Hewlett-Packard Co. v. Benton County Assessor
356 P.3d 70
Or.2015Background
- HP owned a 178-acre Corvallis campus with 28 buildings (~2M sq ft); 1.2M sq ft was "core" (in use), 800K sq ft "non-core" (vacant after consolidation).
- Tax Court found highest and best use (HBU) was continued single-tenant, owner-occupied research/manufacturing using core space and leaving non-core vacant. Tax Court adopted HP expert valuations: improvements valued at ~$65M–68M for assessment years.
- Department of Revenue (via county assessor) proposed a mixed-use HBU (owner-occupied core + converted non-core rental), producing much higher valuations; DOR appealed only the legal application of its rule defining "value of the loss."
- Under DOR rules, the cost approach uses replacement cost less depreciation; functional obsolescence can be measured by either cost to cure or "value of the loss," whichever yields the smaller deduction.
- HP’s expert treated the non-core space as an incurable superadequacy and calculated the value of the loss as excess operating costs of the 2M sq ft subject vs. a 1.2M sq ft replacement, yielding a $38M deduction; DOR argued the value of the loss should instead reflect conversion to rentable space (a $13M figure).
- The Tax Court accepted HP’s approach; the Supreme Court reviewed only the legal question whether the rule for "value of the loss" required treating the non-core space as converted to rental use when computing that value.
Issues
| Issue | Plaintiff's Argument (HP) | Defendant's Argument (DOR) | Held |
|---|---|---|---|
| Proper application of OAR 150-308.205-(F)(3)(k) (value of the loss) | Value of the loss measures excess operating costs given the Tax Court's HBU; HP calculated excess costs of operating subject vs. replacement (non-core left vacant) | Value of the loss must assume a potential owner would convert non-core to marketable rental space and thus compute loss relative to that mixed-use operation | Court held value of the loss must be applied consistently with the Tax Court’s HBU determination; HP method was correct given the unchallenged HBU finding |
| Whether rule interpretation is a legal question reviewable here | HP: valuation largely fact-based; DOR did not dispute factual HBU findings, so calculation followed facts | DOR: interpretation of rule is legal; Tax Court misapplied rule even accepting facts | Court: interpretation of administrative rule is a legal question; but DOR confined argument to rule meaning and did not challenge HBU factual findings, so court resolved rule issue in context of undisputed facts in favor of HP |
| Proper comparison basis for functional obsolescence (subject vs replacement) | Compare subject (operated under the HBU) to replacement property that provides equivalent utility per HBU; non-core excluded from replacement | DOR: comparison may include altered utility of subject (converted non-core) when computing value of the loss | Court: replacement property must reflect the most cost-effective way to provide the same utility under the already-determined HBU; DOR’s approach improperly relitigates HBU at the value-of-loss stage |
| Whether Tax Court’s adoption of HP’s valuation violated DOR rules by not assuming conversion | HP: conversion was not legally/financially feasible per Tax Court findings, so conversion cannot be assumed when calculating value of the loss | DOR: even if conversion loses $13M, that lesser loss should be used rather than $38M | Court: because DOR did not challenge Tax Court’s HBU or feasibility findings, court cannot accept DOR’s alternate-use assumption; thus Tax Court’s calculation stands |
Key Cases Cited
- STC Submarine, Inc. v. Dept. of Rev., 320 Or 589 (discusses valuation tied to buyer intent to use most profitable use)
- Freedom Fed. Savings & Loan v. Dept. of Rev., 310 Or 723 (highest and best use is foundation for market value opinion)
- Reynolds Metals Co. v. Dept. of Rev., 299 Or 592 (valuation issues often fact-intensive; depreciation is a factual inquiry)
- Delta Air Lines, Inc. v. Dept. of Rev., 328 Or 596 (cost approach based on substitution; property worth cost of satisfactory substitute)
- Hopkins v. SAIF, 349 Or 348 (distinguishes factual persuasiveness of expert evidence from legal interpretation of statutes/rules)
- Powerex Corp. v. Dept. of Rev., 357 Or 40 (agency rule interpretations entitled to deference if plausible and consistent)