Garvey Grain, Inc. v. MacDonald , 203 Kan. 1 ( 1969 )

The opinion of the court was delivered by

Fatzer, J.:

These three actions were filed pursuant to K. S. A. 79-2005 to recover taxes levied in 1964 upon grain elevators located in Sedgwick County and paid by the appellants under protest. The actions were ordered consolidated and trial was by the district court. Except for the names of the plaintiffs, the amounts of taxes involved, the date of payment, the bushel storage capacity, and various exhibits computing taxes based on the 1964 assessments sought to be recovered, the evidence was equally applicable to each plaintiff. The appeals are from the order of the district court rendering judgment against the taxpayers.

The parties stipulated that the decision of this court in one case will determine the decision in the other two cases, and since the points of law involved are identical, it is deemed unnecessary to summarize the evidence in each case, hence, the following pertains to the appellant, Sam P. Wallingford, Inc.

On December 21, 1964, the appellant paid 1964 taxes to the county treasurer of Sedgwick County, $28,351.10 of such taxes being paid under protest. The written protest contained citations of law, statutes and facts relied upon, and clearly stated it was made upon grounds that the 1964 taxes were the result of levies extended against valuations and assessments of the appellant’s property which were so unreasonable, excessive, arbitrary, oppressive, illegal and grossly discriminatory as to be void and constituted constructive fraud on the rights of the taxpayer in violation of Chapter 460, Laws of 1963, Section 1 of Article 11 of the Constitution of Kansas, and the Fourteenth Amendment to the Constitution of the United States.

The appellant timely commenced this action, and its amended petition incorporated the written protest and alleged that all conditions precedent to the bringing of the action had been performed; that the valuation of the taxpayer’s property had been fixed at more than the statutory mandate of 30 percent of its true value and at a greater percentage of its true value than the valuation of other comparable properties to which the same tax levies were applicable, and that the valuation and assessment of its property upon which the 1964 taxes were levied was illegal and void for the reason that in determining the justifiable value in money of such property, as required by K. S. A. 79-501, the assessor ignored obvious facts and failed to give consideration to and apply the factors or combinations thereof prescribed by the Legislature in K. S. A. 79-503. The petition further alleged that the illegal and grossly discriminatory valuation placed upon the appellant’s property in 1964 was $843,000; that 30 percent of the justifiable value in money of such property was $500,000, and that the tax which would be due on the difference between such valuations was $28,351.10, for which recovery was sought.

As preliminary, it may be said this controversy revolves around the “Roberts Schedule” promulgated by the Director of Property Valuation for the assessment of bondable grain elevators located in the state. The schedule was prepared in 1960 by Francis R. Roberts, the field director of that department, but was not used in Sedgwick County until 1964. There was no change in the schedule from the time it was formulated until applied in 1964, and with minor exception not here material, it was used and strictly adhered to by the firm of Cole-Layer-Trumble, employed by the county assessor, to assess the appellant’s and other taxpayers’ property in 1964.

In formulating the schedule, Roberts wrote a number of suppliers of materials and builders of grain elevators and obtained costs of building elevators, and he devised the schedule on a cost less depreciation basis, and nothing else. Except for the cost of reproduction factor, the schedule did not provide for any adjustment with respect to the economic condition of the grain storage industry, such as obsolescence or functional depreciation, nor did it recognize or make provision for the consideration of any other pertinent factors set forth in 79-503, to determine justifiable value. It merely directed county assessors to determine justifiable value by bushel storage capacity times the scheduled cost, less one percent per annum depreciation according to the age of the elevator and did not permit depreciation below 40 percent of original cost. Moreover, as demonstrated by the provisions of the schedule, there was no way to determine the effect of average annual occupancy on fair market value although occupancy is a determining factor of revenue and is one of the more important factors that a prudent purchaser would look at in determining whether he would buy an elevator. Likewise, there was no way to attribute valuation to location although location affects transit privileges and the Wichita elevators are at a disadvantage compared with those, for example, at Newton and Hutchinson. A prudent purchaser would take this location factor into consideration, since location affects freight rates and therefore affects profits.

A summary of the facts contained in the pleadings, the admissions of the parties, and pertinent evidence introduced by the appellants, which was uncontradicted except as hereafter noted, follows:

The Wallingford elevators are federally licensed and bonded elevators of a capacity of 12,585,000 bushels, located on 35 acres of land. There are approximately 8/1 million bushels of upright concrete storage and the balance is lean-to sheds. Battery F of the elevator was built in 1929, Battery H was constructed in 1949, and the last unit was built in 1958. Photographs showed cracking and breaking out of the concrete in the concrete tanks.

When Roberts devised the assessment schedule, the storage capacity of appellant’s elevators, as well as elevators of other operators similarly situated, was virtually 100 percent full. Those operators had experienced a number of good years during which capacity was quite full and taxing authorities in many counties had the assessment of their properties up “pretty high.” However, no one was paying attention to the Roberts schedule because it was not being used.

In 1962 or thereabouts, as a result of the change in the farm program from actually storing grain in elevators to the soil bank program, and considerations affecting the supply of world and domestic small grain needs, the United States Department of Agriculture began shipping grain stored in elevators to gulf and west coast ports, which resulted in a steady decline in grain storage occupancy. As a result of those governmental policies, the history of appellant’s average annual occupancy was as follows: 1962, 81.1 percent; 1963, 59.5 percent; 1964, 43 percent; 1965, 35.3 percent, and 1966, 20.38 percent. As indicated, occupancy has an important bearing on the fair market value of an elevator, and the appellant and other operators knew that income was not only on the decline, but they could see it would decline faster. In 1964, the grain storage industry realized it could no longer pay a luxury tax since the occupancy problem was common to all elevators, and the Roberts schedule made no provision for functional or economic obsolescence in that respect.

In November 1963, the Cole firm made a bushel capacity measurement of appellant’s elevators but no effort was made to determine values at that time. Sometime in March, 1964, the Cole firm actually applied the Roberts schedule to the capacity measurements taken in November 1963, which was merely a mathematical calculation by multiplying capacity measurements by the scheduled cost less depreciation of one percent per annum according to the age of the elevator. However, at that time notices had not been sent out by the county assessor giving the appellant its assessed valuation. All the appellant had was the work sheet prepared by the Cole firm and it had not been notified of a tax change other than it knew perhaps such a change was in the wind. Upon receipt of the Cole firm’s work sheet, the appellant went to see the county assessor to seek relief from the proposed assessment of its property and was told he did not make the assessment, but that the Cole firm did. When the Cole firm was contacted, the appellant was told it really did not make the assessment other than to mathematically apply the Roberts schedule, and that the appellant should talle to Roberts.

On April 10, 1964, the appellant and other grain operators in Sedgwick County met with Roberts, the Cole firm, and the county assessor in his office in Wichita. Roberts was told the schedule did not yield a valuation that was in line with the changed conditions in the grain storage industry because it did not permit adjustment by the assessor for economic obsolescence or the effect of location on value. Roberts readily admitted the schedule was a cost less depreciation schedule and stated he knew that conditions had changed in the industry and that the schedule needed to be revised to provide an economic functional depreciation factor. When asked if the schedule could be changed to make that adjustment for the 1964 assessment, Roberts said, “no, that it was too late to change it”; “that he had sent copies of it to some of the county clerks earlier than this April 10th meeting, and he didn’t want to go back to them again with a revised schedule,” and that “[t]his is the schedule, and we have required the Cole-Layer-Trumble firm to use it.” As indicated, when the Roberts schedule was prepared the appellant was operating at almost 100 percent capacity, and in January, 1964, the elevator was less than half full. Roberts stated he would add an economic functional depreciation factor for the 1965 assessment, and suggested the industry appoint a committee to meet with him later in 1964.

In August, 1964, a committee of the Kansas Grain and Feed Dealers Association met with Roberts and representatives of the County Clerks Association in Topeka to work out an economic functional depreciation factor to be incorporated in the 1965 assessment schedule. Representatives of the grain industry asked Roberts to give them an economic factor which could be applied and which would produce a more realistic assessment value. Roberts stated he realized the Property Valuation Department had a sick industry on its hands and he wanted to work with the committee. Various statutory factors were discussed such as depreciation and location, but the problem most common to all firms was occupancy.

As a result of that meeting, Roberts and the Property Valuation Department agreed to and did revise the schedule for the 1965 assessment. The schedule was revised in several particulars, including physical depreciation on replacement cost new, at the rate of IK percent for each year age of the structure, and a new Section V was added for economic functional depreciation. Section V directed that credit be given for depreciation at the stated rate of the percent of occupancy as compared to total capacity, to be applied to the depreciated net value after applying the IK percent physical depreciation. The 1965 schedule was carried forward with slight revision into the 1966 schedule, and was also placed in the schedule for 1967. By applying the economic and functional obsolescence factor as contained in the 1965 schedule to the valuation of the appellant’s property as found by the state taxing authorities for 1964, to determine justifiable value for that year, the appellant’s 1964 assessment would have been reduced and the difference between such amount and the 1964 assessed valuation upon which the tax levy was based, would have produced a tax of the approximate amount for which recovery was sought.

In addition to the evidence that the 1964 schedule was mathematically applied by the Cole firm only on a cost less depreciation basis, there was evidence that the defendant taxing authorities did not consider or apply an economic and functional factor in assessing the appellant’s elevator in 1964. Both the 1964 and 1965 schedules were admitted in evidence as appellant’s exhibits.

The testimony was also uncontradicted that the 1964 Roberts schedule was not applied uniformly in all counties throughout the state by the county assessors for that year. The schedule was not used in Wilson, Allen, Logan, Reno, Sumner, Stafford, Kingman, Harvey and Comanche Counties.

Roberts testified for the defendants that he prepared the schedule referred to as the 1964 Roberts schedule; that state schedules were first made up in 1957; that he was aware at the time the 1964 schedule was prepared, of “factors” to be considered in appraising property in Kansas, and that in making up the 1964 schedule he considered all factors applicable to grain elevators, including economic obsolescence.

At the conclusion of the evidence, the district court stated that the case was to be resolved by the answer to one question: “Does the failure to include a schedule of economic obsolescence in the schedule for grain elevators for the year 1964 constitute constructive fraud?”

The court then made findings; those pertinent are summarized and quoted: The court specifically found that adherence to the directives of the State Property Valuation Department by the local taxing authorities,

“. . . could not be construed as constructive fraud in any event, because they are so bound to adhere by many statutes; and the State Property Valuation Department is obligated to make such directives and issue such instructions to assessors and other taxing authorities.

“Now the evidence in this case discloses that the schedule used by the local taxing authorities, which was promulgated by the State Property Valuation Department, does not include on its face any reference to obsolescence or functional depreciation; nor does it include on its face any particular reference, as such, to any of the factors contained in Section 79-503.” (Emphasis supplied.)

“The Court finds . . . [i]t is obvious from the schedule, itself, that it contains no instruction to the assessing officer to apply any schedule of economic obsolescence depreciation as do the schedules of 1965 and 1966.” (Emphasis supplied.)

The court further found:

“It has been the testimony of (Roberts) . . . who prepared such schedule that he did consider the factor of economic obsolescence in the preparation of such schedule. Curiously, he was not questioned by any Plaintiff in regard to this statement; nor was he called as a witness, though he was in the courtroom throughout the trial, to inquire what factors went into his preparation of such schedule . . .”

And that:

“The Court therefore finds there is no evidence on which to base a finding of constructive fraud. The Court finds for the Defendant in each of the . . . cases and for their costs.”

We now take up the legal questions. The appellant contends that the valuation of its property by mathematical application of an inflexible schedule which did not include pertinent statutory factors for assessment was illegal, arbitrary and constituted constructive fraud, for which it is entided to relief as a matter of law.

In 1963 the Legislature in compliance with its duty to provide a uniform and equal rate of assessment and taxation imposed upon it by Section 1, Article 11 of the Kansas Constitution, enacted House Bill No. 435 which was incorporated in the 1963 Session Laws as Chapter 460. The Act was effective upon publication in the statute book on June 30, 1963. The title of the bill stated it was “An Act relating to taxation, prescribing a uniform and equal rate of assessment of all real and personal property which is subject to general property taxes . . .” Section 1 (now K. S. A. 79-1439) reads:

“From and after January 1, 1964, all real and tangible personal property which is subject to general property taxes shall be assessed uniformly and equally at thirty percent (30%) of its justifiable value, as hereinafter defined and provided.”

Section 3 amended G. S. 1949, 79-501 (now K. S. A. 79-501) and provided that all real and personal property shall be assessed at thirty percent (30%) of its justifiable value. As used in the statute, “justifiable value” means “true value” or “fair and reasonable value” for taxation purposes. (Board of County Commissioners v. Brookover, 198 Kan. 70, 77, 422 P. 2d 906.)

Section 4 (now K. S. A. 79-503) was a new section and for the first time prescribed the standards for the assessment of real property. The section reads:

“To arrive at the justifiable value of real property the assessor or appraiser shall actually view and inspect the property. The price at which real property would sell at auction, forced sale or any transaction in which personal elements were a factor regarding the sale price shall not be taken into consideration in determining the justifiable value. In determining the justifiable value of real property, the assessor or appraiser shall consider that value in money arrived at when the following factors or combinations thereof are considered:

(a) The proper classification of lands and improvements;

(b) the size thereof;

(c) the effect of location on value;

(d) depreciation, including physical deterioration or functional, economic or social obsolescence;

(e) cost of reproduction or improvements;

(/) productivity;

(g) earning capacity as indicated by lease price or by capitalization of net income;

(h) rental or reasonable rental values;

(i) sale value on open market with due allowance to abnormal and inflationary factors influencing such values;

(y) comparison with values of other property of known or recognized value; and

(7c) valuations of land and improvements on the basis of the foregoing elements and such other elements as may be just and proper.” (Emphasis supplied. )

The manifest purpose of the statute was to require uniformity and equality in the mode of assessment of all real property in the state and to benefit and protect the individual taxpayer from a sacrifice of his property by a disregard of its provisions in which his rights might be injuriously affected. It is evident the Legislature intended that from and after January 1, 1964, all real property in every taxing district would be uniformly and equally assessed at thirty percent of its justifiable value in money. (79-501, 79-1406 and 79-1439.) To accomplish that purpose, the Legislature detailed the factors or combinations thereof to be considered by taxing officials in assessing real property and directed they apply the same in determining justifiable value. State and local taxing officials may not ignore the standards prescribed, since the statute clearly requires consideration of the pertinent factors to specific property and of an assessment of specific property in conformity with its provisions. It requires no semantic niceties to conclude that consideration of the pertinent factors is mandatory to determine justifiable value. In 3 Cooley, Taxation, 4th ed., Sec. 1061, p. 2136, it is stated unequivocally if, “the provision is mandatory it must be followed or the assessment will be invalid.” See, also 84 C. J. S., Taxation, Sec. 393, p. 756.

The appellant’s complaint is not merely that its property was overvalued, but that the overvaluation was the result of an arbitrary assessment made in violation of law. A valid assessment of property is a necessary step preliminary to the levy of a valid tax, and the district court’s findings tend to support the appellant’s contention. The court correctly interpreted the 1964 Roberts schedule as making no provision for allowance for economic or functional obsolescence or depreciation or any of the other pertinent statutory factors to determine justifiable value of the appellant’s property. The finding was nothing less than that the schedule was unlawful on its face and prevented application of those factors, although the evidence substantiating application of them was clearly warranted by the facts. Moreover, the evidence was undisputed that the defendant taxing officials did not consider or apply those factors in assessing the appellant’s property.

The district court concluded that adherence to the Roberts schedule could not be construed as constructive fraud in any event because the local taxing officials were bound to adhere to directives of the director of property valuation by many statutes. The conclusion is erroneous. It would have the effect of permitting the Property Valuation Department to usurp both legislative and judicial functions and amount to a holding that it could by administrative action vitiate the statutory commands of the Legislature. It requires no citation of authority to demonstrate that such is not the law. Obviously, the district court misinterpreted the statutes defining the relationship between the director of property valuations and local assessors.

The director of property valuation has general supervision of the system of taxation throughout the state (79-1402), and has supervision of the Property Valuation Department. (74-2440 and 74-2441.) He is given plenary powers over the administration of the assessment and tax laws of the state to the end that all assessments of property be made relatively just and equitable and at its actual and full cash market value. (74-2441 and 79-1404.) Likewise, he has general supervision and direction over all local assessing and taxing officials in the performance of their duties and is required to direct such officials, under penalty of their removal from office, to uniformly assess all property at its justifiable value. (79-503, 79-1401, 79-1404.) In the performance of his duties, he is authorized to adopt and promulgate rules and regulations relating to the assessment of property (79-1441), and to prosecute local taxing officials for a violation thereof. (79-1405.) He is further directed to render all assistance possible toward uniform assessments within the counties and throughout the state (74-2441), and to that end he is authorized to devise forms and schedules for the assessment of property which detail the technical steps necessary to make an accurate valuation and assessment. In Cities Service Oil Co. v. Murphy, 202 Kan. 282, 293, 447 P. 2d 791, it was said that the director of property valuation properly furnished assessment schedules to the county assessor pursuant to 74-2441, and that the county assessor was required to conform to the values in such schedules by which he could more accurately appraise property in his jurisdiction. See, also, Mobil Oil Corporation v. McHenry, 200 Kan. 211, 216, 436 P. 2d 982. Assessment schedules promulgated by the Property Valuation Department must be based upon a consideration of the factors of the statute to provide as nearly as may be a uniform and equal rate of assessment throughout the state, and be so formulated as to enable a competent assessor or appraiser to apply the pertinent factors to specify the property in determining its justifiable value.

The director of property valuation is an administrative official and his decisions in all matters within the scope of his supervisory power, involving administrative judgment and discretion, are conclusive upon subordinate taxing officials. In the exercise of his powers, the director must of necessity interpret the tax laws and such interpretations are prima facie binding. However, the power exercised by the director is not judicial, and the question whether assessment schedules promulgated by the Property Valuation Department conform to the statute is a question of law not finally determinable by the director of property valuation. In such a situation, the court is of the opinion a taxpayer may protect his proprietary interest against an erroneous decision of the director and is authorized to have the validity of the assessment schedule, as applied to his property, reviewed on the ground the schedule was erroneous as a matter of law. Robinson v. Jones, 119 Kan. 609, 612, 240 Pac. 957; Beacon Publishing Co. v. Burke, 143 Kan. 248, 253, 254, 53 P. 2d 888.) The director of property valuation is obligated to instruct local taxing officials to follow the law — not to violate it. (79-1426.)

An assessment of property for taxes must be made in accordance with the provisions of a statute, and it would hardly seem necessary to state that if an assessment schedule failed to direct local taxing ■officials to consider and apply any pertinent statutory factors in ■determining justifiable value, the schedule would be erroneous as a matter of law. And if through adherence to that manifestly unlawful schedule, the evidence showed the assessor made a palpably excessive overvaluation of the property to be assessed, .such act, although made in good faith, would be illegal and amount to constructive fraud or the equivalent of fraud on the rights of the taxpayer.

It is the settled law in this jurisdiction that the assessment of property for tax purposes may not be set aside on account of mere errors of judgment on the part of the assessing officials. Courts cannot be called upon, in every instance, to settle differences of opinion between the assessing officer and the property owner with respect to the value of property. Before courts will interfere, the conduct of the assessing officer must be without authority or so arbitrary or unreasonable as to amount to constructive fraud. The rule is merely the specific application of the rule of law that the assessment of property, when done in accordance with law, is an administrative function in which courts do not interfere or substitute their judgment for that of the administrative auhority. (Symns v. Graves, 65 Kan. 628, 70 Pac. 591; Board of County Commissioners v. Brookover, 198 Kan. 70, 422 P. 2d 906; Mobil Oil Corporation v. McHenry, supra.) However, where state and local taxing officials do not perform their duties in accordance with law, the issue presented to the court is not the exercise of their administrative judgment, but the legality of their acts. In City Rly. Co. v. Roberts, 45 Kan. 360, 25 Pac. 854, it was said that courts have no difficulty with their power and authority where taxing authorities attempt to proceed without statutory authority or contrary to the statutes, and that such matters are rightly within the province of the judiciary. (Harshberger v. Board of County Commissioners, 201 Kan. 592, 594, 442 P. 2d 5.) In Hitch Land & Cattle Co. v. Board of County Commissioners, 179 Kan. 357, 295 P. 2d 640, it was said:

“Insofar as the argument goes that a court will not give relief against a mere overvaluation, it may be remarked that the rule assumes that proper methods have been followed and the overvaluation, if any, is a matter of the exercise of judgment. In the instant case we have a valuation fixed on a basis which is illegal, arbitrary and discriminatory. Under all of the decisions, a court may grant relief where fraud or conduct equivalent thereto exists or where the action of the taxing officials is illegal, arbitrary and discriminatory.” (1. c. 363, 364.)

Likewise, in Addington v. Board of County Commissioners, 191 Kan. 528, 382 P. 2d 315, this court recently and cogently stated:

“. . . Even though the assessor may have thought he was acting in good faith, his illegal acts in failing to comply with the mandate of the legislature constituted bad faith and constructive fraud . . .” (1. c. 534.)

Except for Roberts’ testimony that he “considered” all factors applicable to grain elevators, including economic or functional depreciation, when he prepared the Roberts schedule in 1960, the evidence was uncontradicted he devised the schedule on a cost less depreciation basis, and nothing else. It is difficult to perceive how Roberts could have considered such factors when the statute requiring their consideration was enacted three years after the schedule was adopted. Be that as it may, at the meeting in Wichita Roberts stated he knew conditions had changed in the grain storage industry and that the 1964 schedule needed to be revised to provide an economic or functional depreciation factor. However, he refused to make that adjustment in the schedule, but instead, required the county assessor to use the schedule in making the assessment of the appellant’s property. Under such circumstances, it must be said that Roberts’ conduct at that time can justify no other conclusion than that of an adopted policy or practice of constructive fraud and discrimination against the appellant and its property.

We do not say that in assessing real property and the improvements thereon, consideration and application of the elements of age, state of repair, location, cost of reproduction or improvements, or any other pertinent statutory factors are or that any one of them is controlling upon the assessor in the exercise of his judgment and discretion in determining what valuation he shall place upon the property assessed. What we do hold is that an assessment, made by an assessor in adherence to an assessment schedule promulgated by the Property Valuation Department which fails to take into consideration any of the pertinent statutory factors prescribed in 79-503 and which in common experience ordinarily determines values, will not be upheld where the evidence substantiating application of the pertinent statutory factors is clearly warranted by the facts. When the statutory factors leading to uniformity in distributing the burdens of taxation have been lost sight of or willfully abandoned in promulgating a schedule upon which an assessment is made, the mere assertion of the official who formulated the schedule that he “considered” all pertinent factors, including economic or functional depreciation, when he prepared the schedule, will not avail him in the presence of the actual and admitted facts supplied from his own lips that he did not do so, nor will his assertion suffice to compel the upholding an assessment made in adherence thereto by an assessor, when the evidence shows the assessment resulted in a gross overvaluation of the property assessed. Such an assessment will be invalidated at the instance of a property owner who pursues the proper statutory method to recover the taxes thus improperly imposed.

In view of the conclusion just announced, it is unnecessary to discuss and decide the appellant’s contention that the use of the Roberts schedule deprived it of the equal protection of the law in violation of the Fourteenth Amendment to the Constitution of the United States.

We are of the opinion the appellant has clearly sustained the burden of proof that the assessment of its property was made in violation of 79-503 and is entitled to have judgment entered in its favor in accordance with the views herein expressed and in accordance with the provisions of 79-2005.

It is so ordered.