YANKEE GAS SERVICES COMPANY ET AL. v. CITY OF MERIDEN
No. X07CV960072560S
Superior Court of Connecticut, Judicial District of Waterbury
April 20, 2001
2001 Conn. Super. LEXIS 1113 | 2001 WL 493035
Hodgson, J.
In 1819, Chief Justice John Marshall opined: “. . . . power of taxing the people and their property is essential to the very existence of and may be legitimately exercised on the objects to which it is applicable, to the extent to which the government may choose to carry it.” McCulloch v. Maryland, 17 U.S. 316 (1819). In like vein, Justice Stephen Field later stated: “A municipality without the power of taxation would be a body without life, incapable of acting, and serving no useful purpose.” United States v. New Orleans, 98 U.S. 381, 25 L.Ed 225 (1878). But if the life-blood of government is its ability to impose taxes, that power when run amuck also constitutes the power to destroy. So said Chief Justice Marshall in McCulloch. Similar words were used contemporaneously by Justice Jeremiah Brainard of the Connecticut Supreme Court. In Atwater v. Woodbridge, Justice Brainard opined: “Taxation may be a worm at the root, which, in its consequences, may destroy both root and branch.” 6 Conn. 223, 230 (1826). Unlike either McCulloch or Atwater, this case is not about the right of government to tax but rather it is about the reasonable exercise of government‘s power to tax its citizens. Like both McCulloch and Atwater, this case implicates the destructive potency of government when it misuses its taxing authority. While comprising several lawsuits raising multiple issues, this case, in sum, is an appeal by the plaintiffs from personal property assessments and consequential taxes imposed on them by the defendant municipality for the tax years 1991 through 1999.
The plaintiffs are public utility companies subject to state and federal regulation. In Connecticut, they are regulated by the Department of Public Utilities Control (DPUC). Within the state, the plaintiff Yankee Gas Services Company (Yankee) serves approximately 200,000 customers in 60 cities and towns and the plaintiff Connecticut Light Power Company (CLP) provides electric service to approximately 1.7 million customers in 160 municipalities. There are approximately 57,000 residents of the city of Meriden, including approximately 1,600 business property owners. Both plaintiffs provide services to Meriden and maintain taxable personal property within the City.
While the DPUC regulatory reach over the plaintiffs is broad, pertinent to this case is the DPUC‘s rate-making authority. In the regulatory sense, the term “rate” is used to define, as a percentage, the rate of return a utility company is permitted to earn on its rate base. In determining this rate, the DPUC considers the need for a utility to recover its reasonable operating expenses and its capital costs, and a reasonable opportunity to earn a fair return on investment. In regulatory parlance, rate base is comprised, in large part, of the utility‘s net cost of plant in service. Therefore, in order to fix a maximum allowable rate of return, the DPUC must first determine the net costs of a utility‘s regulated assets, based on the assets’ original costs less accumulated depreciation. In conjunction with this process, the DPUC requires the utility company to submit a description of its regulated assets, which includes information regarding original costs, dates of service, deferred taxes, and data regarding retirement. In conjunction with this process, the DPUC the allowable depreciation. In order to calculate allowable depreciation by category, the DPUC periodically conducts depreciation studies to determine the actual life history and reasonable life expectancy of regulated assets. It is on the basis of these studies and not on Internal Revenue schedules that the DPUC determines the amount of depreciation, by asset category, it will allow in setting a utility‘s rate base. Once a rate base is calculated, the DPUC then sets a maximum allowable rate of return. This process involves a consideration of the cost of debt to the utility as well as a reasonable return on required to have funds to purchase and maintain
As property owners in Meriden, the plaintiffs are required by the terms of
Procedurally, each year Meriden sends each business property owner a form on which the business is asked to report its personal property. Although municipalities have the authority, subject to approval, to utilize a specialized assessment form, Meriden has traditionally used the personal property reporting form prescribed by the Office of Policy and Management pursuant to its statutory authority relating to municipal taxation.1 While the specific language of the form has changed from time to time, for each of the years in dispute, the Meriden form required personal property owners to indicate the costs of acquisition and the amount of claimed depreciation for taxable personal property. Although the form includes depreciation schedules for various categories of property as allowed by the Internal Revenue Service, for its regulated assets the plaintiffs have historically claimed only the depreciation as determined by the DPUC and the plaintiffs do not claim depreciation of regulated assets below thirty percent (30%) of original costs.2
For the grand lists of 1991-1994, the plaintiffs filed personal property declarations as required by
For the tax years 1995-1999, the plaintiffs filed their declarations as required. The assessor increased the assessment each year pursuant to
The plaintiffs paid seventy-five percent of the assessed taxes under protest in accordance with
The plaintiffs brought eight tax appeals, pursuant to The first category in “The second category consists of claims that assessments are (a) manifestly excessive and (b) . . . could not have been arrived at except by disregarding the provisions of the statutes for determining the valuation of the property. E. Ingraham Co, 146 Conn. at 409. Cases in On July 1, 1994, the defendant Meriden entered into a valuation audit contract with NFMA for services in conjunction with an audit of personal property belonging to businesses in Meridеn. The agreement provided for Meriden to select a minimum of four hundred business accounts to be audited. According to the (then) tax assessor, Steven Hodgetts, there were approximately sixteen hundred businesses with taxable personal property located in Meriden. Hodgetts identified the upper half in terms of value of personal property, and from this group he randomly selected a percentage of the businesses for audit. Both plaintiffs were chosen. This manner of selection is consistent with Meriden‘s avowed aim in this audit initiative to increase its tax revenues. The second paragraph of the valuation audit agreement commences with the following sentence: “the background of this Agreement is that the City is seeking to maximize its revenues from the taxation of personal property owned by businesses located within the City.” The contract between NFMA and Meriden called for NFMA to provide audit services for which NFMA was to be compensated through a contingency fee arrangement based upon a percentage of the additional tax revenues, including interest and penalties, actually collected by the City as a result of the contemplated audit.4 Additionally, the contract contained a provision preventing the City from compromising any claim for the payment of increased taxes with any audited business without first giving NFMA a “meaningful opportunity to participate in discussions between the City and such Account with respect to such matters.” At the time Meriden and NFMA entered into this agreement, neither NFMA nor any of its employees was certified as a “revaluation company” pursuant to In order to perform NFMA‘s obligations under this contract, Crozier contacted Donald Swanton and John Parker whom he viewed as utility experts. On January 24, 1995, NFMA and Swanton аnd Parker executed a document entitled, “Master Consulting Agreement” which set forth the general terms of their anticipated business relationship and which stated that Swanton and Parker would receive as compensation thirty-three percent of NFMA‘s earnings from the audit. This agreement also contemplated, by its own terms, that the parties would later execute individual contracts related to specific audits. Also on January 24, 1995, NFMA, Swanton and Parker entered into supplemental agreement relating specifically to the audit of Northeast Utilities, Yankee Gas, and CLP. This later agreement states, in part: “NFMA has entered into an Agreement (“the Audit Agreement“) dated July 1, 1994 with the City of Meriden, Connecticut (the “City“), pursuant to which NFMA is to provide certain personal property tax audit services. NFMA hereby engages Consultant, and Consultant hereby agrees, to perform audit services on behalf of the City as specified in the Master Consulting Agreement.” In spite of the language of the contract obligating them to provide audit services, neither Parker nor Swanton was, in fact, asked to do an audit. Rather, they were asked to perform a specific task, namely, a Pursuant to the request of Meriden‘s then assessor, Hodgetts, the plaintiffs provided substantial documentation to Parker and Swanton from which they prepared their RCNLD study. The results of this study were forwarded to NFMA. Without conducting any further examination or independent analysis, Crozier prepared executive summaries of Parker and Swanton‘s work and forwarded the summaries to the assessor as NFMA‘s work product pursuant to its valuation audit agreement. Thinking erroneously that NFMA had hired utility experts to determine the fair market value of the plaintiffs’ properties, Hodgetts accepted the NFMA product without independent analysis on his part. Based on the executive summaries prepared by Crozier, Hodgetts prepared and sent revised tax bills to the plaintiffs for the audit years 1991, 1992, 1993, and 1994. The tax bill for 1991 was based on the RCNLD study conducted by Swanton and Parker. For 1991, the original Yankee Gas assessment was $8,664,610. As a consequence of the NFMA report, the City increased the assеssment to $25,330,230, approximately 2.92 times the original amount. For CLP while the original assessment for 1991 was $13,439,680, the increased assessment was $25,811,860, approximately 1.92 times the original amount. Without asking for additional information from either plaintiff for any of the audit years 1992 through 1994, the assessor simply multiplied the amount reported by each plaintiff for each of these subsequent years by the factors noted to arrive at his determination of the value of the plaintiffs’ personal property in Meriden for the tax years 1992, 1993, and 1994. Thus, for 1992, while Yankee Gas reported a value of $10,768,280, the assessor simply multiplied that amount by 2.92 to arrive at a new assessment of $31,480,120. Similarly, for the audit year 1993, while Yankee‘s initial assessment was $14,661,670, the tax assessor raised it to $42,862,100 by simply multiplying the reported valuation by the constant factor of 2.92. In 1994, the original assessment of $14,879,720 became $43,499,550.5 The assessor went through a similar calculation for CLP for 1992, 1993, and 1994, and then From the trial, it is evident that Crozier advised Hodgetts to use a factor for each plaintiff for audit years 1992, 1993 and 1994 without considering any additions or retirements in the plaintiffs’ personal property after 1991, and Crozier‘s advice was based on a conversation with Swanton. Swanton had suggested to Crozier that NFMA utilize a trending factor for years subsequent to 1991 since doing a complete analysis of the actual asset inventory for each of the audit years would, in his view, have been too repetitive. Although Swanton suggested to Crozier that he use a trending factor for subsequent years, he did not recommend using an identical factor for each year. According to Swanton, the use of a constant factor in each of the subsequent years must have been Crozier‘s idea. Although the use of trending factors to determine the reproduction or replacement cost of property is an acceptable methodology when using the RCNLD approach to valuation, trending assumes that the property, its acquisition costs, and its age, have all been identified. NFMA‘s use of a constant factor for 1992, 1993, and 1994 based solely on the 1991 profile of assets without regard to any changes for the later years was an unreasonable shortcut. For the tax years 1991 through 1994, the Meriden tax assessor abdicated his responsibility to conduct an audit pursuant to The plaintiffs additionally claim that the assessments for the tax years 1991 through 1994 were unlawful because the assessor changed the valuation methodology. For the tax years 1991-1994, the assessor sent to the taxpayers of Meriden, including the plaintiffs, a declaration requesting the taxpayer to report its property based on original cost less depreciation (OCLD). The assessor used OCLD in initially assessing the plaintiffs’ property, signed the grand lists and issued tax bills accordingly. In the audit, Meriden changed the valuation methodоlogy to RCNLD. “In determining the intended effect of a later enactment on earlier legislation, two questions must be asked. `First, was the act intended to clarify existing law or to change it? Second, if the act was intended to make a change, was the change intended to operate retroactively?’ . . . Circle Lanes of Fairfield, Inc. v. Fay, 195 Conn. 534, 540, (1985).” Anderson Consulting, LLP v. Gavin, 255 Conn. 498, 517 (2001). “Whether to apply a statute retrospectively or prospectively depends upon the intent of the legislature in enacting the statute. In order to determine the legislative intent, we utilize well-established rules of statutory construction. Our point of departure is The language contained in the legislative history of the A reading of the transcripts of the public hearings also suggests that Nowhere in the legislative history is it suggested that It was inappropriate for the defendant to have changed valuation methodology in conjunction with its For the tax years 1995 through 1998, the assessor increased the self-reported valuation of the plaintiffs’ personal properties pursuant to his statutory authority under The plaintiffs further claim that the assessments for the tax years 1991 through 1998 are unlawful because they were denied their state and federal constitutional rights to the equal protection of the law and to due process. It is axiomatic that a just assessment process is one which is uniform and uniformity requires that similarly situated tax payers be treated equally without discrimination. Hanover Fire Insurance Company v. Harding, 272 U.S. 4911. (1926). That is not to say, however, that all classifications are barred by equal protection considerations. “Classification of persons or property, or both, for taxing purposes is The application of those principles to this instance means that if the property of one or two taxpayers is to be valued according to a method employed for no other businesses, there should be a reason relating to the particularly affected tax payers to justify their unique treatment. This is particularly true when the resulting assessment is substantially greater than it would have been if the property had been assessed in the same manner as all other business property. In Meriden, however, this did not occur. From the trial evidence it is clear that for the operative years, the only taxpayers whose property was taxed on the basis of RCNLD were the plaintiffs. There is no reasonable basis for Meriden to have taxed the plaintiffs, and no other taxpayers, on the basis of RCNLD. This view is held by the defendant‘s experts who supported the RCNLD method. In their view, this is the appropriate method to tax all personal property, regardless of whether or not it is regulated, and there was no particular reason to use this methodology assessing the plaintiffs and not other businesses’ property. The defendant offered no credible evidence to support its unique and uneven treatment of the plaintiffs. In its аudit process for the tax years 1991 through 1994 no other taxpayers were assessed on the basis of RCNLD. Similarly, no Meriden taxpayers, other than the plaintiffs, were assessed according to this methodology for any of the tax years 1995 through 1998. By unreasonably singling out the plaintiffs for this unique treatment resulting in substantially greater taxes, the defendant discriminated against the plaintiffs, and in doing so, the defendants denied the plaintiffs the equal protection of the law in violation of both the state and federal constitutions. The plaintiffs claim that the assessment process denied them due process. The power to tax is quasi-judicial. Hagar v. Reclamation District No. 108, 111 U.S. 701 (1993). There can be no dispute that a taxpayer has a property interest in his or her money. Therefore, the municipal taxing process implicates due process considerations, and when a municipal officer conducts a property assessment, due process requires that the assessor act impartially and without bias. Simard v. Board of Education of the Town of Groton, 473 F.2d 988 (2nd Cir. 1973); Transportation General, Inc. v. Insurance Department, 36 Conn. App. 587 (1995). When government acts to take property from a citizen due process requires a fair hearing. Sekor v. Board of Education, 240 Conn. 119 (1997). As noted by our Appellate Court: “Due process for those with protected property rights requires an impartial administrative adjudicator.” Petrowski v. Norwich Free Academy, 2 Conn. App. 551 (1984). Accordingly, the individual assessing taxes must be free from any pecuniary interest in the resulting taxes paid. It is clear to this court that the risk of a In this case, the fairness and impartiality of the process was fatally compromised by the terms of the contract between Meriden and NFMA and the consequent behavior of the parties to it. By awarding NFMA a contract which rewarded NFMA for any increased tax collections, the defendant created at least the appearance of bias in favor of increased assessments. By yielding to NFMA the right to participate in hearings and to be consulted by Meriden before the resolution of any tax dispute, the tax assessor lost his claim to impartiality. Rather, because of his admitted ignorance regarding the proper method to tax regulated utility assets, he looked to NFMA for direction and, in fact, relied entirely on their report. The lack of due process for the plaintiffs was for the tax years 1991-1994 by the refusal of Meriden to afford the plaintiffs meaningful hearings without the participation of NFMA, and, in all of the tax years, by the failure of the assessor to independently exercise his statutory responsibility to asses the properties. As a consequence, the plaintiffs were, in fact, denied due process. The defendant argues by way of special defense that the plaintiffs’ payment under protest of seventy-five percent of the assessed tax bars them from bringing a claim under For the reasons stated, the assessments of the plaintiffs’ personal property for the tax years 1991 through 1998 were unlawful and manifestly excessive. Having concluded that the assessments are unlawful, the court In a For the tax year 1999, Meriden retained the valuation firm of RW Beck to value the plaintiffs’ property. Nancy Hughes, a senior director of RW Beck, did a fair market value analysis of the plaintiffs’ properties in Meriden for 1999. With respect to Yankee Gas, while she reviewed data concerning original and reproduction costs of property, comparable sales, and the income of Yankee, she determined the most accurate measure of the value of Yankee‘s property in Meriden could be determined by the stock and debt approach. Her report was provided to the tax assessor, Mordarski, on the same day as he was required to sign the grand list. The court disagrees with the propriety of this approach in valuing tаngible personal property in this instance. The stock and debt approach is a variant of the income method of valuation, based, in large part, on the value of the company‘s stock. Since Yankee was involved in a stock transaction at the time of valuation, Hughes believed it appropriate to utilize the stock share value as a beginning point in her estimate of market value. Her ultimate estimate of value was derived by a formula which did not take into consideration that a portion of the stock price reflects the value of a going business including its intangible assets such as good will and its work force. Therefore, by utilizing stock value as a factor in valuation, Hughes impermissibly included the value of intangible assets in determining the fair market value of Yankee‘s For CLP, she utilized four methodologies in her study: OCLD, RCNLD, comparable sales, and income. Her study resulted in an uncertain fair market value ranging from approximately $23,000,000 to $72,000,000. Without conducting any independent analysis or selecting any particular valuation methodology, the assessor took the average of the four values to posit the fair market value of CLP‘s property for the tax year 1999. Mordarski was unable to provide the court with any authority, either in the law or in assessment normalcy, for this unusual mathematical approach to assessing the personal property of Meriden taxpayers. The plaintiffs are aggrieved for the tax year 1999. Once aggrievement is established, the court may proceed to the next step in a In assessing property for tax purposes, a municipal tax assessor is charged to determine the present true and actual value of the property which is statutorily defined as the fair market value of the property and not its value at a forced or auction sale. cf In assessing the plaintiffs’ personal property, the Meriden tax assessor does not appear to have consistently adopted any one method for Though the plaintiffs initially reported their personal property on the basis of OCLD, for trial purposes, they presented expert testimony through John Goodman that the valuation of the plaintiffs’ property should be on the income basis, supported by a variant of RCNLD methodology. For trial purposes, RW Beck, utilizing data provided by Goodman, also valued the plaintiffs’ property for the 1991 tax year on the basis of RCNLD. However, the RCNLD approach of the experts and NFMA were no more than nominally similar. As noted supra, NFMA did not, in fact, determine a valuation of the plaintiffs’ property for the tax year 1991. But experts retained by NFMA did perform an RCNLD study for 1991, which became thе work product of NFMA and the basis of the assessor‘s audit valuation for 1991 through 1994. In order to conduct this study, Swanton and Parker reviewed the personal property tax filings and backup data supplied by the plaintiffs. By utilizing a reference guide known as the Handy Whitman Index, Swanton and Parker determined the current costs of each category of the plaintiffs’ personal property and then applied depreciation schedules to arrive at the present value of each asset category. They entitled this method the “Current Depreciated Replacement Cost Method.” Through this process they determined that the current depreciated replacement costs of the CLP personal property in 1991 in Meriden was $36,874,088, approximately 192% of the value reported by CLP. With respect to Yankee Gas, employing the same methodology, Swanton and Parker determined the RCNLD of its 1991 assets in Meriden to be $36,186,036, or approximately 292% greater than reported y Yankee in its 1991 filing. In its review of this matter, RW Beck utilized RCNLD for the 1991 tax year. Notwithstanding the nominal identity of its methodology, RW Beck‘s conclusions for 1991 vary from the determinations made by Swanton and Parker. For 1991, RW Beck determined the fair market value of CLP‘s Meriden personal property to be $40,985,000 and Yankee‘s property to be $33,371,000. Applying a similarly named method, the plaintiffs’ expert, Goodman, arrived at significantly different valuations for the plaintiffs’ property for the 1991 tax year. For CLP, Goodman determined the fair market value of its Meriden personal property to be In order to understand Goodman‘s viewpoint that external obsolescence should be considered as a factor in valuation, one must consider the nature of depreciation. Depreciation may be considered as either an accounting or an economic concept. As an accounting concept, depreciation relates to the recovery of costs. Thus, the owner of property used in business is permitted to depreciate that property over its useful life as a means to recover its acquisition cost. To effectuate this tax policy, the IRS has created depreciation schedules for different classes of property, allowing business property owners to depreciate property in accordance with the appropriate schedule by classification notwithstanding the actual economic utility of the asset. When considered as an economic concept, however, depreciation relates to any factor that reduces the value of business property. Thus, from an economic perspective, depreciation may include such considerations as physical deterioration, functional obsolescence caused by technological change, and external factors which negatively impact on the economic utility of business assets. It is this last factor, sometimes known as economic obsolescence, which is controversial. Goodman argues that the factor of regulation operates to reduce the value of the plaintiffs’ property. His argument has received some professional approbation. the text The Appraisal of Real Estate,7 the author notes: “Depreciation is a loss in property value from any cause. It may also be defined as any difference between reproduction cost or replacement cost and market value. Deterioration, or physical depreciation, is evidenced by wear and tear, decay, dry rot, cracks, encrustations, or structural defects in a building. Other types of depreciation are caused by obsolescence, which Goodman posited that the government regulation of the plaintiffs’ property is a cause of external or economic obsolescence which must properly be considered in determining value, and he calculated this factor by measuring the difference between the rate of return on assets allowed by the DPUC and the rate of return a prudent investor would expect to realize on the same assets. Goodman then capitalized this difference and subtraсted the resulting sum from the RCNLD calculation to arrive at his estimate of fair market value. This approach is sound. If value is seen as the property‘s contribution in the marketplace, or its contribution to revenue, it is reasonable to deduct from the reproduction or replacement cost of an asset an amount which takes into consideration the difference between what the asset would generate in a free economy from what it is able to contribute as a result of regulation. In his treatise, Valuation of Railroad and Utility Property, Arlo Woolery suggests that one way to measure economic depreciation, or external obsolescence is to capitalize the income loss resulting from the condition or negative influence. Woolery, Arlo, Valuation of Railroad and Utility Property, (Published in cooperation with The Lincoln Institute of Land Policy and The Wichita Public Utility and Railroad Workshop) at 61. This is the methodology utilized by Goodman and it accounts for the greatest difference between his RCNLD outcomes and those derived by NFMA and Beck, neither of whom considered the fact of regulation in their valuations. While a reduction in the value of an asset due to government regulation may appear to be an income concept not properly applied when using cost methodology, on closer scrutiny, the approach provides a useful analysis. As a starting point, it can fairly be said that the original cost of an asset, standing alone, is not a measure of its present worth. But when the economic value of that asset to the business is directly tied to its original cоst, then original cost becomes a relevant valuation factor. Such is the case with DPUC regulation, which, as stated previously, uses original cost as the base-point in determining an allowed rate of return. The cost of reproducing or replacing an asset has no such correlation to its economic worth to its business owner. Woolery notes: “Reproduction cost new has been widely used as evidence of value for property in unregulated industries. This estimate of cost spans the time “In valuing non regulated properties, reproduction cost has a wide range of useful applications if used with skill and understanding. However, making this type of cost estimate is expensive and time consuming. Regulatory authorities and courts are inclined to give it little consideration in determining the base for earnings, so tax administrators have little reason to use it as the basis for ad valorem taxation.” Id. at. 42-43. Similarly, with respect to replacement cost methodology, Woolery comments: “Replacement cost, even though it is a useful and reliable tool for valuing properties in a free economy, may have limited utility for valuing transportation and utility рroperty for ad valorem tax purposes. It is expensive, time consuming, and technically demanding. To use this tool effectively, the transportation or utility property would have to be hypothetically redesigned and reengineered to specifications imposed by the current state of the art and current market demand.” Id. at 42. While the RCNLD method was once the prevalent in methodology utilized to value personal property, it is no longer in general use in Connecticut because its formulations are complicated and involve substantial subjectivity in determining appropriate depreciation, and because technological change has made reproduction and replacement costs less reliable indicators of value.8 Regarding valuation methodology, the Handbook for Connecticut Assessors, published by the Connecticut Association of Assessment Officers in concert with the Office of Policy and Management, recommends the use of the modified cost approach (OCLD) and not RCNLD. “The cost approach to value involves a determination as to the current depreciated cost of personal property. In appraisal theory, the replacement cost new of an item of personal property is adjusted to reflect its condition and utility in order to arrive at an estimate of market value. As a point of departure in this approach to value, Connecticut assessors seldom utilize the replacement cost new other than for items that are new, due to a lack of data sources.” Handbook for Connecticut Appraisers, (2000 Ed), 10-8. The Handbook goes on to state, “It is not recommended that an assessor use trending factors applied against acquisition costs to arrive at an estimate of fair market value. Given the multitude of personal property items to be valued, and the fact that many of them are subject to significant technological obsolescence, these items may actually be “Most assessors use a modified cost approach to value wherein the acquisition cost of personal property items is adjusted to reflect accrued depreciation. In the mass appraisal process, this adjustment is accomplished via use of depreciation schedules.” Id. While the Handbook for Connecticut Assessors has no coercive effect on assessors, our courts have looked to the Handbook for guidance and clarification. United Illuminating Co. v. New Haven, 240 Conn. 422 (1997). It is also reflective of practice norms.9 In her utilization of trending factors and the RCNLD approach, Hughes of RW Beck was influenced by her perception of the status of Connecticut law. In support of her utilization of the RCNLD method for valuation, Hughes concluded in her report, “Based on the relative merits of the indicators of value developed using the cost, income and market approaches to valuation, and taking into сonsideration the legal precedent for determining the present true and actual value of utility property as determined by the Supreme Court of Connecticut, we believe that the fair market value of the property for tax assessment purposes is equal to the RCNLD value.” The reference to the Connecticut Supreme Court was to its 1974 decision in New Haven Water Company v. Board of Tax Review, 166 Conn. 232. At first impression, reliance on New Haven Water Company appears justified. But it is its underlying principles in addition to its contextual factual determinations which make New Haven Water Company pertinent today. In New Haven Water Company, the plaintiff water company had appealed the refusal of the Board of Tax Review to reduce its personal property assessment. The trial court had referred the matter to a committee, Judge P.B. O‘Sullivan, who filed a report affirming the Board‘s action. On appeal, the water company had argued that the assessor was required, as a matter of law, to value the property using the OCLD method of valuation. The Board had confirmed the assessor‘s valuation on the basis of the RCNLD approach. In affirming the trial court‘s adoption of the committee report, the Supreme Court noted: “The committee found that the replacement cost less depreciation method is widely used throughout the state, and is used to assess the taxable property of other public service companies.” Id. at 237. Additionally, a review of the record and briefs pertaining to this case indicates that at trial there was testimony from the tax assessor, Harry J. Cohen that: “The figures supplied by the plaintiff used by the assessor was replacement cost less deprеciation. For The court finds it meaningful that at the time of the New Haven Water Company decision, self reporting by business property owners was on the basis of RCNLD and this was the generally accepted method for valuing personal property. Today, the circumstances are significantly different. Now, the general practice by municipal tax assessors in Connecticut is to request businesses to report their business property on the basis of OCLD and to assess on that basis. Indeed, this was the manner in which Meriden requested information from the plaintiffs. Requesting historical information concerning the date and cost of acquisition is in accord with the guidelines set forth in the Handbook for Connecticut Assessors. In pertinent part, the Handbook states: “The assessment of personal property must be based on its fair market value. Establishing value on the basis of market sales is very difficult due to the lack of bona fide sales data. Historic cost data is likely to be the best economic information that is available to the assessor. The property owner enters the total cost of the personal property by assessment year of acquisition in the schedules on the declaration. This allows the assessor to determine personal property values by use of the modified cost approach.” Handbook, 10-6. As noted supra, in addition to embracing the modified cost approach to valuation, the Handbook discourages assessors from utilizing the replacement cost approach. Thus, appraisal practice has markedly changed from 1974 when RCNLD was the normative valuation method. Now it is the exception. Indeed, from trial evidence it is apparent that in all Connecticut municipalities business owners are asked to report their property in terms of acquisition costs less depreciation. In short, tax assessment on the basis of OCLD is now the norm. In the court‘s view, there is good reason for the common practice of In addition, with respect to regulated assets, the plaintiffs submit their personal property declarations to municipalities utilizing the schedules of depreciation approved by the DPUC and not the shorter depreciation schedules suggested on the fоrms provided by municipal assessors. The form utilized by the Meriden assessor, and in general use in the state, contains depreciation schedules as allowed by the Internal Revenue Service. The depreciation claimed by the plaintiffs in their tax filings, however, is in accordance with depreciation schedules established by the DPUC.10 Periodically, the DPUC and regulated utilities conduct depreciation studies to determine the actual useful life of regulated assets by categories and, following these studies, the DPUC sets allowable depreciation schedules. These schedules are based on the actual longevity of regulated assets by category which are invariably longer than would normally be allowed by the IRS for tax filing purposes. As a consequence, the net values reported by the plaintiffs to Meriden are higher than they would be if the plaintiffs had simply followed the schedules suggested in the City‘s declaration forms. And, since the depreciation schedules adopted by the DPUC are based on studies of the actual longevity of assets, the resulting values reported are more realistic than those which are simply subjected to an IRS approved depreciation schedule. Additionally, it is the plaintiffs practice not to depreciate any regulated assets lower than 30% of original cost, no matter how aged, in spite of the fact that the asset could be completely The modified cost method, which is based on OCLD, has been criticized as merely an accounting expedient unrelated to true value. When depreciation is based solely on IRS schedules, this criticism may be valid. But in the case of regulated assets, such as those of the plaintiffs‘, the depreciation schedules are derived by the DPUC on the basis of the actual economic life of asset groups. And, as noted supra, when determining the rate of return the plaintiffs may be allowed to earn on their assets, the DPUC considers the original and not the replacement cost of these assets. In the court‘s view, the methodology employed by the vast number of assessors in Connecticut, the methodology recommended by the Connecticut Association of Assessment Officers, and the methodology generally applied to all other personal property subject to taxation in Meriden is the appropriate methodology to determine the fair market value of the plaintiffs’ personal property. And that is the methodology, known as the modified cost approach, requested by the assessor and provided to the assessor by the plaintiffs in all the tax years in question. In reaching this conclusion the court has also considred the income and comparable sales approaches to valuation. To value property by the income approach one must calculate the present value of anticipated future earnings. To make this computation, one must determine the earnings and then discount them to a present valuation. Thus, the present value of an asset is derived by determining the earnings on may realize from the asset and then discounting those earnings to their present value. As pointed out by Nancy Hughes of RW Beck, “the income value for a regulated utility should equal its rate base value, since this is the value of the utility‘s investment on which it is allowed to earn its authorized rate of return or profit.” Defendant‘s Exhibit 1112, RW Beck Report, 4-3. The court agrees. Hughes also correctly notes that the income approach is based on a return on all the plaintiffs’ assets, then prorated to Meriden, and some of these assets may have been more profitable than others. For example, she commented that in certain of the tax years in question, CLP maintained unprofitable generation facilities which, when taken into consideration as part of a system-wide income analysis, artificially deflated income. Therefore, she argued, it would be inappropriate to value CLP‘s assets in Meriden using its proportionate income based on its proportionate share of assets, if it contained none of the non-income producing generation facilities. The court agrees. The lack of profitability of assets located outside of Meriden should not be a factor in determining the income reasonably derived from assets The court also considered the comparable sales met nod of valuation and found it to be the least reliable indicator of value because of the absence of comparable sales of regulated utility property alone. In its report, RW Beck detailed several utility company sales to demonstrate that utility distribution facilities sold at an average sales price 1.8 times greater than book value. Hughes urges the point that because utility companies sell at more than book value, the modified cost approach is not a reliable indicator of value. The court disagrees. The assessment of personal property is limited to tangible property. A stock sale of a utility business, however, typically involves the sale of a going business with attendant good will with a work force in place. Understandably, no witness was able to report a comparable sale of tangible personal property only. And yet, to include, as a comparable, the unidentified worth of intangible assets, makes the comparison of little use. For the same reasons, reference to the pending merger between Con Edison and Northeast Utilities and to the sale of Yankee Gas are unhelpful. In both these stock ventures, the sales price is not solely a function of the value of taxable personal property, but more generally of the anticipated revenues and profitability of companies, a determination flowing from many considerations which include but are not limited to the companies’ tangible assets. The plaintiffs’ filings for their regulated personal property for the tax years 1991 through 1999 were based on OCLD as allowed by the DPUC.11 As noted, the court believes that this manner of reporting was appropriate and the most reflective of the value of the plaintiffs’ regulated assets. The defendant has failed to meet the burden of proving any of its special defenses. Similarly, the defendant‘s counterclaims fail for want of proof. Accordingly, the court finds the fair market value of the plaintiffs’ personal property was as filed by the plaintiffs in their self-reporting,12 as follows: YANKEE GAS CLP Pursuant to both In determining what rate of interest should apply, which is also discretionary, the court looks to CLP AUDIT YEARS 1991-1994 YANKEE GAS AUDIT YEARS 1991-1994 Therefore, for the audit years 1991-1994, Meriden is ordered to pay to CLP $3,241,500 principal and interest. Meriden is ordered to pay to Yankee Gas, for the same years, $5,339,448 principal and interest. CLP REVALUATION YEARS 1995-1999 YANKEE GAS REVALUATION YEARS 1995-1999 Therefore, for the revaluation years 1995-1999, Meriden is ordered to pay to CLP $1,329,115 principal and interest. Meriden is ordered to pay to Yankee Gas, for the same years, $3,501,083 principal and interest. Pursuant to CLP YANKEE GAS Therefore, Meriden is ordered to pay $653,282 to CLP and $1,562,432 to Yankee Gas as interest on the offers of judgment. The fifth count constitutes a claim of civil conspiracy. The plaintiffs allege that the defendant conspired with NFMA to violate the taxpayers’ constitutional rights and to engage in conduct by way of illegal and improper means in an attempt to illegally and improperly benefit from such activity. In order to prove a civil conspiracy, the plaintiffs must demonstrate that the defendant combined with NFMA to do a criminal or an unlawful act or a lawful act by сriminal or unlawful means, that one of them acted pursuant to the scheme in furtherance of its purpose, and that the act caused harm to to the plaintiffs. Marshak v. Marshak, 226 Conn. 652 (1993); Williams v. Maislen, 116 Conn. 433 (1933). While the court believes that the assessor did, in fact, abdicate his statutory responsibilities to value the plaintiffs’ properties, and that the processes utilized by NFMA and Meriden did ultimately harm the plaintiffs, the plaintiffs’ proof fails to establish that the offending acts were the products of a conspiracy between Meriden and NFMA, or between any of Meriden‘s employees and NFMA. The plaintiffs seek a declaratory judgment that the contingent fee arrangement between Meriden and NFMA is void because it violates public policy. Pursuant to a) has a legal or equitable interest by reason of danger or loss or uncertainty as to his rights or there is an actual bona fide and substantial dispute or substantial uncertainty of legal relations which requires settlement between the b) all persons having an interest in the subject matter of the complaint are parties to the action or have reasonable notice thereof, and c) the court is not of the opinion that the parties should be left to seek redress by some other form of procedure. In regard to this requested relief, the plaintiffs provided notice to NFMA. While other municipalities have not been given notice, the court believes that notice to NFMA is adequate to render declaratory judgment regarding the speсific contract in question. Public policy may be found in constitutional or statutory provisions or in judicially conceived notions. Daley v. Aetna Life and Casualty Co., 249 Conn. 766, 798 (1999). Connecticut has not adopted legislation prohibiting the use of contingent fee arrangements in personal property tax audits.16 As discussed supra, the Office of Policy and Management (OPM), in conjunction with the Connecticut Association of Assessing Officers, publishes the Handbook for Connecticut Assessors. OPM‘s mission is to provide information and analysis that the Governor uses to formulate public policy goals for the state of Connecticut and [to] assist . . . municipalities in implementing policy decisions on behalf of the people of Connecticut.” Handbook, 1-3. While the Handbook does not speak to the propriety of contingent fee audits, it incorporates the regulations of the International Association of Assessing Officers (IAAO). The IAAO has adopted the ethical standards of USPAP, which restricts the use of contingent fee arrangements when an opinion of value will be rendered. The defendant‘s own experts, Hughes, Swanton and Parker, stated that they would not perform an appraisal or an audit on a contingent fee basis. The power to tax is a uniquely governmental function and is vested in individuals who are directly accountable to the people through the political process. There exists a public policy in favor of fair and accurate taxation which has been recognized by our Supreme Court. Robertson v. Stonington, 253 Conn. 255 (2000). “The people‘s entitlement to fair and impartial tax assessments lies at the heart of our system, and, indeed, was a basic рrinciple upon which this country was founded.” Sears, Roebuck Co. v. Parsons, 260 Ga. 824, 401 S.E.2d 4 (1991). “Fairness and impartiality are threatened where a private organization has a financial stake in the amount of tax collected as a result of the When a municipality enters into a contingent fee contract with a third party to determine the tax obligations of its citizenry, it is essentially entering into a partnership with a party who has a pecuniary interest in the amount of taxes assessed. Although, theoretically, when a municipality enters into a contingent fee arrangement with a firm to do a personal property valuation for tax assessment purposes the ultimate responsibility for assessment remains with the assessor, the cornerstone from which the assessor begins his statutory exercise of judgment and discretion is the value recommended by the contingent fee auditor. There is a high risk that the process may become tainted with the influence of the third party who maintains a direct financial interest in keeping that value high. There is an attendant likelihood that consequence of any resulting assessment will be skewed. The contract between NFMA and Meriden goes further than just the audit. The agreement provides that the City shall not compromise any of the assessments without providing NFMA a meaningful opportunity to participate in the discussions and negotiations. This agreement belies the bedrock notion that the power to tax must lie solely with the assessor. Neither NFMA nor any other firm hired a contingent fee basis is likely to have any interest in compromising the assessment value once determined. In entering into such an arrangement, the focus shifts from serving the public good to generating the highest revenue from the citizenry. In this matter the plaintiffs ask for a determination not that all contingency fee contracts between a municipality and an outside audit or appraisal company be declared void but, more specifically, that this particular contract violates public policy. Though the court has found much to criticize in the contents and operation of the contract between NFMA and the defendant municipality, the contract, by its own terms, is not operative beyond the 1994 tax year. Therefore, its potential for harm is extinguished. Additionally, the court believes that the economic relief accorded the plaintiffs in this matter fully vindicates their J.
Year FMV Year FMV
1991 12,378,015 1991 19,199,547
1992 15,383,266 1992 21,137,228
1993 20,945,241 1993 21,160,273
1994 21,256,736 1994 19,905,721
1995 23,872,393 1995 20,729,322
1996 21,862,963 1996 21,269,365
1998 20,775,836 1998 27,261,492
1999 25,354,745 1999 27,529,829