cleaning, meals, and transportation. The Board thus found and ruled that Bay View was more akin to a luxury-living setting than an assisted-living facility or nursing home, and the operation of Bay View was not a traditionally charitable activity. See Western Mass. Lifecare, 434 Mass. at 105.
With respect to Adams House, the Board found and ruled that Home was engaged in the operation of a long-term care facility which provided housing, meals, nursing care, social opportunities, and assistance with activities of daily living to its residents, most of whom paid market-rate fees for those services. Although the Board is cognizant that “the operation of a nursing home for the elderly and infirm” has been found to be the work of a charitable corporation, H-C Health Services, Inc. v. Assessors of S. Hadley, 42 Mass. App. Ct. 596, 599 (1997), the work conducted by Home at Adams House must be viewed within the context of Home’s “dominant purposes and methods.” New Habitat, 451 Mass. at 733. Home’s dominant purposes and methods involved operating both Bay View and Adams House, and the Board found and ruled that, between Bay View and Adams House, the majority of the population served by Home consisted of financially and physically independent individuals rather than traditional objects of charity. See Western Mass. Lifecare, 434 Mass. at 105.
These appeals are therefore distinguishable from Mary Ann Morse Healthcare, 74 Mass. App. Ct. 701. The Appeals Court ruled in Mary Ann Morse Healthcare that the taxpayer, which used seventy-one percent of its assisted-living facility to service the needs of its Alzheimer’s and dementia residents (id. at 702), was “indisputabl[y] perform[ing] a traditional public charitable function.” Id. at 705. However, because the Board heard and issued its Decision in Mary Ann Morse Healthcare before the New Habitat case was decided[71], the assessors in that case did not emphasize the proximity of the taxpayer’s “dominant purposes and methods” to traditional charitable purposes. New Habitat, 451 Mass. at 733.[72] In contrast, the assessors in these appeals offered ample evidence demonstrating that the majority of Home’s activities were devoted to the operation of Bay View, which was a luxury independent-living community. Although the provision of services to Alzheimer’s and dementia residents such as those offered by the taxpayer in Mary Ann Morse Healthcare may constitute the “indisputable performance of a traditional public charitable function,” the provision of luxury housing and services for seniors does not. See Western Mass. Lifecare, 434 Mass. at 105. Where, as here, the majority of the appellant’s efforts were devoted to non-charitable purposes, the Board found and ruled that the dominant purposes and methods of the appellant were not traditionally charitable.
Moreover, the evidence offered by the appellant failed to persuade the Board that Home was operating as a public charity. Much of that evidence consisted of testimony regarding Home’s goals and unwritten policies, some of which were directly contradicted by the written policies introduced into evidence.
In making its determination, the Board was mindful of the fact that organizations need not serve exclusively the poor or needy to be considered charitable, nor does the charging of fees preclude a finding that an organization is charitable. See Western Mass. Lifecare, 434 Mass. at 104 (citing New England Legal Found., 423 Mass. at 609; Garland Sch. of Home Making, 296 Mass. at 389) (other citations omitted). However, it is also true that many activities and services that “are commendable, laudable and socially useful [do] not necessarily come within the definition of ‘charitable’ for purposes of the exemption.” Western Mass. Lifecare, 434 Mass. at 103 (citing Massachusetts Med. Soc’y, 340 Mass. at 333). Though Home undoubtedly provided “commendable, laudable and socially useful” services, the Board could not find on the record before it that the dominant purposes and methods of Home were traditionally charitable. Western Mass. Lifecare, 434 Mass. at 103. Accordingly, the Board gave greater weight to the traditional factors used for determining whether an organization is operating as a public charity. See New Habitat, 451 at 732.
II. Home Did Not Relieve a Burden of Government for Purposes of Clause Third
One of the factors to be considered in determining whether an organization is operating as a public charity is whether it “perform[s] activities which advance the public good, thereby relieving the burdens of government to do so.” Sturdy Memorial Foundation v. Assessors of North Attleborough, Mass. ATB Findings of Fact and Reports 2002-203, 224, aff’d 60 Mass. App. Ct. 573 (2004) (citing Molly Varnum Chapter DAR v. City of Lowell, 204 Mass. 487 (1909)). “The fact that an organization provides some service that would, in its absence, have to be provided by the government, ‘is frequently put forward as the fundamental reason for exempting charities from taxation.’” Western Mass. Lifecare, 434 Mass. at 105 (quoting Assessors of Springfield v. Cunningham Foundation, 305 Mass. 411, 418 (1940)).
Thus, in Straight Ahead Ministries, Inc. v. Assessors of Hubbardston, the Board found that a corporation which ran a non-profit academy for young males who had just been released from a juvenile detention center operated as a public charity, despite the fact that the academy housed less than a dozen young men at any given time and was only available to males between the ages of sixteen and twenty. Straight Ahead Ministries, Inc. v. Assessors of Hubbardston, Mass. ATB Findings of Fact and Reports 2009-1, 13-14. In that case, a state agency placed the young men in the academy and paid for a portion of their attendance costs; governmental grants, private gifts and donations made up the remainder of the academy’s budget. Id. at 2009-12-13. Because the academy was partly funded by the government, because the population which it served entered the academy directly from a government-care setting, and because its goal was to prevent re-entry of the men it served into the criminal justice system, the Board found and ruled that the academy served to relieve a burden of government. Id. at 2009-12-14.
Unlike in Straight Ahead Ministries, there was no direct correlation between the work done by Home and the work of the government. Adams House and Bay View were expressly off-limits to those dependent on Medicaid, as Home did not accept Medicaid payments. Contrast H-C Health Services, 42 Mass. App. Ct. at 598, William B. Rice Eventide Home v. Assessors of Quincy, Mass. ATB Findings of Fact and Reports 2006-457, 481, rev’d on other grounds, 69 Mass. App. Ct. 867 (2007). Because of the fees which Home charged, Adams House and Bay View were not accessible to elders of limited means, and the majority of their residents were not in the class of persons who would otherwise be dependent on government assistance.
Further, Mr. Girrier stated that Adams House strove to maintain competitive market rates in order to avoid losing potential residents to other nursing homes. Similarly, Mr. Westgate testified that Adams House strove to deliver “extraordinary” care, which included maintaining low staff-to-resident ratios and providing more individualized care than most nursing homes. Mr. Westgate testified that one of the reasons that Home did not accept Medicaid was that the low reimbursement rates would have made it impossible to maintain superior staffing ratios. Thus, the Board found that the policies and fees in place at Adams House were not dictated by a concern with preventing residents from becoming dependent upon the government, but by a desire to prevent them from going to Home’s competitors.
Lastly, Home provided subsidized care to only a minority of residents at Adams House and the amount of subsidy varied for each “supported” resident. The care of some “supported” residents was subsidized almost completely, while other “supported” residents received only modest financial assistance. No subsidized care was provided for residents of Bay View, which was the larger of Home’s two facilities. The Board found and ruled that, although Home provided subsidized care to a minority of residents at Adams House, the provision of subsidized care was incidental to Home’s dominant purposes and methods, which was the provision of housing and other services in return for market-rate fees. See The Mediation Group v. Assessors of Brookline, Mass. ATB Findings of Fact and Reports 2003-64, 78-79 (finding that entity which charged market-rate fees to the majority of its clients and conferred only an incidental benefit to the general public was not a charitable organization). The Board therefore found and ruled that the appellant failed to demonstrate that it “advance[d] the public good, thereby relieving the burdens of government to do so.” Sturdy Memorial Foundation, Mass. ATB Findings of Fact and Reports at 2002-224.
III. Home’s Services Were Not Available to a Large and Fluid Class of People
Residents at Adams House paid $10,000 for admission and approximately $8,000 per month thereafter. Entrance fees at Bay View ranged from $125,000 to $500,000, depending on the unit. A mandatory fee of $390 per month was charged for residence at the cottages, while a menu of optional services was available for prices ranging from $1,600 to $2,500 per month. The Board found and ruled that the considerable fees charged by Home, along with its failure to accept Medicaid, limited the class of persons eligible to receive its services.[73] “The class of elderly persons who can pay [such entrance and monthly fees] is a limited one, not a class that has been ‘drawn from a large segment of society or all walks of life.’” Id. (quoting New England Legal Found., 423 Mass. at 612).
Although Home subsidized the care of a minority of Adams House residents, the Board found and ruled that this fact did not prove that Adams House was accessible to a large and fluid class of persons. The evidence indicated that the residents receiving subsidized care at Adams House were not elders of limited means upon entry to Adams House. Rather, they were persons who had resided at, and paid full fees to, Adams House for a number of years prior to receiving subsidized care. The Board found that the fees charged by Adams House barred access to elders of limited financial means, and, therefore, it was not accessible to a large and fluid class of people.
Accordingly, the Board found and ruled that Home’s services were not accessible to a large and fluid class of persons.
IV. The Appellant’s Arguments Were Unavailing
The appellant introduced evidence into the record showing that Home operated at a loss during the fiscal years at issue. However, the Board did not find this evidence to be a persuasive indication that it was a charitable organization. Adams House was licensed for up to fifty-nine beds, yet it housed only forty-one residents in 2007 and forty-seven residents in 2008. Similarly, during the years at issue, many of the cottages were unoccupied. Though the appellant asserted that Home operated at a loss, there was no testimony or other evidence which addressed the impact of the significant vacancies at Adams House and Bay View upon its finances.[74] As there were myriad possible reasons why Home operated at a loss, the Board did not find the fact that it operated at a loss to be persuasive evidence that it was a charitable organization.
Similarly, the facts that Home was organized under chapter 180, tax-exempt under § 501(c)(3) of the Internal Revenue Code, and that its Articles of Organization stated that its purpose was to serve the elderly in a charitable manner did not prove that Home was a charitable organization. These facts, though germane, did not persuade the Board that Home was “conducted . . . in actual operation . . . as a public charity.” Jacob’s Pillow Dance Festival, Inc., 320 Mass. at 313. Because substance and not form must control, the Board’s determination that Home was not a charitable organization was based on its findings as to Home’s actual operations, the population which it served, and its dominant purposes and methods. The Board therefore rejected the appellant’s arguments.
“Any doubt must operate against the one claiming an exemption, because the burden of proof is upon the one claiming an exemption from taxation to show clearly and unequivocally that he comes within [its] terms . . . .” Boston Symphony Orchestra, 294 Mass. at 257. “It is well established that a party claiming exemption bears a grave burden of proving the claim.” Kings’ Daughters and Sons Home v. Board of Assessors of Wrentham, Mass. ATB Findings of Fact and Reports 2002-427, 452, (citing Meadowbrooke Daycare Center, Inc. v. Assessors of Lowell, 374 Mass. 509, 513 (1978)). On the basis of all of the evidence, the Board found and ruled that the appellant did not meet its burden of proving that it was a charitable organization for purposes of Clause Third. Accordingly, the Board found that the subject property was not “owned by a charitable organization,” and therefore it was not exempt under Clause Third.
Conclusion
Although it found and ruled that the Adams House parcel was not exempt under Clause Third, the Board found and ruled that, as stipulated by the parties, the Adams House parcel was assessed at greater than its fair cash value for each of the fiscal years at issue. Accordingly, the Board decided these appeals for the appellant and granted abatements as follows:
|
Fiscal Year |
Assessed Value ($) |
Fair Cash Value ($) |
Over-valuation ($) |
Tax Rate ($/$1,000) |
Abatement Amount ($) |
|
2007 |
3,794,000 |
2,200,000 |
1,594,000 |
16.37 |
26,093.78 |
|
2008 |
3,784,300 |
2,000,000 |
1,784,300 |
16.31 |
29,101.93 |
|
2009 |
3,771,300 |
1,800,000 |
1,971,300 |
17.49 |
34,478.04 |
THE APPELLATE TAX BOARD
By: _____ ____
Thomas W. Hammond, Jr., Chairman
A true copy,
Attest: ______ _______
Clerk of the Board
COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD
EDWARD BLANCHARD, TRUSTEE BOARD OF ASSESSORS OF
ASNACOMET POND REALTY TRUST v. THE TOWN OF HUBBARDSTON
Docket No. F294101 Promulgated:
May 6, 2011
This is an appeal filed under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 59, §§ 64 and 65 from the refusal of the Board of Assessors of Hubbardston (“assessors” or “appellee”) to abate taxes assessed on certain property located in the Town of Hubbardston, owned by and assessed to Edward Blanchard, Trustee of the Asnacomet Pond Realty Trust (“appellant”) under G.L. c. 59, §§ 11 and 38 for fiscal year 2007.
Commissioner Mulhern (“Presiding Commissioner”) heard the appeal and, in accordance with G.L. c. 58A, § 1A and 831 CMR 1.20, issued a single-member decision for the appellant.
These findings of fact and report are promulgated at the request of the appellee pursuant to G.L. c. 58A, § 13 and 831 CMR 1.32.
Edward Blanchard, Trustee, pro se, for the appellant.
Ellen M. Hutchinson, Esq. for the appellee.
FINDINGS OF FACT AND REPORT
Based on the evidence and testimony offered at the hearing of this appeal, the Presiding Commissioner made the following findings of fact.
On January 1, 2006, the appellant was the assessed owner of a 1.65-acre parcel of unimproved real estate located at 19 East Comet Pond Access Road in Hubbardston identified on the assessors’ Map 11A as Parcel 19 (“subject property”). Although the subject property does not meet the minimum zoning requirements of 2 acres and 200 feet of road frontage, it is nonetheless classified as a buildable lot because it is a grandfathered lot. For fiscal year 2007, the assessors valued the subject property at $195,200 and assessed taxes thereon, at the rate of $9.69 per $1,000, in the amount of $1,905.33.[75] On May 24, 2007, the Collector of Taxes for Hubbardston mailed out the actual fiscal year 2007 tax bills. In accordance with G.L. c. 59, § 57, the appellant timely paid the taxes due without incurring interest.
The appellant timely filed an abatement application with the assessors on June 21, 2007. Pursuant to G.L. c. 59, § 64, the assessors had until September 21, 2007 to act on the appellant’s abatement application. On September 10, 2007, the appellant filed a written consent which granted the assessors “an additional three months beyond the three months provided by application for abatement.” As a result, the assessors had until December 21, 2007 to act on the appellant’s abatement application. On December 10, 2007, the assessors sent notice to the appellant that his abatement application was “deemed denied.” The Presiding Commissioner found and ruled that the assessors’ December 10, 2007 notice was defective and that the appellant’s abatement application, with a valid consent to extend, was deemed denied on December 21, 2007. Therefore, in accordance with G.L. c. 59, §§ 64 and 65, the appellant seasonably filed his appeal with the Appellate Tax Board (“Board”) on March 21, 2008. On the basis of these facts, the Presiding Commissioner found and ruled that the Board had jurisdiction to hear and decide this appeal.
The appellant argued that the increase in the subject property’s assessment from $107,000 for fiscal year 2006 to $195,200 for fiscal year 2007 was unwarranted and therefore the subject property was overvalued for fiscal year 2007. The appellant presented his case primarily through his own testimony and that of Maria Hopkins, whom the Board qualified as a real estate valuation expert. The appellant also offered into evidence numerous exhibits, including a land map of Asnacomet Pond and the surrounding area, the subject property’s deed, the subject property’s property record cards for the fiscal year at issue and also the preceding fiscal year, a written explanation of Hubbardston’s revaluation process, letters and emails from both the assessors and the Hubbardston Building Commissioner, and also an appraisal report prepared by Ms. Hopkins.
The subject property is located to the rear of several residential waterfront properties situated on that portion of Asnacomet Pond more specifically identified as East Comet Pond, (“the pond”), which is reported to be the best of the several ponds in Hubbardston. The 127-acre pond, which is spring fed and feeds into the Quabbin Reservoir, is protected by the Watershed Protection Act, G.L. c. 92, § 107A. Pursuant to § 107A, development of the area within 400 feet of the shore line of the pond is restricted. The subject parcel is generally rectangular in shape with the exception of a heavily wooded, ten-foot wide strip of land that runs between two abutting parcels, identified on the assessors’ map as parcel 24 and parcel 25, and provides access to the pond.[76] The parcel is encumbered by a twenty-foot wide easement, known as East Comet Pond Access Road, which travels the length of the parcel in a north-southeasterly direction and cuts the parcel’s usable width from 110 feet to 90 feet. Both parties agreed that the subject property is a buildable lot.
East Comet Pond Access Road is an unpaved, private way subject to the oversight of the Massachusetts Department of Conservation and Recreation (“DCR”). Access to the road is via a gate, which at times is locked by DCR employees, located off of Old Boston Turnpike (otherwise known as State Route 20). Mr. Blanchard testified that the road is basically one way with only a few turnouts. He further testified that the road is not maintained by the DCR and, as the only year-round resident within the area, he must plow the road in the winter months to gain access to the subject property.
Ms. Hopkins performed a comparable-sales analysis. She cited sales of four purportedly comparable properties. The following table outlines the four sales that Ms. Hopkins relied upon in her analysis, and the adjustments she made.
| Subject Property | 2B Gardner Rd, |
Hubbardston24 Narrow Ln,
Phillipston9 Comet Pond Access,
Hubbardston140 Seminole,
HubbardstonProximity
2-3 mi
8 mi
¼ mi
1-2 mi
Sale Price
$150,000
$ 65,000
$ 70,000
$ 98,500
Date of Sale
5/25/2005
8/30/2005
8/6/2004
1/29/2004
Adjustment
+2,000
+5,500
Location
Gd/Avg
Superior
Avg – Superior Access
Gd/Avg-Sup
Superior-Subdivision
Adjustment
-5,000
+5,000
-5,000
+10,000
Site ViewWV/ROW Access
WV/WF
Sawyers Pond
WV-BR
Queen Lake
Proximate to Pond
WF
Cushman Pond
Adjustment
+5,000
+10,000
+5,000
Lot Size
1.65
4.82/
3.9 WF
1.16
3.96
2.18
Adjustment
-6,000
+1,000
-4,000
-1,000
Street AccessPrivate/
Gravel
Public/
Paved
Public/
Paved
Private/
Gravel
Public/
Paved
Adjustment
-5,000
-5,000
0
-5,000
Topography/
Water FrontageMostly level/
10’+/-
Sloping/
2500’
Sloping/
None
Rolling/
None
Sl. Sloping/
450’ +/-
Adjustment
-10,000
+5,000
+5,000
-10,000
Features
None
2 Lots
Septic Design
4BR Design
Septic Design
Adjustment
-50,000
-5,000
-5,000
-5,000
Total Adjustments
-76,000
6,000
3,000
-20,500
Indicated Value of
Subject
$74,000
$71,000
$73,000
$78,000
Ms. Hopkins also developed a land residual approach to value based on the sale of 51 Grimes Road, which is a 2.2-acre parcel improved with a ranch-style home with a finished living area of 1,100 square feet. This sale is a waterfront property with approximately 200 feet of frontage on Lovewell Pond. The property sold on October 19, 2005 for $260,000. Using a building cost of $110 per square foot, totaling $121,000, plus additions of $25,000 for the two-car garage, $6,000 for the fireplace, $5,000 for the finished basement, and $5,000 for the porch, Ms. Hopkins calculated a total cost new of $162,000. She then allowed a twenty-five percent deduction for depreciation and a $20,000 deduction for the cost of site improvements, to arrive at a total site/building value of $141,500. Finally, she deducted this amount from the property’s sale price of $260,000 to arrive at a residual land value of $118,500.
Ultimately, Ms. Hopkins relied on her comparable-sales analysis in forming her opinion of value of the subject property as of January 1, 2006 of $75,000.
The assessors presented their case through the testimony of Dianne Lanney, assessor. Ms. Lanney testified that the increase in the subject property’s assessed value from fiscal year 2006 to fiscal year 2007 was attributable to the yearly revaluation and revised neighborhood factors that placed East Comet Pond at the uppermost end of the range for waterfront properties. She conceded, however, that no sales of property on the pond had occurred during calendar year 2006.
The assessors also presented a comparable-sales analysis which relied on four sales of purportedly comparable properties, all located within Hubbardston. Comparable sale number one, located at 45 Seminole Avenue, is a 3.31-acre parcel of waterfront land located on Cushman Pond. This parcel sold on February 25, 2004 for $88,500. The parcel satisfies the zoning requirements which requires a minimum lot size of 2 acres and 200 feet of road frontage and therefore is classified as a buildable lot. Ms. Lanney testified that she did not make a time adjustment because she found the market to be flat from the date of sale to the relevant date of assessment. She did make a positive adjustment of $115,100 to account for the inferior location on Cushman Pond, and a negative $6,300 adjustment to account for the parcel’s larger lot size to arrive at an adjusted sale price of $197,300.
Comparable sale number two is a 1.45-acre waterfront parcel located at 21 Seminole Avenue, which sold on January 29, 2004 for $98,500. Despite the fact that this parcel does not meet the minimum zoning requirements, it is a grandfathered lot and is therefore buildable. The only adjustment made was a positive adjustment of $128,100 for inferior location, to arrive at an adjusted sale price of $226,600.
Comparable sale number three is a 4.78-acre parcel of non-waterfront property located at Birches Road. This property sold on February 6, 2004 for $75,000. Ms. Lanney made a positive adjustment of $141,000 to account for the inferior location and also a negative adjustment of $16,800 to account for the excess acreage to calculate an adjusted sale price of $199,200.
Finally, comparable sale number four, located at Ed Clark Road, is a 3.40-acre buildable parcel of non-waterfront property. This property sold for $80,000 on October 31, 2006. Ms. Lanney made a positive adjustment of $150,400 for the property’s inferior location and a negative adjustment of $8,500 for the excess acreage, to arrive at an adjusted sale price of $221,900. Ms. Lanney determined that comparable sale number two, 21 Seminole Avenue, was the most comparable to the subject property and therefore concluded that the subject property’s fair market value as of January 1, 2006 was $226,600.
Based on the evidence, the Presiding Commissioner found and ruled that the appellant met his burden of proving that the subject property was overvalued for the fiscal year at issue. In reaching this decision, the Presiding Commissioner gave some weight to the comparable sales evidence offered by both parties. The Presiding Commissioner, however, modified the adjustments which Ms. Hopkins and Ms. Lanney used to reach his determination of fair cash value. After modifying the parties’ adjustments, the Presiding Commissioner found, on the basis of all the evidence of record, that the fair cash value of the subject property for fiscal year 2007 was $132,000. Accordingly, the Presiding Commissioner found that the subject property was overvalued by $63,200 and granted an abatement of $621.60.
OPINION
The assessors are required to assess real estate at its fair cash value. G.L. c. 59, § 38. Fair cash value is defined as the price on which a willing seller and a willing buyer will agree if both of them are fully informed and under no compulsion. Boston Gas Co. v. Assessors of Boston, 334 Mass. 549, 566 (1956). Generally, real estate valuation experts and the Massachusetts courts rely upon three approaches to determine the fair cash value of property: income capitalization, sales comparison, and cost reproduction. Correia v. New Bedford Redevelopment, 375 Mass. 360, 362 (1978). “The board is not required to adopt any particular method of valuation.” Pepsi-Cola Bottling Co. v. Assessors of Boston, 397 Mass. 447, 449 (1986).
The appellant has the burden of proving that the property has a lower value than that assessed. “‛The burden of proof is upon the petitioner to make out [his] right as [a] matter of law to [an] abatement of the tax.’” Schlaiker v. Assessors of Great Barrington, 365 Mass. 243, 245 (1974) (quoting Judson Freight Forwarding Co. v. Commonwealth, 242 Mass. 47, 55 (1922)). “[T]he board is entitled to ‛presume that the valuation made by the assessors [is] valid unless the taxpayers . . . prov[e] the contrary.’” General Electric Co. v. Assessors of Lynn, 393 Mass. 591, 598 (1984) (quoting Schlaiker, 365 Mass. at 245). In appeals before this Board, a taxpayer “‛may present persuasive evidence of overvaluation either by exposing flaws or errors in the assessors’ method of valuation, or by introducing affirmative evidence of value which undermines the assessors’ valuation.’” General Electric Co., 393 Mass. at 600 (quoting Donlon v. Assessors of Holliston, 389 Mass. 848, 855 (1983)).
Sales of comparable realty in the same geographic area and within a reasonable time of the assessment date generally contain probative evidence for determining the value of the property at issue. Graham v. Assessors of West Tisbury, Mass. ATB Findings of Fact and Reports 2008-321, 400 (citing McCabe v. Chelsea, 265 Mass. 494, 496 (1929)), aff’d, 73 Mass. App. Ct. 1107 (2008). “Once basic comparability is established, it is then necessary to make adjustments for the differences, looking primarily to the relative quality of the properties, to develop a market indicator of value.” New Boston Garden Corp. v. Assessors of Boston, 383 Mass. 456, 470 (1981).
In the present appeal, both the appellant’s real estate valuation expert and the assessors presented sales data of comparable properties and made adjustments for differences between the subject property and the purported comparables. On the basis of the parties’ analyses, together with necessary modifications to their adjustments, the Presiding Commissioner found that the fair cash value of the subject property for fiscal year 2007 was $132,000.
“In reaching its opinion of fair cash value in this appeal, the Board was not required to believe the testimony of any particular witness or to adopt any particular method of valuation . . . . Rather, the Board could accept those portions of the evidence that the Board determined had more convincing weight.” Foxboro Associates v. Board of Assessors of Foxborough, 385 Mass. 679, 683 (1982); New Boston Garden Corp., 383 Mass. at 473; Assessors of Lynnfield v. New England Oyster House, Inc., 362 Mass. 696, 701-02 (1972). “The credibility of witnesses, the weight of evidence, the inferences to be drawn from the evidence are matters for the Board.” Cummington School of the Arts, Inc. v. Assessors of Cummington, 373 Mass. 597, 605 (1977).
The Board need not specify the exact manner in which it arrived at its valuation. Jordan Marsh v. Assessors of Malden, 359 Mass. 196, 110 (1971). The fair cash value of property cannot be proven with “mathematical certainty and must ultimately rest in the realm of opinion, estimate and judgment.” Assessors of Quincy v. Boston Consol. Gas Co., 309 Mass. 60, 72 (1941).
Based on the foregoing facts and findings, the Presiding Commissioner found and ruled that the appellant met his burden of proving that the subject property was overvalued for fiscal year 2007. Accordingly, the Presiding Commissioner issued a single-member decision for the appellant in this appeal and granted an abatement in the amount of $621.60.
APPELLATE TAX BOARD
By: ______ _____
Thomas J. Mulhern, Commissioner
A true copy,
Attest: ______ _____
Clerk of the Board
COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD
JOHN MARTINS v. COMMISSIONER OF REVENUE
Docket No. C298758 Promulgated:
May 17, 2011
This is an appeal filed under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 62C, § 39(c), from the refusal of the Commissioner of Revenue (“Commissioner” or “appellee”) to abate personal income tax assessed to John Martins (“appellant”) for the tax years 1992 through 1994 and 1996 through 2001 (“tax years at issue”).
Chairman Hammond heard the Commissioner’s Motion to Dismiss the appellant’s appeal for lack of jurisdiction, and Commissioners Scharaffa, Egan, Rose, and Mulhern joined him in the decision for the appellee.
These findings of fact and report are made pursuant to requests by the appellant and appellee under G.L. c. 58A, § 13 and 831 CMR 1.32.
Michael S. Marino, Esq. and Melissa Curley, Esq. for the appellant.
Mireille T. Eastman, Esq. for the appellee.
FINDINGS OF FACT AND REPORT
The Commissioner filed a Motion to Dismiss the appellant’s appeal for lack of jurisdiction on March 2, 2009, alleging that the appellant failed to file his appeal with the Appellate Tax Board (“Board”) within the statutory time period prescribed by G.L. c. 62C, § 39. On March 9, 2009, the Board held a hearing relating to the Commissioner’s motion. Based on the arguments presented during the hearing, supporting memoranda and various documents submitted during the discovery process, including sworn statements from the parties, the Board made the following findings of fact.
Having been issued a Notice of Failure to File a Massachusetts personal income tax return for the tax year 1999 during January of 2003, the appellant filed a Form 1 – Massachusetts Resident Personal Income Tax Return for each of the tax years at issue. On these returns, the appellant listed his address as 390 Broadway, Somerville, MA 02145 (the “Somerville address”). On February 20, 2004, the appellant filed a Form CA-6, Application for Abatement/Amended Return (“abatement application”), claiming that his income tax returns had been filed in error because he was not a Massachusetts resident during the tax years at issue.[77] The address appearing on the application for abatement was 13844 SW 106 TERR., MIAMI, FL 33186 (the “Miami address”).[78]
Accompanying the abatement application, which was signed by attorney Michael S. Marino, was a Form M-2848, Power of Attorney and Declaration of Representative (“Form M-2848”) appointing Mr. Marino as the appellant’s attorney in fact (“POA”).[79] [80] Also attached was a “Durable Power of Attorney” appointing the appellant’s brother, Joe Martins, as his POA.[81] By letter to the Department of Revenue (“DOR”) dated May 10, 2004, Mr. Marino requested that all future correspondence relating to the appellant be sent to Mr. Marino.
In his abatement application, the appellant requested both a statutory hearing and settlement consideration. Consequently, the matter was transferred by the DOR’s Customer Service Bureau to the DOR’s Office of Appeals, which conducted a statutory hearing on November 28, 2005. The Office of Appeals issued a determination letter on April 18, 2006, setting forth the basis for the DOR’s impending denial of the appellant’s abatement application.[82]
On April 25, 2006, the DOR issued a Notice of Abatement Determination denying the appellant’s abatement application (“Notice”). The Notice was addressed to the appellant and his brother, Joe Martins, at the Somerville address. A copy of the Notice was sent to Mr. Marino on April 27, 2006.
During the discovery phase of the proceedings relating to this appeal, the appellant submitted Responses to Commissioner’s Request for Admissions (“Admissions”).[83] Among his responses, the appellant acknowledged that he had received the Notice during 2007. Further, the responses included Mr. Marino’s acknowledgement that he had received a copy of the Notice in 2006 and 2007.[84]
On January 11, 2007, having received a request for information relating to the Notice from Mr. Marino, the hearing officer at the Office of Appeals who had conducted the hearing sent Mr. Marino a copy of the Notice via facsimile. Mr. Marino acknowledged that he received the facsimile the day it was sent. The record does not reflect subsequent communication from the appellant until nearly twenty-one months later, on October 2, 2008, when the appellant’s counsel sent a letter to the DOR purporting to withdraw the appellant’s consent for the Commissioner to act on his abatement application more than six months from the date of its filing. The next day, the appellant mailed his petition, which was received by the Board on October 6, 2008.
Based on the foregoing, and for reasons which are explained in the Opinion section of these findings, the Board found and ruled that: Mr. Marino was authorized to receive the Notice on behalf of the appellant, and such receipt served as actual notice to the appellant; and the appellant’s receipt of the Notice in 2007, at the latest, separately served to satisfy applicable notice requirements. The Board thus found and ruled that the appellant’s October 2008 appeal to the Board was not timely and, therefore, it lacked jurisdiction over the appeal.[85] Accordingly, the Board issued a decision for the appellee.
OPINION
Appeals to the Board from the Commissioner’s refusal to abate a tax are governed by G.L. c. 62C, §39, which provides, in pertinent part that “[a]ny person aggrieved by the refusal of the Commissioner to abate a tax, in whole or in part, may appeal therefrom, within sixty days after the notice of the decision of the commissioner . . . by filing a petition with the clerk of the appellate tax board.”
The Board does not have jurisdiction to hear an appeal that is filed after the statutorily prescribed time period. Commissioner of Revenue v. Pat’s Super Market Inc., 387 Mass. 309, 311 (1982); see also Peterson v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 1994-305. Neither the courts nor the Board have the authority to create an exception to the time limit specified by statute. Sears Roebuck & Co. v. State Tax Commission, 370 Mass. 127, 130 (1976).
This appeal centers upon the timeliness of the appellant’s petition to the Board. The appellant does not dispute that the Notice was sent to Mr. Marino and to the Somerville address. Neither does the appellant dispute that both he and Mr. Marino received the Notice, in Mr. Marino’s case in 2006 and 2007, and in the appellant’s case, 2007 at the latest. Rather, the appellant’s argument depends entirely upon the Commissioner’s failure to mail the Notice to the appellant at the Miami address. This lapse, according to the appellant, rendered the Notice a nullity. On this basis, the appellant asserts that “on October 2, 2008, having not heard from the Commissioner on his application for abatement . . . [he] withdrew his consent pursuant to c. 58A, § 6.” Appellant’s Opposition to the Commissioner of Revenue’s Motion to Dismiss, p. 2-3. The appellant then claims to have timely filed his petition with the Board on October 6, 2008. The Board was not persuaded by the appellant’s arguments or his conclusion that his petition was timely.
Pursuant to G.L. c. 62C, § 37, “[t]he commissioner shall give notice to the applicant of [her] decision upon the [abatement] application.” Under 830 C.M.R. 62C.37.1(7), the Commissioner “shall mail or deliver written notice of the decision to grant or deny the abatement application to the taxpayer or his representative.” G.L. c. 62C, § 71 provides that “[a]ny notice authorized or required under the provisions of [chapter 62C] may be served personally or may be given by mailing the same, postage prepaid, to the person for whom it is intended, addressed to such person at his address as it appears in the records of the commissioner.”
The appellant argues that pursuant to the cited notice provisions, the only person to whom the Notice should have been sent was the appellant, and that his “address of record” within the meaning of § 71 was the Miami address. To reach this conclusion, the appellant, implicitly acknowledging that receipt of a notice of abatement determination by an authorized representative may satisfy applicable notice requirements, places particular emphasis on the contents of the Form M-2848, and his choice not to check the box on the form requesting that copies of notices and other communications be sent to Mr. Marino.[86] Thus, the appellant concludes that any notice sent to and received by Mr. Marino is ineffective. The appellant, however, makes no reference to Mr. Marino’s letter of May 10, 2004, in which Mr. Marino requested that he receive all subsequent correspondence from the DOR relating to the appellant. By the explicit terms of Form M-2848, Mr. Marino was empowered to make this request. Specifically, Form M-2848 provides that subject to its revocation, which did not occur, or other limitations not relevant to this appeal, Mr. Marino “c[ould] perform any and all acts that the [appellant] [could] perform. . . .” Mr. Marino was therefore entitled to request that he receive all future correspondence, including the Notice, on the appellant’s behalf. Having found that Mr. Marino was authorized to receive the Notice, the Board found and ruled that the DOR correctly sent the Notice to Mr. Marino and his receipt of the same served as actual notice to the appellant. See Theodore and Joan Levitt v. Commissioner of Revenue, Mass. ATB Findings of Facts and Reports 1997-38, 41-44 (having explicitly declined to make a finding as to whether a notice of abatement denial was mailed to the appellants, the Board found that the appellants received notice of the denial on the date the notice was received by their attorney); see also Syms Corp. v. Commissioner of Revenue, Mass. ATB Findings of Facts and Reports 2000-711, 719, aff’d 436 Mass. 505 (2002) (finding that the appellant received notice of an abatement denial when its representative received a copy of the denial notice).
The Board also found and ruled that even if the Notice had not been properly sent to and received by Mr. Marino, the appellant’s receipt of the Notice was dispositive. As noted, supra, the appellant unequivocally acknowledged that he received the Notice during 2007. He did not subsequently disavow this acknowledgement. Rather, the appellant asserted only that he did not receive the Notice at a particular location, the Miami address, or directly from the Commissioner. The appellant then focused on the failure of the Commissioner to send the Notice to him at the Miami address, leading him to conclude that the notice requirements of c. 62C had not been met. By the appellant’s reasoning, notwithstanding that he received actual notice of the Commissioner’s abatement denial, and having not yet withdrawn consent for the Commmissioner to act on his abatement application, he would be able to file a timely appeal with the Board into the indefinite future. Indeed, in oral argument during the motion hearing relating to this appeal, counsel for the appellant argued that “[a]ctual notice is not relevant.” Hearing Transcript, p. 12. The appellant cites no authority, and the Board knows of none, to support the counterintuitive proposition that actual notice of an abatement denial does not serve to satisfy the notice requirements of G.L. c. 62C. In fact, notice provisions such as those contained in G.L. c. 62C, §§ 37 & 71 are by design intended to ensure that a taxpayer receives actual notice of material information. See, e.g. SCA Disposal Services of New England, Inc. v State Tax Commission, 375 Mass. 338, 341 (1978) (holding that it is “logical to infer” that relevant notice provisions were “included to indicate that compliance with those provisions provides some evidence of actual notice.”)
Finally, as previously noted, a taxpayer generally must file an appeal with the Board “within sixty days after the notice of the decision of the commissioner.” G.L. c. 62C, § 39. Consistent with the Court’s holding in SCA Disposal, if the Board were to find that the appellant did not receive the Notice within this statutory time limit, the appellant would be afforded a “reasonable time to appeal which [could not] be longer than the statutory period itself, measured from the date of receipt.” SCA Disposal, 375 Mass. at 342. Given Mr. Marino’s actual receipt of copies of the Notice in 2006 and 2007, and the appellant’s actual receipt of the Notice in 2007, allowance for the sixty day statutory appeal period pursuant to SCA Disposal would not nearly suffice to render the appellant’s October 2008 petition timely.
Accordingly, the Board allowed the Commissioner’s Motion to Dismiss the appellant’s appeal for lack of jurisdiction and issued a decision for the appellee.
THE APPELLATE TAX BOARD
By: _________________________________
Thomas W. Hammond, Jr., Chairman
A true copy,
Attest: __________________________
Clerk of the Board
COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD
RICHARD S. & v. BOARD OF ASSESSORS OF
CYNTHIA JO NULL GOODOF THE TOWN OF NEEDHAM
Docket No. F299670 Promulgated:
May 24, 2011
This is an appeal filed under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 59, §§ 64 and 65 from the refusal of the Board of Assessors of the Town of Needham (“assessors” or “appellee”) to abate taxes on certain real estate owned by and assessed to Richard S. and Cynthia Jo Null Goodof (“appellants”) under G.L. c. 59, §§ 11 and 38, for fiscal year 2009 (“fiscal year at issue”).
Commissioner Egan heard this appeal and was joined by Chairman Hammond and Commissioners Scharaffa, Rose, and Mulhern in the decision for the appellee.
These findings of fact and report are made pursuant to a request by the appellants under G.L. c. 58A, § 13 and 831 CMR 1.32.
Richard S. Goodof, pro se, for the appellants.
Chip Davis, assessor, for the appellee.
FINDINGS OF FACT AND REPORT
Based on the testimony and exhibits offered into evidence at the hearing of this appeal, the Appellate Tax Board (“Board”) made the following findings of fact.
On January 1, 2008, the appellants were the assessed owners of a 12,140-square-foot-parcel of real estate, improved with a two-story, single-family dwelling located at 57 Birds Hill Avenue in Needham (“subject property”). For fiscal year 2009, the assessors valued the subject property at $957,800, and assessed a tax thereon, at the rate of $9.96 per thousand, in the total amount of $9,539.69. The appellants timely paid the tax due without incurring interest. On January 29, 2009, the appellants timely filed an Application for Abatement with the assessors. The assessors denied the appellants’ abatement application on February 6, 2009. The appellants timely filed their appeal with the Board on April 30, 2009. Based on the foregoing, the Board found and ruled that it had jurisdiction to hear and decide this appeal.
The dwelling on the subject property was built in 1996. It is a Colonial-style dwelling with 3,000 square feet of finished living area above-grade. It has eight rooms in total, including four bedrooms. The subject property also has three full bathrooms and one half bathroom. Additional features include a three-car garage, two fireplaces, a 9-foot-by-5-foot open front porch, and a deck. The subject property has an additional 728 square feet of finished living area in the basement.
The appellants purchased the subject property in 1999 for $601,500. In 2007, the appellants added a small addition and made several renovations to the subject property. The renovations included updating the kitchen and master bath and adding a bathroom in the basement. The appellants also added a third garage bay along with the 9-foot-by-5-foot front porch. The addition added 160 square feet to the subject property’s finished living area. The total cost of the addition and renovations was $250,000.
The appellants, who presented their case through documentary submissions along with the testimony of Mr. Goodof, asserted that the assessed value of the subject property exceeded its fair cash value. In an attempt to support their assertions, the appellants introduced evidence comparing the assessed value of the subject property to the assessed values of other nearby properties. Specifically, the appellants introduced information and property record cards for four purportedly comparable properties. All of the properties were, like the subject property, located in neighborhood “305” for assessing purposes; three of them were located on the same street as the subject property. The appellants’ comparable properties featured dwellings which were constructed between 1995 and 2007 and ranged in size from 3,291 square feet to 4,705 square feet. Their assessed values for fiscal year 2009 ranged from $885,300 to $1,294,300.
The appellants’ primary argument was that the subject property was overvalued because its dwelling was valued at a higher per-square-foot value than their four selected comparable properties. The appellants argued that the subject property’s higher per-square-foot valuation was not warranted, particularly considering that at least one of the comparables – located at 105 Birds Hill Avenue – was much newer construction. Additionally, the appellants contended that the dwelling located at 63 Birds Hill Avenue, which was built in 1995 by the same builder who built the subject property and renovated in 2007 by the same contractor who renovated the subject property, was valued at approximately 15 percent less per square foot than the subject property’s dwelling. The appellants contended that the building value of the subject property as assessed did not reflect the fact that only 20 percent of the subject property was updated in 2007. The appellants’ opinion of the subject property’s fair cash value for the fiscal year at issue was $875,000.
The assessors presented their case-in-chief through the testimony of assessor Chip Davis, and through the submission of exhibits containing a comparable-assessment analysis and a comparable-sales analysis, along with property record cards for each of their selected comparable properties. The assessors’ comparable-assessment analysis featured assessment data for four comparable properties located, like the subject property, in neighborhood “305” for assessment purposes. The dwellings on the assessors’ comparable-assessment properties were built between 1998 and 2000, and ranged in size from 2,969 square feet to 3,186 square feet. The fiscal year 2009 assessed values of the assessors’ comparable-assessment properties ranged from $964,400 to $978,300.
The assessors’ comparable-sales analysis contained five properties which sold in Needham between March and August of 2007. Two of the properties were located in neighborhood “305.” Each of the assessors’ comparable-sales properties featured Colonial-style dwellings which ranged in size from 2,969 square feet to 3,351 square feet. The sales prices ranged from $985,000 to $1,090,000.
On the basis of all of the evidence, the Board found that the appellants did not meet their burden of proving that the assessed value of the subject property was greater than its fair cash value. The appellants’ primary argument was that the subject property’s dwelling was assessed at a higher per-square-foot value than their four selected comparable properties. However, with finished living areas ranging from 3,291 square feet to 4,705 square feet, the appellants’ four purportedly comparable properties were larger than the subject property; certain of them were significantly larger. In making their argument, the appellants overlooked the familiar principle of real estate valuation that smaller dwellings often have a higher per-square-foot value than similar but larger dwellings. The Board therefore did not find the appellants’ evidence to be a persuasive indication that the assessed value of the subject property exceeded its fair cash value as of the relevant date of assessment.
In contrast, the assessors presented ample, credible evidence in support of their assessment. The assessors presented sales data for five sales in Needham which occurred close in time to the relevant date of assessment. The assessors’ comparable-sales properties were Colonial-style dwellings which ranged in size from 2,969 square feet to 3,351 square feet, and the Board found that they were sufficiently comparable to the subject property to provide probative evidence of its fair cash value. The sales prices of the assessors’ comparable-sales properties ranged from $985,000 to $1,090,000, a range which, even at its low-end, exceeded the subject property’s assessed value of $957,800. The Board found the assessors’ comparable-sales analysis to be persuasive evidence that the subject property’s assessed value did not exceed its fair cash value.
In addition, the assessors offered a comparable-assessment analysis which the Board found provided further support for the assessment. The four comparable-assessment properties offered by the assessors were, like the subject property, located in neighborhood “305” for assessment purposes, and their dwellings were close in age and size to the subject property’s dwelling. The Board therefore found that they were sufficiently comparable to the subject property to provide probative evidence of its value. The fiscal year 2009 assessed values of the assessors’ comparable-assessment properties ranged from $964,400 to $978,300; like the range of prices that the assessors offered in their comparable assessment analysis, this range, even at its low end, exceeded the subject property’s assessed value of $957,800. The Board found that the assessors’ comparable-assessment analysis provided additional evidence that the subject property was not overvalued.
Thus, on the basis of all of the evidence, the Board found and ruled that the appellants did not meet their burden of proving that the assessed value of the subject property was greater than its fair cash value for the fiscal year at issue. Accordingly, the Board issued a decision for the appellee.
OPINION
The assessors are required to assess real estate at its fair cash value. G.L. c. 59, § 38. Fair cash value is defined as the price on which a willing seller and a willing buyer in a free and open market will agree if both of them are fully informed and under no compulsion. Boston Gas Co. v. Assessors of Boston, 334 Mass. 549, 566 (1956).
The appellants have the burden of proving that the property has a lower value than that assessed. “‘The burden of proof is upon the petitioner to make out its right as [a] matter of law to [an] abatement of the tax.’” Schlaiker v. Assessors of Great Barrington, 365 Mass. 243, 245 (1974) (quoting Judson Freight Forwarding Co. v. Commonwealth, 242 Mass. 47, 55 (1922)). “[T]he board is entitled to ‘presume that the valuation made by the assessors [is] valid unless the taxpayers . . . prov[e] the contrary.’” General Electric Co. v. Assessors of Lynn, 393 Mass. 591, 598 (1984) (quoting Schlaiker, 365 Mass. at 245).
The fair cash value of property may be determined by recent sales of comparable properties in the market. Actual sales generally “furnish strong evidence of market value, provided they are arm’s-length transactions and thus fairly represent what a buyer has been willing to pay for the property to a willing seller.” Foxboro Associates v. Assessors of Foxborough, 385 Mass. 679, 682 (1982); New Boston Garden Corp. v. Assessors of Boston, 383 Mass. 456, 469 (1981); First National Stores, Inc. v. Assessors of Somerville, 358 Mass. 554, 560 (1971). Further, properties are “comparable” to the subject property when they share “fundamental similarities” with the subject property, including similar age, locations, sizes and date of sale. Lattuca v. Robsham, 442 Mass. 205, 216 (2004). “Once basic comparability is established, it is then necessary to make adjustments for the differences, looking primarily to the relative quality of the properties, to develop a market indicator of value.” New Boston Garden Corp., 383 Mass. at 470.
Additionally, evidence of the assessed values of comparable properties may provide probative evidence of fair cash value. G.L. c. 58A, § 12B. “The introduction of such evidence may provide adequate support for either the granting or denial of an abatement.” John Alden Sands v. Assessors of Bourne, Mass. ATB Findings of Fact and Reports 2007-1098, 1106-07, (citing Chouinard v. Assessors of Natick, Mass. ATB Findings of Fact and Reports 1998-299, 307-308. However, “[r]eliable comparable sales data will ordinarily trump comparable assessment information for purposes of finding a property’s fair cash value.” Graham v. Assessors of West Tisbury, Mass. ATB Findings of Fact and Reports 2007-321, 403, aff’d, 73 Mass. App. Ct. 1107 (2008).
In the present appeal, the appellants introduced assessment data and property record cards for four properties located in the same neighborhood as the subject property. Their primary argument was that the subject property’s dwelling was assessed at a higher per-square-foot value than their four purportedly comparable properties. However, the appellants’ comparable properties had larger finished living areas than the subject property, certain of them significantly larger. As it has in past appeals, the Board recognized the familiar principle of real estate valuation that smaller properties often have a higher per-square-foot value than similar but larger properties. See Ricky L. Seto v. Assessors of Quincy, Mass. ATB Findings of Fact and Reports 2006-585, 590 (“In making this finding and ruling, [the Board] also recognized that all other things being equal, smaller condominium units ordinarily have a higher value per square foot than larger ones”). See also appraisal institute, the appraisal of real estate 212 (13th ed. 2008) (“Size differences can affect value . . . . Generally, as size increases, unit prices decrease. Conversely, as size decreases, unit prices increase.”). Because it is to be generally expected that smaller homes will have greater per-square-foot values than similar larger homes, the Board did not find the appellants’ arguments to be a persuasive indication that the subject property was overvalued.
The assessors, for their part, introduced ample, credible comparable-assessment and comparable-sales data supporting the assessment. The Board found and ruled that the properties submitted for comparison by the assessors were sufficiently comparable to the subject property to provide probative evidence of its fair cash value. Moreover, the Board found and ruled that the range of sale prices and assessed values encompassed in the assessors’ analyses provided reliable evidence that the assessed value of the subject property did not exceed its fair cash value. Accordingly, on the basis of all of the evidence, the Board found and ruled that the appellants did not meet their burden of proving that the assessed value of the subject property was greater than its fair cash value for the fiscal year at issue. The Board therefore issued a decision for the appellee in this appeal.
APPELLATE TAX BOARD
By: _______________
Thomas W. Hammond, Jr., Chairman
A true copy,
Attest: ______ __________
Clerk of the Board
COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD
ROBERT J.& MARLENE CORKERY v. BOARD OF ASSESSORS OF
THE TOWN OF WAREHAM
Docket No. F294231 Promulgated:
May 27, 2011
This is an appeal filed under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 59, §§ 64 and 65, from the refusal of the Board of Assessors of the Town of Wareham (“assessors”), to abate taxes on certain real estate located in Wareham, owned by and assessed to Robert J. and Marlene Corkery (“appellants”) under G.L. c. 59, §§ 11 and 38, for fiscal year 2008.
Commissioner Egan heard this appeal. Chairman Hammond and Commissioners Scharaffa, Rose and Mulhern joined her in the decision for the assessors. These Findings of Fact and Report are made pursuant to a request by the appellants under G.L. c. 58A, § 13 and 831 CMR 1.32.
Robert J. Corkery, pro se, for the appellants.
Richard Gonsalves, assessor, for the appellee.
FINDINGS OF FACT AND REPORT
On the basis of the testimony and exhibits offered into evidence at the hearing of this appeal, the Appellate Tax Board (“Board”) made the following findings of fact.
On January 1, 2007, the appellants were the assessed owners of an improved parcel of real estate located at 28 Mark’s Cove Road in the Cromesett neighborhood of Wareham (“subject property”). For fiscal year 2008, the assessors initially valued the subject property at $634,000. In accordance with G.L. c. 59, § 57C, the appellants paid the tax due without incurring interest and in accordance with G.L. c. 59, § 59, timely filed an Application for Abatement with the assessors on January 7, 2008. The assessors granted a partial abatement on April 3, 2008, having reduced the subject property’s assessed value to $616,000. On April 11, 2008, the appellants seasonably filed an appeal with the Board. On the basis of these facts, the Board found and ruled that it had jurisdiction to hear and decide this appeal.
The subject property consists of a salt-waterfront 0.29-acre parcel of real estate improved with a single-family, contemporary-style home in average condition containing 1,434 square feet of finished living area. The parcel is close to rectangular in shape, slopes slightly downward toward the rear, and has panoramic water views as well as a private beach area. The dwelling consists of six rooms and features an open floor plan on the first floor and a spiral staircase leading to the second floor. There are three bedrooms, one full bath and one half bath. The dwelling is not heated.
The appellants argued that the subject property was overvalued for fiscal year 2008. In support of their argument, the appellants submitted a book largely composed of a collection of numerous approximately two-inch square advertisements for the sale of properties purportedly in the general area of the subject property.[87] Although the advertisements included each property’s offering price and often touted certain amenities, crucial information was lacking. More specifically, the appellants failed to present evidence relating to the properties’ addresses, the desirability, or lack thereof, of each property’s location, the condition of the dwellings situated on the purportedly comparable properties, or the physical attributes of each parcel. Further, and most importantly, no data reflecting actual sale prices was included in the presentation. Lacking this information, the Board could not determine if the properties were comparable to the subject property, much less consider adjustments to account for differences between the properties and the subject property. Consequently, the Board found that the “sales offering” data presented by the appellants were not sufficiently probative to establish the subject property’s fair cash value.
The appellants also submitted property record cards relating to approximately a dozen properties to support their assertion that the subject property’s assessed value was excessive relative to these properties’ assessed values. The Board found that this evidence did not undermine the value placed upon the subject property by the assessors.
As a threshold matter, the Board found that the appellants failed to establish comparability between their chosen properties and the subject property. In particular, the cited properties’ parcel sizes varied dramatically, from 0.07 acre to 4.17 acres. Similarly, dwellings varied in size, style and condition. Moreover, the majority of the cited properties, unlike the subject property, were not waterfront properties. The appellants failed to address, in any respect, the substantial differences between these properties and the subject property. In sum, as was the case with the “sales offering” data, the appellants failed to demonstrate the comparability of their chosen properties or a method to make adjustments to account for differences between these properties and the subject property.
Finally, the appellants argued that the presence of “toxic bloom” in the waters surrounding the subject property adversely affected the value of the property, ultimately resulting in rescission of the only offer for the property that the appellants received when they placed it on the market during 2006 and 2007. The appellants, however, did not substantiate when or for how long the property had been offered for sale. Nor did they substantiate the terms of the offering or that they had received only one offer, which they stated was for “between $300,000 and $400,000.” Similarly, their asserted reason for rescission of the offer was undocumented. Further, the assessors submitted into evidence a letter from the Wareham Harbormaster Department responding to an inquiry relating to water quality and the presence of “Bay foam” in the area. The Harbormaster Department stated that Bay foam, which typically occurs after a heavy rain, poses no threat, and noted no conditions, such as toxic bloom, that might adversely affect water quality.
For their part, the assessors submitted four sales of salt-waterfront properties, which the Board found were comparable to the subject property. Among these, the Board found that the property at 241 Cromesett Road, which is located within half a mile of the subject property in the Cromesett neighborhood, and which sold on December 3, 2007 for $675,000, was most comparable to the subject property and therefore provided the most probative evidence of the subject property’s value.[88] Like the subject property, 241 Cromesett Road is salt-waterfront property, although its water views were somewhat obscured by foliage. The ranch-style dwelling at Cromesett Road is in average condition, has six rooms, three bedrooms, one full bath and one half bath, all attributes shared by the dwelling on the subject property. The Cromesett Road dwelling is smaller, containing 982 square feet of finished living area, but the dwelling offers electric heat. The parcel on Cromesett Road is approximately 0.33 acres, slightly larger than the subject property’s parcel.
On balance, the property at 241 Cromesett Road is similar to the subject property in numerous respects, and the differences, certain of which favored each property, did not affect the Board’s finding of comparability or warrant significant adjustment to the Cromesett Road property’s sale price to estimate an indicated value for the subject property. Thus, the Board found that the sale price of the Cromesett Road property, taking into account the value of the adjoining parcel, supported the assessed value of the subject property.
Having considered the evidence of record, the Board found that neither the “sales offering” nor the comparable-assessment evidence presented by the appellants provided a reliable basis to establish the fair cash value of the subject property. The Board therefore found and ruled that the appellants failed to meet their burden of demonstrating that the subject property’s assessed value exceeded its fair cash value for fiscal year 2008. The Board also found and ruled that the comparable-sales evidence presented by the assessors, particularly with respect to the property located at 241 Cromesett Road, supported the contested assessment. On this basis, the Board issued a decision for the assessors in this appeal.
OPINION
Assessors have a statutory obligation to assess real estate at its fair cash value as of the first day of January of the year preceding the fiscal year at issue. G.L. c. 59 §§ 11 and 38. Fair cash value is defined as the price upon which a willing buyer and a willing seller would agree if both were fully informed and neither was under compulsion. Boston Gas Co. v. Assessors of Boston, 334 Mass. 549, 566 (1956).
The burden of proof is upon the taxpayer to make out a right to an abatement as a matter of law. Schlaiker v. Assessors of Great Barrington, 365 Mass. 243, 245 (1974). An assessment is presumed to be valid unless the taxpayer is able to sustain his or her burden of proving otherwise. Id. The taxpayer may sustain this burden by introducing affirmative evidence of fair cash value, or by proving that the assessors erred in their method of valuation. General Electric Co. v. Assessors of Lynn, 393 Mass. 591, 600 (1984). “The introduction of ample and substantial evidence in this regard may provide adequate support for abatement.” Chouinard v. Assessors of Natick, Mass. ATB Findings of Fact and Reports 1998-299, 307-308 (citing Garvey v. Assessors of West Newbury, Mass. ATB Findings of Fact and Reports 1995-129, 135-36; Swartz v. Assessors of Tisbury, Mass. ATB Findings of Fact and Reports 1993-271, 279-80).
To support their assertion that the subject property was overvalued for fiscal year 2008, the appellants submitted a variety of information, including a book primarily composed of advertisements for the sale of properties purportedly in the general area of the subject property. The Board found that this presentation did not provide affirmative evidence of the subject property’s value or support the assertion that the assessors had erred in their valuation method, because it lacked crucial information. In particular, there was no evidence relating to the properties’ addresses, the quality of each property’s location, the condition of the dwellings, or the physical attributes of each parcel. Further, no data reflecting actual sale prices was included in the presentation. Without this information, the Board could not determine if the properties were comparable to the subject property or consider adjustments to account for differences between the advertised properties and the subject property.
G.L. c. 58A, § 12B provides, in pertinent part, that “at any hearing relative to the assessed fair cash valuation or classification of property, evidence as to fair cash valuation or classification of property at which assessors have assessed other property of a comparable nature or class shall be admissible.” “The admissibility under G.L. c. 58A, § 12B, of evidence of assessments imposed on other property claimed to be comparable in nature to the subject property is largely a matter within the discretion of the board.” Assessors of Lynnfield v. New England Oyster House, Inc., 362 Mass. 696, 703 (1972).
The Board, in its discretion, allowed into evidence various property record cards, which the appellants had submitted to bolster their argument that the subject property’s assessed value was excessive. However, the Board found that the appellants failed to establish comparability between their chosen properties and the subject property. There were dramatic variations among the properties with regard to parcel size, the dwellings varied in size, style and condition, and the majority of the properties were not waterfront properties. The appellants failed to address in any way the substantial differences between these properties and the subject property. Therefore, the Board found that the appellants failed to demonstrate the comparability of their chosen properties or offer a method to make adjustments to account for differences between these properties and the subject property.
Finally, the Board found unsubstantiated the appellants’ claims regarding the duration, terms and outcome of their attempt to sell the subject property, as well as the presence or effect of “toxic bloom.” The Board therefore found that these claims were not probative of the subject property’s fair cash value.
“[S]ales of property usually furnish strong evidence of market value, provided they are arm’s-length transactions and thus fairly represent what a buyer has been willing to pay for the property to a willing seller.” Foxboro Associates v. Assessors of Foxborough, 385 Mass. 679, 682 (1982). Sales of comparable realty in the same geographic area and within a reasonable time of the assessment date generally contain probative evidence for determining the value of the property at issue. Graham v. Assessors of West Tisbury, Mass. ATB Findings of Fact and Reports 2008-321, 400 (citing McCabe v. Chelsea, 265 Mass. 494, 496 (1929)), aff’d Graham v. Assessors of West Tisbury, 73 Mass. App. Ct. 1107 (2008). Properties are “comparable” to the subject property when they share “fundamental similarities” with the subject property, including similar age, locations, sizes and dates of sale. Lattuca v. Robsham, 442 Mass. 205, 216 (2004). When comparable sales are used, allowances must be made for various factors which would otherwise cause disparities in the comparable property’s sale prices. See Pembroke Industrial Park Co., Inc. v. Assessors of Pembroke, Mass. ATB Findings of Fact and Reports 1998-1072, 1082.
In the present appeal, the assessors submitted data relating to sales of four salt-waterfront properties, each of which the Board found comparable to the subject property. Among these, the Board found that the property at 241 Cromesett Road, which is located within half a mile of the subject property in the Cromesett neighborhood, and which sold on December 3, 2007 for $675,000, was most comparable to the subject property and therefore provided the most probative evidence of the subject property’s value. The property at 241 Cromesett Road was similar to the subject property in numerous respects, and the differences between the properties did not affect the Board’s finding of comparability or warrant significant adjustment to the Cromesett Road property’s sale price to estimate an indicated value for the subject property. Thus, the Board found that the sale price of the Cromesett Road property supported the assessed value of the subject property.
On the basis of the evidence presented, the Board found and ruled that the appellants did not provide sufficient evidence to support their claim that the subject property was overvalued. As discussed, supra, the appellant’s evidence relating to properties for sale in the area lacked crucial data, and their comparable-assessment submissions did not undermine the contested assessment. The Board thus found and ruled that the appellants failed to meet their burden of demonstrating that the subject property’s assessed value exceeded its fair cash value for fiscal year 2008. Moreover, the Board found and ruled that the comparable-sales data provided by the assessors, and in particular the data relating to the property at 241 Cromesett Road, supported the contested assessment. On the basis of the foregoing, the Board issued a decision for the assessors in this appeal.
APPELLATE TAX BOARD
By: ________________________________
Thomas W. Hammond, Jr., Chairman
A true copy:
Attest: _________________________
Clerk of the Board
COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD
VERIZON NEW ENGLAND, INC. v. COMMISSIONER OF REVENUE
Docket Nos. C293850-C293856 Promulgated:
June 7, 2011
These are appeals filed under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 62C, § 39 from the refusal of the Commissioner of Revenue (“Commissioner” or “appellee”), to abate sales taxes assessed against Verizon New England, Inc. (“Verizon” or “appellant”) for the monthly tax periods beginning January 1, 1999 and ending December 31, 2001, and the monthly tax periods beginning October 1, 2003 and ending September 30, 2006 (collectively, the “tax periods at issue”).
Commissioner Scharaffa heard these appeals and was joined by Chairman Hammond and Commissioners Egan, Rose, and Mulhern in decisions for the appellant.
These findings of fact and report are made pursuant to requests by the appellant and the appellee under G.L. c. 58A, § 13 and 831 CMR 1.32.
William A. Hazel, Esq., James F. Ring, Esq., and Brad G. Hickey, Esq. for the appellant.
Timothy R. Stille, Esq. and Frances M. Donovan, Esq. for the appellee.
FINDINGS OF FACT AND REPORT
- I. Introduction
On the basis of a Statement of Agreed Facts, the testimony, and the exhibits offered into evidence at the hearing of these appeals, the Appellate Tax Board (“Board”) made the following findings of fact. The appellant was incorporated under the laws of New York in 1883. It has been qualified to do business in the Commonwealth since 1884. The appellant was originally incorporated as New England Telephone & Telegraph Company but changed its name to “Verizon” in 2001. Verizon provides telecommunications services to customers in Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont.
For each of the tax periods at issue, the appellant timely filed monthly sales tax returns with the Commissioner. In 2001, the Commissioner commenced an audit of the appellant’s monthly sales tax returns filed for periods beginning January 1, 1999 and ending December 31, 2001 (the “first audit cycle”). During the course of the audit, the appellant and the Commissioner entered into agreements extending the time for the assessment of taxes, and on October 7, 2006, the Commissioner issued to the appellant a Notice of Intention to Assess (“NIA”) proposing the assessment of additional sales taxes in the amount of $876,132 for the first audit cycle. Also, in October of 2006, the Commissioner began auditing the appellant’s monthly sales tax returns for the periods beginning October 1, 2003 and ending September 30, 2006 (the “second audit cycle”). Again, the Commissioner and the appellant entered into agreements extending the time for the assessment of taxes, and on December 22, 2006, the Commissioner issued to the appellant an NIA proposing the assessment of additional sales taxes in the amount of $622,297 for the second audit cycle.
The appellant requested and received a hearing with the Department of Revenue’s Office of Appeals to discuss the Commissioner’s proposed additional assessments. On June 4, 2007, the Office of Appeals issued a Letter of Determination upholding the Commissioner’s proposed additional assessments in full. On July 3, 2007, the Commissioner issued to the appellant a Notice of Assessment indicating that the additional sales taxes proposed on the October 7, 2006 NIA and on the December 22, 2006 NIA had been assessed on July 1, 2007.
On July 31, 2007, the appellant filed an Application for Abatement with the Commissioner requesting abatements of the additional sales taxes assessed for each of the periods at issue. By Notices of Abatement Determination dated October 1, 2007, the Commissioner denied the appellant’s request for abatements for each of the tax periods at issue. The appellant timely filed its petitions with the Board on November 29, 2007. On the basis of the foregoing, the Board found and ruled that it had jurisdiction to hear and decide these appeals.
During the periods relevant to these appeals, G.L. c. 64H, § 2 (“64H, § 2”) imposed a tax, at the rate of 5 percent, upon sales at retail in the Commonwealth, by any vendor, of tangible personal property or of telecommunications services performed in the Commonwealth. There was no dispute between the parties that Verizon was a vendor making retail sales of telecommunications services. The primary issue presented in these appeals was whether the Commissioner properly disallowed the exemption found in G.L. c. 64H, § 6(i)(4) (“§ 6(i)(4)”) on certain sales of telephone services made by the appellant. Section 6(i)(4) provides an exemption from the sales tax imposed by 64H, § 2 for up to $30.00 of “residential main telephone services” billed on a monthly recurring basis (“$30.00 exemption”). On audit, the Commissioner disallowed the claimed $30.00 exemption in instances in which there were more than one account with the same customer name and billing address and in instances in which it appeared that an account was being used for business, rather than residential purposes, leading to the deficiency assessments at issue.
The Commissioner made no additional assessments with respect to the second issue, which was whether charges made by the appellant for voice mail services were subject to the sales tax imposed by 64H, § 2. The appellant had reported sales taxes on its returns, and it therefore had self-assessed all such taxes for the tax periods at issue, which it collected and remitted to the Commissioner. The appellant contended in its Applications for Abatement and in its petitions with the Board that voice mail was not subject to the sales tax imposed by 64H, § 2 because it was not a “telecommunications service” as defined by G.L. c. 64H, § 1 (“64H, § 1”), and therefore it should not have been included in its tax returns.
The appellant called two witnesses to testify at the hearing of these appeals. Those witnesses were Mr. Vinod Motwani, who was the manager of Verizon’s transaction tax audit group, and Mr. Michael Anglin, who, as of the time of the hearing, had been employed in various positions at Verizon and its predecessors for 38 years. The Commissioner offered the testimony of one witness, Mr. Dale Morrow of the Massachusetts Department of Revenue. Mr. Morrow was the regional director in charge of the audits which generated the deficiency assessments at issue.
II. Audit Methodology
The Commissioner conducted her audit of the appellant’s sales tax returns using what is known as a sampling methodology. For the first audit cycle, the Commissioner selected a sample of 579 customer bills, all of which were issued during October of 1999. The Commissioner determined that nine of the 579 bills contained erroneous applications of the $30.00 exemption, resulting in $204.78 of telecommunications services that were, in the Commissioner’s opinion, erroneously exempted from tax. The Commissioner then calculated an error rate by taking the $41,198.05 of total sales shown in the sample bill pool and dividing it by the $204.78 of sales that should have been subject to tax in the Commissioner’s opinion. The error rate was then applied to the net taxable amount reported for October of 1999, less coin revenue, and then multiplied by the number of months in the audit period to arrive at a total additional tax due of $836,430 relating to the $30.00 exemption issue.[89] The Commissioner applied the same methodology and error rate for the second audit cycle, arriving at a total additional tax due of $582,595 relating to the $30.00 exemption issue.[90]
The appellant did not dispute the Commissioner’s use of the sampling methodology in general, but did dispute certain calculations and adjustments made by the Commissioner in the course of the audit. Prior to the hearing of these appeals, the parties reached an agreement with respect to the audit methodology issues, and that agreement, as reflected in the Statement of Agreed Facts, was that regardless of the Board’s determinations on the issues presented in these appeals, the appellant is entitled to abatements totaling $176,139 for the first audit cycle and abatements totaling $89,581 for the second audit cycle. The amount remaining at issue with respect to the $30.00 exemption issue for the first audit cycle was $660,291, and the amount remaining at issue with respect to the $30.00 exemption issue for the second audit cycle was $493,014.
III. The $30.00 Exemption
Section 6(i)(4) provides an exemption from sales tax for up to $30.00 of “residential main telephone services billed on a monthly recurring basis or billed as message units.” During the course of the audit, the Commissioner identified nine customer bills (“nine bills”) from the total sample which, in her opinion, were improperly treated by Verizon as eligible for the $30.00 exemption. The Commissioner therefore disallowed the $30.00 exemption on those nine bills.
The Commissioner denied four of the nine bills after concluding that the accounts were being used for business, not residential, purposes. Prior to the hearing of these appeals, the parties were able to reach agreements with respect to three out of those four bills, leaving only one bill, the Todd Richman bill (“Todd Richman bill”), in dispute. The remaining five bills (“five bills”) each reflected an account billed to a billing address at which an additional account was also billed to the same individual. The Commissioner denied the $30.00 exemption for each of the five bills because they did not reflect, in the Commissioner’s opinion, sales of “residential main telephone services.”
Substantial evidence was entered into the record regarding the meaning of the phrase “residential main telephone services.” Mr. Anglin testified that the phrase “residential main telephone services” is a telecommunications industry term. He explained that the phrase is used in the telecommunications industry to describe basic, local residential telephone services, which include the provision of a dial tone and the ability to make and receive local telephone calls. He stated that additional services, such as long distance service and toll calls, are not “residential main telephone services.” Mr. Anglin testified that Verizon offers several varieties of “residential main telephone service” packages and that each of the bills at issue reflected charges for Verizon’s “residential main telephone service” packages.
Mr. Anglin’s testimony was supported by documentary evidence entered into the record. Mr. Anglin explained that Verizon is an incumbent local exchange carrier (“ILEC”), and that each of Verizon’s customers purchases services within a specific calling area, known in the telecommunications industry as a local access and transport area (“LATA”). As an ILEC, Verizon is required to file a local exchange tariff (“tariff”) with the Massachusetts Department of Telecommunications and Energy, and a copy of that tariff was entered into the record. The tariff states that “[m]ain telephone exchange service consists of basic exchange services.”
The Commissioner, on the other hand, interpreted the phrase “residential main telephone services” as used in § 6(i)(4) to mean the primary telephone account at a residence. It was for this reason that the Commissioner disallowed the claimed exemption in the five bills, each of which reflected an account billed to a billing address at which an additional account was also billed to the same customer.
On the basis of all of the evidence, the Board found that, for purposes of § 6(i)(4), the phrase “residential main telephone services” meant basic local residential telephone services. The testimony and documentary evidence entered into the record reflected that the phrase “residential main telephone services” was commonly understood and used within the telecommunications industry to mean basic local residential telephone services. The Board found it apparent from the statutory language that the Legislature intended to adopt the phrase’s established industry meaning, as the Legislature used additional industry terminology, such as “local access and transport area,” and “message units”[91] within § 6(i)(4).
The Board found that the Commissioner’s interpretation of the phrase “residential main telephone services,” was not supported by the statutory language. The Commissioner’s construction of the phrase appeared to read the word “main” to modify the word “residential;” however, that construction is backwards. The word “main” does not precede the word “residential;” rather, it follows, and therefore does not modify, that word.
Moreover, the Commissioner’s reading of § 6(i)(4) to impose a limit of one $30.00 exemption per service address was not supported by the language used elsewhere in the statute. Unlike § 6(i)(4), which exempts “sales . . . of . . . residential main telephone services,” G.L. c. 64H, § 6(u) (“§ 6(u)”) exempts the “sale of a motor vehicle” to permanently disabled veterans and others with certain disabilities, and expressly states that the exemption “shall apply to one motor vehicle only owned and registered for the personal, noncommercial use of such person.” It was evident from this statutory language that if the Legislature intended to limit the $30.00 exemption to one per customer, it knew how to and could have. The Board concluded that the Legislature’s use of plural terms, coupled with its failure to use express limiting language as it did in § 6(u), indicated its intent not to limit the $30.00 exemption in the manner suggested by the Commissioner.
Further, the guidance issued by the Commissioner on the sale of telecommunications services offered no support for her argument. Within one year of the enactment of § 6(i)(4), the Commissioner promulgated 830 CMR 64H.1.6, her regulation on the taxability of telecommunications services, as well as Technical Information Release (“TIR”) 90-8, each of which explained the parameters of the $30.00 exemption. Nowhere in either 830 CMR 64H.1.6 or TIR 90-8 did it state that only one $30.00 exemption would be allowed per customer per service address. The Commissioner first asserted this position in TIR 99-2, which was issued nine years after the enactment of § 6(i)(4). However, the Board found that TIR 99-2 was not entitled to deference because it did not comport with § 6(i)(4) and because it was issued long after the statute’s enactment.
Further, assuming arguendo that the Commissioner’s statutory interpretation was correct, the Board found that the Commissioner’s denial of the $30.00 exemption for the five bills was improper. The Commissioner denied the $30.00 exemption because she concluded that the bills were secondary accounts billed to the same individual for the same residence, in contravention of the statute as she interpreted it. However, the evidence did not support the Commissioner’s conclusion regarding the bills. As an initial matter, the Commissioner’s assumption equated billing addresses with service addresses, which are not necessarily one and the same. Certain of the bills had billing addresses that were different than the service addresses, as evidenced by the area codes and exchange numbers reflected in the account numbers, many of which did not correspond geographically with the billing location. Mr. Anglin testified that it was fairly common for a customer to have different billing and service addresses. For example, he testified that an individual may prefer to have all bills sent to an office address rather than a residential address. In addition, the billing address for some of the bills was a post office box. Mr. Anglin testified that Verizon never provided telephone service to post office boxes, so those bills did not support the Commissioner’s conclusion that they represented a secondary account at a single residence because there was no indication as to where the telephone services were actually provided.
In sum, the Board found serious flaws in both the factual assumptions made by the Commissioner and in her statutory interpretation. The evidence established that Verizon applied the $30.00 exemption in a manner consistent with the dictates of statute. Accordingly, the Board found that the Commissioner improperly disallowed the $30.00 exemption with respect to the five bills.
Likewise, the Board found that the Commissioner’s disallowance of the $30.00 exemption for the Todd Richman bill was improper. The billing address for that bill read “Todd Richman, Broad Reach Consulting, 183 Willis Rd., Sudbury, MA.” Although Broad Reach Consulting was listed beneath Mr. Richman’s name on the billing address, the customer name on the account was listed only as Todd Richman. Further, the bill reflected charges for unlimited local residential service and residential voice mail service. According to the Statement of Agreed Facts submitted by the parties, the service for the Todd Richman account was installed at a residence, but was subsequently used primarily for business purposes, with occasional personal use.
Mr. Anglin testified that, when ordering telephone services from Verizon, customers must indicate whether they want residential or business telephone service. He also testified that, before installing residential service, it was Verizon’s practice to confirm that the account would be used for residential purposes. For example, Mr. Anglin testified that if a technician arrived to install a residential line at a building that appeared to be commercial, the technician would be instructed to inform the customer that residential service could not be installed. It was in Verizon’s best interest to verify that a customer who ordered residential service would be using it for that purpose, because, as Mr. Anglin explained, business service was priced differently – and was usually more expensive than – residential service.
The Commissioner denied the $30.00 exemption for the Todd Richman account because, as Mr. Morrow testified, “it looked like a business to us.” Verizon argued in these appeals that once it installs residential service to a residence, it is not responsible for monitoring subsequent use of the account to determine eligibility for the $30.00 exemption. Rather, Verizon contended that, as indicated by the Commissioner’s regulation, a customer who uses residential telephone services for business purposes must file a use tax return with the Commissioner and pay the appropriate taxes. 830 CMR 64H.1.6(5)(b) provides, in relevant part, “[t]elephone service provided to a business is not residential service even if the business is located in an individual’s home. If an otherwise residential telephone is used for business purposes, the business must file a use tax return and pay tax on the services that it used.”
On the basis of all of the evidence, the Board found that Verizon installed residential main telephone service at a residential address to a customer listed as “Todd Richman.” Therefore, the Board found that Verizon properly applied the $30.00 exemption to the Todd Richman account, and that nothing in the language of § 6(i)(4) required Verizon to continuously monitor how individual accounts were being used to determine eligibility for the $30.00 exemption. Rather, consistent with 830 CMR 64H.1.6(5)(b), the Board found that if a customer subsequently used residential telephone service for business purposes, it was the obligation of the customer to file a use tax return, and not Verizon’s obligation to deny the exemption. The Board therefore found that the Commissioner’s denial of the $30.00 exemption for the Todd Richman bill was improper.
- IV. Voice Mail Services
64H, § 1 defines “telecommunications services” as:
any transmission of messages or information by electronic or similar means, between or among points by wire, cable, fiberoptics, laser, microwave, radio, satellite or similar facilities but not including cable television.
That same section states that telecommunications services are taxable services for purposes of Chapter 64H. Voice mail services were among the services provided by Verizon to its customers during the periods relevant to these appeals. Verizon reported the sales taxes associated with voice mail services on its tax returns for the periods at issue. In these appeals Verizon sought an abatement of the sales taxes which it self-assessed on its tax returns, arguing that voice mail charges are not telecommunications services for purposes of Chapter 64H and therefore should not have been included in its tax returns.
According to Mr. Anglin, charges made by Verizon for its voice mail services were not charges for the transmission of messages or information, but rather, were charges for the recording and storage of messages on Verizon’s voice mail system. Mr. Anglin testified that a subscription to Verizon’s voice mail service provided a customer with the ability to store recorded messages or to retrieve them from the system. He further stated that a person leaving a message on or retrieving a message from the voice mail system makes a phone call for which they incur charges separate and apart from the voice mail charges. The appellant contended that any “transmission of messages or information” occurred only at such time as an individual made the phone call for which they were separately charged, and thus, the appellant contended that the fees it charged for voice mail services were not fees for telecommunications services as defined by 64H, § 1.
On the basis of all of the evidence, the Board found that Verizon’s voice mail services constituted “the transmission of messages . . . by electronic or similar means, between or among points by wire, cable, fiberoptics, laser, microwave, radio, satellite or similar facilities.” The evidence indicated that a message was transmitted from one point, a caller, to another point, the voice mail system, when a caller recorded the message on the voice mail system. The message was then stored on the voice mail system, and later, transmitted from the voice mail system to a party retrieving the message. Although there were separate charges associated with calling into the voice mail system to record or retrieve messages, that fact in no way altered the reality that voice mail served to transmit messages from one point to another. The mere ability to store messages without the ability to retransmit and retrieve them would be valueless, and the Board therefore rejected the appellant’s arguments that voice mail charges were solely charges for the storage, not transmittal, of messages. Accordingly, the Board found that charges made by Verizon for voice mail services were charges for the “transmission of messages or information by electronic or similar means, between or among points” and that Verizon properly reported sales taxes on its voice mail services. The Board therefore found that Verizon was not entitled to an abatement of those sales taxes.
In conclusion, on the basis of all of the evidence, the Board found that, for each of the bills at issue, the Commissioner’s denial of the $30.00 exemption was improper. However, because the Board found that Verizon properly charged and collected sales taxes on its voice mail services, it was not entitled to an abatement of those amounts. Accordingly, the Board issued decisions for the appellant, and, taking into consideration the parties’ stipulation, granted abatements totaling $836,430, along with statutory additions, for the first audit cycle and abatements totaling $582,595, along with statutory additions, for the second audit cycle.
OPINION
Two issues were presented for the Board’s consideration in these appeals: (1) whether the Commissioner properly disallowed the $30.00 exemption from sales tax on certain sales of telephone services made by the appellant pursuant to § 6(i)(4); and (2) whether the appellant’s voice mail services were subject to the sales tax under 64H § 2.
- I. The Commissioner Improperly Disallowed the $30.00 Exemption for Each of the Bills at Issue
At all times relevant to these appeals, pursuant to 64H, § 2, Massachusetts imposed a sales tax of five percent upon sales by a vendor of telecommunications services not otherwise exempt. There was no dispute between the parties in these appeals that Verizon was a vendor and that at least some of the sales of telecommunications services made by Verizon were subject to the sales tax. Verizon contended in these appeals that certain of its sales were eligible for the exemption provided by § 6(i)(4), which exempts from sales tax up to $30.00 of “residential main telephone services billed on a monthly recurring basis or billed as message units.”
After concluding her audit of Verizon for the periods at issue, the Commissioner disallowed the $30.00 exemption for two categories of sales: (1) sales of residential telephone services which were billed to a customer at a billing address to which another bill was also issued to the same customer; and (2) sales of residential telephone services which appeared to have been used for business purposes.
With respect to the first category, the Board found and ruled that the Commissioner’s adjustments were improper, as there was neither legal nor factual support for the Commissioner’s conclusions. The Commissioner interpreted the phrase “residential main telephone services” to mean main residential telephone services, i.e., the primary account at a service address. Thus, the Commissioner denied the $30.00 exemption for accounts for which an additional bill was issued to the same customer at the same billing address because the Commissioner interpreted the statute to permit only one $30.00 exemption per customer per service address. The Board disagreed.
Based on the ample evidence of record, the Board found and ruled that, for purposes of § 6(i)(4), the phrase “residential main telephone services” meant basic local residential telephone services, which was its established meaning within the telecommunications industry. The Board found and ruled that the Legislature’s liberal use of telecommunications industry terminology within § 6(i)(4) indicated its intent to give the phrase “residential main telephone services” the same meaning for purposes of § 6(i)(4) that it had within the telecommunications industry. See Eaton Financial Corporation v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2000-526, 536 (finding that the Legislature’s repeated use of financial accounting terminology within a statute indicated its intent to incorporate standard accounting practice and concepts into the statute). See also Web Industries, Inc. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 1999-122, 129; Winslow Brothers & Smith Co. v. Hillsborough Mills, 319 Mass. 137, 141 (1946) (quoting Hoffman v. Palmer, 129 F.3d 976, 984 (2d Cir. 1942)) (“Each trade has its peculiar jargon and courts rely on that jargon when it finds its way into a statute dealing with that trade.”).
The Commissioner’s arguments to the contrary were unavailing. The Commissioner’s construction appeared to read the word “main” to modify the word “residential,” but that construction is backwards. The term “residential” precedes the term “main,” and therefore it does not modify that word. Moreover, the Commissioner’s reading of § 6(i)(4) to impose a limit of one $30.00 exemption per customer per service address was not supported by the language used elsewhere in the statute. Unlike § 6(i)(4), which exempts “sales . . . of . . . residential main telephone services,” § 6(u) exempts the “sale of a motor vehicle” to permanently disabled veterans and others with certain disabilities, and expressly states that the exemption “shall apply to one motor vehicle only owned and registered for the personal, noncommercial use of such person.” (emphasis added). It was evident from the statutory language that if the Legislature intended to limit the $30.00 exemption to one per customer per service address, it could have done so. See Commissioner of Revenue v. Cargill, Inc., 429 Mass. 79, 82 (1999) (“Had the Legislature intended to limit the credit in the manner advocated by the commissioner, it easily could have done so.”) The Board concluded that the Legislature’s use of plural terms, coupled with its failure to use express limiting language as it did in § 6(u), indicated its intent not to limit the $30.00 exemption in the manner suggested by the Commissioner.
Further, the Board afforded no weight to the authority cited by the Commissioner. The Commissioner cited TIR 99-2, in which she asserted for the first time, nine years after the enactment of § 6(i)(4), that it permitted only one $30.00 exemption per customer per service address. However, TIR 99-2 represented a departure from 830 CMR 64H.1 and TIR 90-8, the regulation and TIR issued by the Commissioner within one year after the enactment of § 6(i)(4), neither of which referenced the limitation asserted by the Commissioner in TIR 99-2. The Board found and ruled that TIR 99-2 was entitled to no weight, both because it was issued long after the enactment of § 6(i)(4), and because it sought to impose limitations not authorized by the statutory language. See Miller Studio, Inc. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 1992-48, 61 (citing Xtra., Inc. v. Commissioner of Revenue, 380 Mass. 277, 282-83 (1980)); Wellington v. Comm’r of Corps. & Tax’n, 359 Mass. 448, 451-52 (1971) (holding that administrative interpretation issued long after the statute’s enactment was not entitled to deference); Bureau of Old Age Assistance of Natick v. Commissioner of Pub. Welfare, 326 Mass. 121, 124 (1950) (“[A]n administrative board or officer has no authority to promulgate rules and regulations which are in conflict with the statutes or exceed the authority conferred by the statutes by which such board or office was created.”). Accordingly, the Board rejected the Commissioner’s arguments.
Additionally, the Board found and ruled that there was no factual support for the Commissioner’s adjustments. Each of the five bills reflected, in the Commissioner’s opinion, accounts for which an additional account was billed to the same customer at the same service address. Because the Commissioner interpreted § 6(i)(4) to permit only one $30.00 exemption per customer per service address, the Commissioner disallowed the $30.00 exemption for each of the five bills. However, the evidence did not support the Commissioner’s conclusions. The Commissioner equated billing addresses with service addresses, which are not necessarily one and the same. For example, one of the bills for which the $30.00 exemption was denied was mailed to a post office box. Since Verizon does not provide residential telephone service to post office boxes, the Commissioner’s conclusions regarding that bill were incorrect. Several of the bills had different billing and service addresses, as evidenced by area codes and exchange numbers which did not correspond geographically with the billing addresses. Further, as Mr. Anglin testified, it was not unusual for customers to have different billing and service addresses, as, for example, in the case of an individual who preferred to have bills mailed to an office address rather than a residence. In sum, even if the Board agreed with the Commissioner’s conclusion that § 6(i)(4) permitted only one $30.00 exemption per customer per service address, which it did not, the Board found and ruled that there was insufficient evidence in the record to support the Commissioner’s adjustments.
Likewise, the Board found and ruled that the Commissioner’s disallowance of the exemption for the Todd Richman bill was improper. Section 6(i)(4) exempts up to $30.00 of sales of “residential main telephone services billed on a monthly recurring basis or billed as message units, and residential intra local access and transport area service billed on a recurring monthly basis.” There was ample evidence in the record establishing that the services sold by Verizon to Todd Richman were “residential main telephone services billed on a monthly recurring basis.” Thus, the Board found and ruled that Verizon correctly applied the $30.00 exemption in accordance with the language of the statute.
Although it appeared from the record that Mr. Richman used the account at issue primarily for business purposes, the Board found nothing in the language of § 6(i)(4) that required Verizon to monitor accounts for use to determine eligibility for the $30.00 exemption. In fact, 830 CMR 64H.1.6(5)(b) expressly places the obligation on a customer who uses residential telephone services for business purposes to file a use tax return and pay the appropriate taxes. Accordingly, the Board found and ruled that Verizon properly applied the $30.00 exemption to the Todd Richman bill because it was a sale of residential main telephone services. The Board therefore found and ruled that the Commissioner’s disallowance of the $30.00 exemption for that account was improper.
The burden of proof is on the party seeking an abatement. Staples v. Commissioner of Corporations and Taxation, 305 Mass. 20, 26 (1946). A “taxpayer is not entitled to an exemption unless he shows that he comes within . . . the express words” of the statute. Animal Rescue League of Boston v. Assessors of Bourne, 310 Mass. 330, 332 (1941). In the present appeal, the Board found and ruled that the appellant demonstrated that the sales at issue fell within the express language of the statute because they were sales of “residential main telephone services” as set forth in § 6(i)(4). Moreover, the Commissioner’s assessments were based on faulty factual assumptions and on an incorrect interpretation of the relevant statute, and could not be upheld. See Food Service Associates, Inc. and Dennis G. Maxwell v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports, 2001-341, 363-64 (quoting Chef Chang’s House, Inc. v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 1996-738, 751) (“[T]he [Commissioner’s] analysis was predicated on . . . dubious assumptions and was thus unreliable and invalid.”). Accordingly, the Board found and ruled that the appellant met its burden of proving its right to an abatement, and decided this issue for the appellant.
- II. Verizon’s Voice Mail Services were Taxable Telecommunications Services
In addition to abatements of the deficiency assessments made by the Commissioner in these appeals, Verizon sought abatements of sales taxes which it reported for its voice mail services during the periods at issue. 64H, § 1 defines “telecommunications services” as:
any transmission of messages or information by electronic or similar means, between or among points by wire, cable, fiberoptics, laser, microwave, radio, satellite or similar facilities but not including cable television.
Verizon argued that the voice mail fees which it charged its customers were not fees for the “transmission of messages,” but rather, were fees charged for the ability to store messages. Verizon contended that the transmission of messages occurred only when a customer placed a call to the voice mail system to retrieve a stored message, at which time a separate charge, not encompassed by the voice mail charges, would be incurred by the customer.
On the basis of all of the evidence, the Board found and ruled that Verizon’s voice mail services were “telecommunications services” as defined by 64H, § 1 because they constituted “the transmission of messages . . . by electronic or similar means, between or among points by wire, cable, fiberoptics, laser, microwave, radio, satellite or similar facilities.” The evidence indicated that a message was transmitted from one point, a caller, to another point, the voice mail system, when a caller recorded the message on the voice mail system. The message was then stored on the voice mail system, and later, transmitted from the voice mail system to a party retrieving the message. Although there were separate charges associated with calling into the voice mail system to record or retrieve messages, that fact in no way altered the reality that voice mail served to transmit messages from one point to another. The mere ability to store messages without the ability to retransmit and receive them would be valueless, and the Board therefore rejected the appellant’s arguments that voice mail charges were solely charges for the storage, not transmittal, of messages. Accordingly, the Board found that charges made by Verizon for voice mail services were charges for the “transmission of messages or information by electronic or similar means, between or among points” and that Verizon properly reported sales taxes on its voice mail services. The Board therefore found that Verizon was not entitled to an abatement of those sales taxes.
Several other states which have considered the taxability of voice mail charges have reached the same conclusion. In Paging Network of Ariz. v. Department of Revenue, No. 1058-93-S, 1995 Ariz. Tax Lexis 19 at *1, (Ariz. B.T.A. March 21, 1995), the Arizona Board of Tax Appeals rejected a taxpayer’s claim that voice mail was not a taxable telecommunications service. Id. at 4-5. In so ruling, the Board of Appeals stated that the purpose of the taxpayer’s voice mail service was to “pass on or enable the sending or passing of messages from one person to another.” Id. at 5. The Board of Appeals noted that there “would be no revenue to [the Taxpayer] if the messages were only stored and never transmitted.” Id.
Similarly, in BellSouth Telecommunications, Inc. v. Johnson, No. M2005-00865-COA-R3-CV, 2006 Tenn. App. Lexis 699 at *1, (Tenn. Ct. App. Oct. 27, 2006), the Tennessee Court of Appeals concluded that voice mail services were taxable telecommunications services because it concluded that “the true object of the voice mail services . . . is to facilitate, albeit delayed, the transmission and receipt of a telephone communication.” Id. at 10. The court further noted that “the fact that the oral message is held in abeyance in a computer memory does not change the service provided, that is, the customer can communicate with a specific person or persons through telephonic means.” Id. at 11.
The appellant’s attempts to distinguish these cases were unavailing. In both cases, as here, the relevant inquiry was whether voice mail services involved the transmission of messages, and in both cases, the courts concluded that they did. The Board agreed with the reasoning in these cases, and found and ruled that the appellant’s voice mail services were telecommunications services as defined by 64H, § 1. The Board therefore found and ruled that Verizon had properly reported sales taxes for its voice mail services, and that it was not entitled to abatements of those taxes.
CONCLUSION
On the basis of all of the evidence, the Board found and ruled that the appellant met its burden of proving that the deficiency assessments at issue resulted from the Commissioner’s improper disallowance of the $30.00 exemption. Accordingly, the Board issued a decision for the appellant in these appeals and, after taking into consideration the parties’ agreements as reflected in the Statement of Agreed Facts, granted abatements totaling $836,430, along with statutory additions, for the first audit cycle and abatements totaling $582,595, along with statutory additions, for the second audit cycle. Additionally, the Board found and ruled that the appellant’s voice mail services were subject to the sales tax imposed by 64H, § 2 because they were “telecommunications services” as defined by 64H, § 1. Accordingly, the Board found and ruled that the appellant was not entitled to abatements of the sales taxes which it reported for its voice mail services.
APPELLATE TAX BOARD
By: _________________________________
Thomas W. Hammond, Jr., Chairman
A true copy,
Attest: ________________________________
Clerk of the Board
COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD
SUSAN J. LEFAVER v. BOARD OF ASSESSORS OF
THE CITY OF NORTH ADAMS
Docket No. F306880 Promulgated:
June 7, 2011
This is an appeal filed under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 59, §§ 64 and 65, from the refusal of the appellee Board of Assessors of the City of North Adams (“assessors”) to abate a tax on certain real estate in North Adams assessed to Susan J. Lefaver (“appellant”) under G.L. c. 59, §§ 11 and 38, for fiscal year 2010.
Commissioner Mulhern (“Presiding Commissioner”) heard this appeal under G.L. c 58A, § 1 and 831 CMR 1.20 and issued a single-member decision for the appellant.
These findings of fact and report are made pursuant to a request by the appellant under G.L. c. 58A, § 13 and 831 CMR 1.32.
Susan J. Lefaver, pro se, for the appellant.
Thomas Manuel, Esq. for the appellee.
FINDINGS OF FACT AND REPORT
On the basis of exhibits and testimony offered at the hearing of this appeal, the Presiding Commissioner made the following findings of fact.
On January 1, 2009, the appellant was the assessed owner of an improved parcel of real estate located at 690 State Road in North Adams (“subject property”). For fiscal year 2010, the assessors valued the subject property at $147,000 and assessed a tax thereon, at a rate of $12.44 per $1,000, in the amount of $1,828.68. In accordance with G.L. c. 59, § 57C, the appellant paid the tax due without incurring interest, and in accordance with G.L. c. 59, § 59, the appellant timely filed an Application for Abatement with the assessors on January 26, 2010. The assessors denied the appellant’s abatement application on March 17, 2010, and on June 1, 2010, the appellant seasonably filed an appeal with the Appellate Tax Board (“Board”). On the basis of these facts, the Presiding Commissioner found and ruled that the Board had jurisdiction to hear and decide this appeal.
The subject property, which faces State Road, a major thoroughfare also known as Route 2, consists of a 0.453-acre parcel of real estate improved with a two-family home containing 2,159 square feet of finished living area. The dwelling, which is in average condition, has eight rooms divided between two units, one of which has two bedrooms, and the other, one bedroom. Each unit has a kitchen and a full bath. The dwelling’s exterior is clad in wood shingles, and it has an asphalt roof.
The appellant argued that the subject property had no monetary value. The appellant based her conclusion almost exclusively on her belief that contamination affecting the properties at 700 and 708 State Road, which are contiguous parcels separated from the subject property by a street known as Chantilly Avenue, had spread to the subject property, rendering it valueless.
The appellant submitted various documents to support her argument, certain of which indicated that the property at 708 State Road, a former gas station currently operating as an auto repair shop, had been contaminated by gasoline leakage from a storage tank in the early 1990s. Other documents relating to 708 State Road included a copy of a letter dated August 9, 2009, to the Massachusetts Department of Environmental Protection (“DEP”) from Norfolk-Ram, an engineering firm involved with environmental testing and remediation efforts at the property. The letter referenced a “Response Action Outcome Report” relating to 708 State Road (“RAO”) dated February 8, 2006, that Norfolk-Ram had prepared after completion of post-remediation sampling at the property.[92] The RAO, which was combined with a “Release Abatement Measure Report” to form a single document, discussed in detail testing and remediation activities performed at 708 State Road and concluded, based on several considerations, that “a ‘Condition of no Significant Risk’ to public safety exist[ed] at the Site [then] and into the foreseeable future.”
The appellant also submitted a copy of a report dated December 14, 2009, from the engineering firm of Tighe & Bond to DEP detailing “site assessment activities performed in response to a historical release of chlorinated solvents” from the drycleaners at 700 State Road. The report described placement of several “monitoring wells” and noted detection of vinyl chloride in a monitoring well “approximately 60 feet from a . . . residential property listed at 690 State Road.”[93] The report also stated that “additional assessment would be required to evaluate the potential for indoor air quality impacts from vapor intrusion into the buildings” at 708 State Street and the subject property.
In a memorandum to the Mayor of North Adams, the city’s Chief Administrative Officer (“CAO”) described “any contamination or clean-up activity” at 708, 700 and 690 State Road. Regarding contamination at and emanating from 700 State Road, the CAO stated:
[DEP] supervised investigative work performed between October 2009 and February 2010. The data from this work showed that although the contamination was moving away from the property, it was also naturally degrading. One of the sampling wells located on Chantilly Avenue contained vinyl chloride[94]. . . . Because this product has the potential for vapor intrusion, indoor air samples were collected from the LeFaver household at 690 State Road on February 16-17, 2010. No contaminants associated with the documented contamination were detected in the indoor air samples. Based on these findings, [DEP] has no current plans for additional assessment or clean-up activity related to the [drycleaners’] site at this time.
As for 708 State Road, the CAO stated:
[DEP] monitored a release of gasoline from a leaking underground storage tank to soil and groundwater in September, 1993. Two underground storage tanks were removed and contaminated soil has been removed from the parcel. A DEP “Response Action Outcome” (RAO) statement was submitted . . . closing that site . . . [DEP] performed a “screening level” audit of the RAO in October 2009 and no further action was taken by [DEP] following that review.
The memorandum made no reference to activity at the subject property beyond its description of air sample testing performed during February of 2010.
Based on the record before it, the Presiding Commissioner found that the properties at both 700 and 708 State Road had been and to some degree remained contaminated. However, the evidence presented also indicated that remediation had been performed at 708 State Road, and that there was no ongoing or contemplated DEP action at either 700 or 708 State Road. Absent additional data or an expert opinion, neither of which was provided, the Presiding Commissioner could not determine if there remained contamination issues at 700 or 708 State Road which posed any risk to public safety or diminished the value of these properties, let alone the subject property. Moreover, the Presiding Commissioner found that the appellant provided insufficient evidence to establish that the subject property had been contaminated. Indeed, the only direct evidence relating to contamination of the subject property, the air samples tested during February of 2010, pointed to the opposite conclusion.
The appellant also argued that contamination of the subject property resulted in denial of her applications for home equity loans which otherwise would have been approved. In support of this argument, the appellant submitted a “Statement of Credit Denial” from the Hoosac Bank dated July 14, 2009, which stated that the appellant’s request for a line of credit had been denied “based on disclosed potential for hazardous contamination that has not been officially determined.” The denial statement also explicitly stated, however, that the appellant herself disclosed the “potential for hazardous contamination.” The Presiding Commissioner therefore found that the credit denial, which resulted from the appellant’s own unsubstantiated beliefs, was of little probative value.
Finally, the Presiding Commissioner found that the appellant presented no evidence to establish that the subject property suffered a diminution in value resulting from the contamination at 700 and 708 State Road or from the operation of the auto repair shop at 708 State Road, which the appellant claimed violated local zoning laws. Given this finding and the appellant’s failure to demonstrate contamination of the subject property, the Presiding Commissioner found and ruled that the appellant failed to offer persuasive evidence that the subject property’s assessed value exceeded its fair cash value on the relevant assessment date.
Notwithstanding the foregoing, the Presiding Commissioner found that evidence provided by the assessors indicated that the subject property was overvalued for fiscal year 2010. In particular, the assessors submitted property record cards for nine purportedly comparable properties in the area. Of these, the Presiding Commissioner found that six of the properties, each of which featured a two-family dwelling, were comparable to the subject property.[95] The properties were in similar condition, their finished living areas ranged from 1,788 square feet to 2,944 square feet and, with the exception of one significantly larger property, their parcel sizes from 0.11 acres to 0.26 acres. The properties’ average sale price was $128,500. Taking into account various differences between these properties and the subject property and, in particular the subject property’s location on a busy thoroughfare, the Presiding Commissioner derived an indicated value for the subject property of $125,000 for fiscal year 2009. Thus, the Presiding Commissioner found and ruled that the fair cash value of the subject property was $22,000 less than its assessed value of $147,000.
Accordingly, the Presiding Commissioner issued a decision for the appellant in this appeal and ordered an abatement in the amount of $273.68.
OPINION
Assessors are required to assess real estate at its fair cash value. G.L. c. 59, § 38. Fair cash value is defined as the price on which a willing seller and a willing buyer in a free and open market will agree if both of them are fully informed and under no compulsion. Boston Gas Co. v. Assessors of Boston, 334 Mass. 549, 566 (1956).
The appellant has the burden of proving that property has a lower value than that assessed. “‘The burden of proof is upon the petitioner to make out its right as [a] matter of law to [an] abatement of the tax.’” Schlaiker v. Assessors of Great Barrington, 365 Mass. 243, 245 (1974) (quoting Judson Freight Forwarding Co. v. Commonwealth, 242 Mass. 47, 55 (1922)).
In the present case, the Presiding Commissioner found and ruled that the appellant’s evidence failed to establish that the subject property had a lower value than its assessed value for fiscal year 2010. While the appellant revealed that there was contamination at 700 and 708 State Road, she did not demonstrate ongoing contamination issues that posed a risk to public safety, nor did she establish that any form of contamination had spread to her property. Finally, the appellant did not present evidence to establish that the value of the subject property had been diminished as a result of contamination at 700 and 708 State Road or the operation of an auto repair shop at 708 State Road.
Notwithstanding the appellant’s failure to establish the subject property’s lower value, the Presiding Commissioner, relying on the entire record, found and ruled that the assessed value of the subject property exceeded its fair cash value for fiscal year 2010. See, e.g., General Electric Co. v. Assessors of Lynn, 393 Mass 591, 599-600 (1984).
As with decisions of the Board, the Presiding Commissioner’s “determination must be made ‘upon consideration of the entire record.’” New Boston Garden Corp. v. Assessors of Boston, 383 Mass. 456, 466 (1981) (quoting Cohen v. Board of Registration in Pharmacy, 350 Mass. 246, 253 (1966), quoting from G.L. c 30A, § 14 (8) (State Administrative Procedure Act)). Further, the Presiding Commissioner is “entitled to ‘select the various elements of value as shown by the record and from them form . . . [his] own independent judgment.’” General Electric Co. 393 Mass. at 605 (quoting North American Philips Lighting Corp. v. Assessors of Lynn, 392 Mass. 296, 300 (1984))(additional citation omitted).
The fair cash value of property may be determined by recent sales of comparable properties in the market. Sales of comparable realty in the same geographic area and within a reasonable time of the assessment date generally contain probative evidence for determining the value of the property at issue. Graham v. Assessors of West Tisbury, Mass. ATB Findings of Fact and Reports 2008-321, 400 (citing McCabe v. Chelsea, 265 Mass. 494, 496 (1929)), aff’d, 73 Mass. App. Ct. 1107 (2008). When comparable sales are used, allowances must be made for various factors which would otherwise cause disparities in the comparable properties’ sale prices. See Pembroke Industrial Park Co., Inc. v. Assessors of Pembroke, Mass. ATB Findings of Fact and Reports 1998-1072, 1082.
Consistent with the cited authority, the Presiding Commissioner considered evidence submitted by the assessors relating to six multi-family properties in the area, which the Presiding Commissioner found were comparable to the subject property. The record indicated the properties’ condition, finished living areas, sale prices, and parcel sizes. The Presiding Commissioner took into account various differences between the properties and the subject property, with emphasis on the subject property’s location on a busy thoroughfare, and derived an indicated value for the subject property of $125,000 for fiscal year 2010. Thus the Presiding Commissioner found and ruled that the subject property’s assessed value exceeded its fair cash value by $22,000.
Accordingly, the Presiding Commissioner issued a decision for the appellant in this appeal and ordered an abatement in the amount of $273.68.
APPELLATE TAX BOARD
By:_______________________________
Thomas J. Mulhern, Commissioner
A true copy,
Attest: __________________________
Clerk of the Board
COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD
AT&T CORP. v. COMMISSIONER OF REVENUE
Docket No. C293831 Promulgated:
June 8, 2011
This is an appeal filed under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 62C, § 39 from the refusal of the appellee, Commissioner of Revenue (“Commissioner”), to grant an abatement of public service corporate franchise taxes assessed against the appellant, AT&T Corp. (“AT&T” or “appellant”) for tax years ending December 31, 1996 through December 31, 1999 (“tax years at issue”).
Commissioner Scharaffa heard this appeal and was joined by Chairman Hammond and Commissioners Egan, Rose, and Mulhern in the decision for the appellant.
These findings of fact and report are made pursuant to requests by the appellant and the appellee under G.L. c. 58A, § 13 and 831 CMR 1.32.
David S. Ruskin, Esq., Megan M. Mathias, Esq. and Kathleen King Parker, Esq. for the appellant.
Jeffrey S. Ogilvie, Esq. and Daniel Shapiro, Esq. for the appellee.
FINDINGS OF FACT AND REPORT
On the basis of a Statement of Agreed Facts and the testimony and exhibits offered into evidence at the hearing of this appeal, the Appellate Tax Board (“Board”) made the following findings of fact.
At all times relevant to this appeal, AT&T was a New York corporation with its administrative headquarters located in New Jersey. AT&T was in the business of providing interstate and international network telecommunications services. The receipts at issue in this appeal were from its interstate and international voice and data telecommunications services.[96]
The appellant timely filed Massachusetts public service corporation franchise tax returns for each of the tax years at issue and paid the tax due as reflected on those returns in full. The total tax due on the original returns was $7,706,624. After an audit based on an issue unrelated to this appeal, the Commissioner assessed additional public service corporation franchise taxes against the appellant in the amount of $276,746 for the tax years at issue by Notice of Assessment dated July 19, 2005. The appellant did not contest this assessment. On October 17, 2005, the appellant timely filed a Form CA-6 Application for Abatement/Amended Return requesting abatements of the assessments in the total amount of $2,108,137 for the tax years at issue based upon what it deemed to be the proper calculation of its sales-factor numerator, the issue in this appeal.[97] On October 2, 2007, the Commissioner issued a Notice of Abatement Determination denying AT&T’s abatement application. On November 15, 2007, AT&T seasonably filed its Petition Under Formal Procedure with the Board. On the basis of these facts, the Board found and ruled that it had jurisdiction over this appeal.
The central issue in this appeal is whether certain receipts from interstate and international telecommunications services provided by the appellant should be included in the numerator of the appellant’s sales factor for purposes of determining its Massachusetts taxable income for the tax years at issue. As will be explained more fully in the Opinion, when a taxpayer is engaged in the sale of services, calculation of its sales factor requires a determination first of the taxpayer’s so-called “income-producing activity.” Once the income-producing activity is determined, then the “costs of performance” of that activity are analyzed to determine if the taxpayer incurred more of those costs in Massachusetts than in any other single state. This two-part determination ultimately establishes whether the taxpayer’s receipts are Massachusetts sales and thus included in the numerator of its sales factor.
The Commissioner contended that AT&T’s income-producing activity was its provision of each individual telephone call and data transmission (collectively, “transmission”) for each of its customers located in Massachusetts, the performance of which created an obligation of the individual customer to pay specific consideration to AT&T. In support of her argument, the Commissioner cited the fact that AT&T’s bills to its customers were based on discrete transactions, and it received its revenue by means of this transaction-based billing process. The Commissioner would thus analyze AT&T’s receipts, derived from its customers located in Massachusetts, on a per-transmission basis. The Commissioner asserted that, when analyzed under this “transactional approach,” AT&T’s costs of performance incurred in Massachusetts, in serving its customers located in Massachusetts, were greater than the costs of performance incurred in any other single state.
AT&T, however, contended that its income-producing activity was its business of providing a national, integrated telecommunications network, which it operated and managed from its Global Network Operations Center located in Bedminster, New Jersey. In support of its position, AT&T presented evidence detailing how transmission signals were connected from one end of a transaction to the other via AT&T’s global, integrated network. As will be explained below, AT&T demonstrated that it engaged in numerous activities (so-called “core processes,” which will be described further in these Findings) both within and without Massachusetts that were necessary to the overall activity of operating and managing the network. The appellant contended that these core processes together enabled AT&T to create and make available a viable long-distance telecommunications network, which was designed to be 99.99% reliable at all times. When analyzed under this “operational approach,” AT&T’s costs of performance incurred in Massachusetts were less than its costs of performance incurred in another single state, namely, New Jersey.
A subsidiary issue raised in this appeal was the Commissioner’s inclusion as AT&T’s costs of performance the so-called “access fees” which AT&T paid to local exchange operating companies (“LEOCs”). Relying on 830 CMR § 63.38.1(9)(d)(2), AT&T excluded these costs from its analysis, considering them to be third-party costs, and thus not reflective of the appellant’s costs of performance. 830 CMR § 63.38.1(9)(d)(2) provides that, in determining a taxpayer’s income-producing activity, the “transaction, procedure or operation” must be an activity which is “directly engaged in by a taxpayer [and] which results in a separately identifiable item of income.” Further on in the regulations, 830 CMR § 63.38.1(9)(d)(4) defines “costs of performance” as the taxpayer’s “direct costs,” which “do not include costs of independent contractors or services by subcontractors.”
AT&T’s first witness, Robert Holleron, a retired 36-year employee of AT&T, testified with respect to the evolution and functioning of AT&T’s global network and to the workings of the Global Network Operations Center. Mr.&nb