Who should decide how to perform an external obsolescence (EO) analysis? This is the key issue in a tax assessment dispute that recently ended up in front of the Minnesota Supreme Court. As we reported here last week, in Guardian Energy, the taxpayer, an ethanol plant owner, appealed the Tax Court’s EO analysis, which sharply deviated from the approaches and values the parties’ experts proposed and produced a valuation of the plant that exceeded all other valuations.

Recorded live: Both parties’ oral arguments were captured on video—and it makes for fascinating viewing. It shows members of the court wrestling with what is by all accounts a complicated valuation problem. The company’s attorney argues that the high-level analysis required for EO quantification should be left to experts. Here, appraisers for both sides reached strikingly similar EO-based reduction rates. Where the company’s appraiser proposed a consistent 33.3% reduction for the three valuation years, the county’s trial expert proposed a decreasing rate of 45% in 2009, 35% in 2010, and 25% in 2011. The county’s rates average a 35% reduction rate. This narrow difference in rates between the parties highlights the outlier nature of the tax court’s 16%, 8%, and 0% rates. The court’s rates are the result of a flawed EO calculation that has no support in the evidence, the company’s lawyer maintains.

The county’s attorney disagrees vigorously. For one, the Tax Court’s EO analysis is based on relevant data regarding federally mandated ethanol-blending requirements that appeared in the appraisal reports of both parties. The lawyer emphasizes that each of the county’s rates for the three valuation years represents a separate valuation. To average the three numbers, as the company tries to do, does not accurately convey the improvement in the market and industry the county’s decreasing reduction rates convey. In fact, there was trial testimony that sales of ethanol plants “clearly show[ed] an upward trend in prices after early to mid-2009.” The county’s lawyer also claims that the tax court’s analysis is not unreasonably narrow because the court did not only look at production capacity, but also considered demand for ethanol as impacted by the federal government’s Renewable Fuel Standard Program. The attorney concludes that it should be the judge who decides, not witnesses. Because in this case the judge made her EO determination based on data from the record, her findings both in terms of EO reduction and the property’s fair market values are not clearly erroneous.

The high court rejected the county’s position and sent the case back to the Tax Court. To view the entire oral argument, click here. An extended discussion of Guardian Energy, LLC v. County of Waseca, 2015 Minn. LEXIS 437 (Aug. 12, 2015) appears in the November issue of Business Valuation Update; the court’s opinion is available at BVLaw.