State high court balks at tax court’s external obsolescence analysis

Guardian Energy, LLC v. County of Waseca, 2015 Minn. LEXIS 437 (Aug. 12, 2015)

Who gets to decide how to perform an external obsolescence (EO) analysis? This was the crux of a tax assessment dispute that involved a special purpose property and recently ended up in front of the Minnesota Supreme Court. External obsolescence (also known as “economic obsolescence”) represents a loss in the value of a property due to factors beyond the physical boundaries of the property and beyond the owners’ control. Measuring EO is a difficult task even for experienced appraisers.

In the instant case, the tax court heard from experts for the taxpayer company, an ethanol plant owner, and the county but eschewed both EO expert opinions and developed an entirely different analysis. Accordingly, the tax court arrived at substantially lower EO-related reduction rates and substantially higher valuations of the property. In fact, the tax court’s property assessments exceeded those of the other appraisers working on the case.

Both trial experts agreed that during the three valuation years the facility incurred losses because of “prevailing negative industry conditions.” They also agreed that overcapacity, lower demand for ethanol, and deteriorating profit margins were factors that played a role in the EO analysis in this case.

In contrast, the tax court’s EO analysis pivoted on unused production capacity. To compare demand for ethanol in the U.S. with production capacity in the U.S. for the valuation years, the court relied on government data that appeared in the expert reports. The court gave no consideration to the other factors the experts identified. Importantly, the court did not explain its thinking.

The company successfully appealed the tax court’s EO analysis and the resulting tax assessment with the state Supreme Court, arguing the court’s EO quantification lacked support in the record.

You can read more about the case here.

To find out more about the video recording of the parties’ oral argument in front of the state high court, click here.