State Tax Commission of Missouri
| DOE RUN COMPANY, | ) | |
| ) | ||
| Complainants, | ) | |
| ) | ||
| v. | ) | Appeal No. 11-82500 |
| ) | 11-82502 thru 11-82505 | |
| RICK PARKER, ASSESSOR, | ) | |
| REYNOLDS COUNTY, MISSOURI, | ) | |
| ) | ||
| Respondent. | ) |
DECISION AND ORDER
UPON APPLICATION FOR REVIEW
On November 3, 2015, Senior Hearing Officer Luann Johnson (Senior Hearing Officer) entered her Decision and Order (Decision) affirming the assessment by the Board of Equalization of Reynolds County (BOE), which sustained the assessed value for the subject property (the Property) for tax year 2011 at $143,772,100.
Doe Run Company (Complainant) subsequently filed its Application for Review of the Decision with the State Tax Commission (the Commission). Rick Parker, Assessor of Reynolds County, (Respondent) filed his Response. Complainant filed its Reply.
CONCLUSIONS OF LAW
Standard of Review
A party subject to a Decision and Order of a Hearing Officer may file an application requesting the case be reviewed by the Commission. Section 138.432 RSMo Cum. Supp. 2015; 12 CSR 30-3.080(4). The Commission may then summarily allow or deny the request. Section 138.432; 12 CSR 30-3.080(5). The Commission may affirm, modify, reverse, set aside, deny, or remand to the Hearing Officer the Decision and Order of the Hearing Officer on the basis of the evidence previously submitted or based on additional evidence taken before the Commission. Section 138.432; 12 CSR 30-3.080(5)(A).
The Senior Hearing Officer is not bound by any single formula, rule, or method in determining true value in money, but is free to consider all pertinent facts and estimates and give them such weight as reasonably they may be deemed entitled. St. Louis County v. State Tax Commission, 515 S.W.2d 446, 450 (Mo. 1974). The relative weight to be accorded any relevant factor in a particular case is for the Senior Hearing Officer to decide. St. Louis County v. Security Bonhomme, Inc., 558 S.W.2d 655, 659 (Mo. banc 1977); St. Louis County, 515 S.W.2d at 450; Chicago, Burlington & Quincy Railroad Company v. STC, 436 S.W.2d 650 (Mo. 1968). Likewise, the Commission is free to consider all pertinent facts and give them such weight as reasonably the Commission deems them entitled.
The Commission, having reviewed the record in this appeal and having considered the Decision of the Senior Hearing Officer and the briefs of the parties, enters its Decision and Order. Segments of the Senior Hearing Officer’s Decision have been incorporated into our Decision and Order without further reference.
DECISION
Complainant’s Points on Review
Complainant asserts the following points in support of its Application for Review:
- The Decision is erroneous, arbitrary, capricious, unreasonable, constitutes an abuse of discretion and is contrary to Missouri law in that Complainant presented competent and persuasive evidence to rebut the presumption in favor of the BOE’s determination of value.
- The Decision is erroneous, arbitrary, capricious, unreasonable, constitutes an abuse of discretion and is contrary to Missouri law in that the Decision imposes taxes on tax-exempt Bureau of Land Management (BLM) ore body, tax-exempt manufacturer’s inventory, in the form of lead, zinc and copper concentrates, and income attributable to other personal property.
- The Decision is erroneous, arbitrary, capricious, unreasonable, constitutes an abuse of discretion and is contrary to Missouri law in that the Decision concludes that leasehold interest has bonus value contrary to both experts’ stipulations and established case law in Missouri.
4. The Decision is erroneous, arbitrary, capricious, unreasonable, constitutes an abuse of discretion and is contrary to Missouri law in that the Decision makes erroneous legal conclusions regarding the separate ownership of real property interest in the same property, value the subject property at its value-in-use rather than its value-in-exchange, and misapplies the Supreme Court’s holding in Iron County v. State Tax Commission, 437 S.W.2d 655 (mo. Banc 1968) and Frontier Airlines, Inv. V. State Tax Commission, 528 S.W.2d 943 (Mo. Banc 1975) as well as other case law.
Commission’s Decision
After review of the evidence previously submitted, the Commission modifies the Senior Hearing Officer’s Decision.
Factual and Procedural History
The property subject to the appeal is real property and mineral estates located in Reynolds County. Complainant, Doe Run Company, is a mining company currently selling lead concentrates, metals and alloys. The mining operations are located in southeastern Missouri in Reynolds, Iron and Shannon counties. In Reynolds County, the mining operations and/or mineral leaseholds of the company involve 39,221 acres of real property or 234 parcels. The mining properties are referred to as Brushy Creek Mine, Fletcher West Fork Mine and Sweetwater Mine[1]. The parcels are owned primarily by Complainant and BLM, although some property is owned by others. The mining activities on private owner properties and BLM properties are permitted through mineral leases. The leases permit the Complainant to explore and sever rock from the ore body as well as engage in supporting activities such as creating shafts, drifts and stopes. The mineral lease payments are in the form of royalty payments. The royalty payments are 5% of net smelter returns. Net smelter returns are the net revenue from the Complainant’s sales of lead, zinc and copper concentrates.
Complainant has property below and above ground as part of their mining operations. Above-ground, Complainant has industrial buildings and equipment for processing mineral-bearing rock and support of those activities. Below ground, Complainant has processing equipment and maintenance shops to support the necessary equipment used for severing mineral bearing rock and mining such as hauling trucks, excavating machinery and crushers.
The mining operation involves drilling into the mine face and using explosives to sever large pieces of mineral-bearing rock. The rock is loaded onto hauling trucks and transported to an underground crushing device. The rock is crushed and loaded into the haulage shaft to be transported above-ground for further processing. The rock is further crushed in an above-ground processing crusher. It is crushed and refined to a granular consistency. The granulated rock is processed chemically through floatation where the lead and other metals are separated. The resulting product for Complainant is lead, zinc and copper concentrates. The tailings are stored in tailing ponds covering several hundred acres of land.
The Respondent determined the true value of the properties to be $143,772,100, a commercially assessed value of $45,975,231. Complainant appealed their 2011 assessment to the BOE who sustained the valuation. The valuation for each parcel was:
[1] Doe Run also owns and operates Buick Mines in Reynolds County which is not subject to this appeal.
| Appeal No. | Parcel No. | TVM | Assessed Value |
| 11-82500 | 04-0.6-023-000-000-001.00000 | $69,096,940 | $22,107,321 |
| 11-82502 | 06-0.6-013-000-000-004.00000 | $57,157,580 | $18,288,060 |
| 11-82503 | 14-0.5-021-000-000-001.00000 | $5,375,910 | $1,710,941 |
| 11-82504 | 14-0.5-022-000-000-001.00000 | $6,733,610 | $2,146,417 |
| 11-82505 | 14-0.7-035-000-000-002.00000 | $5,408,060 | $1,722,492 |
| TOTAL | $143,772,100 | $45,975,231 |
Complainant filed an appeal with the Commission. The case was heard by Senior Hearing Officer Luann Johnson on March 10-12, 2015. At the hearing, the Complainant proposed a value of $60,056,000. The Respondent’s proposed value increased from $143,772,100 to $264,365,599.
| Party | True Value |
| Respondent’s True Value | $143,772,100 |
| BOE | Sustained Respondent |
| Respondent’s Proposed True Value at Hearing | $264,365,599 |
| Complainant’s Proposed True Value at Hearing | $60,056,000 |
The appeals were taken under advisement at the close of evidence. The parties submitted briefs and replies. Senior Hearing Officer issued her decision on November 3, 2015. Senior Hearing Officer found that neither party presented substantial and persuasive evidence to rebut the correct valuation by the BOE.
Valuation
The property subject to appeal includes (1) land owned by Complainant[2]; (2) improvements on land owned by Complainant; and (3) mineral interests. Property not subject to this appeal includes business personal property, Buick Mines, property owned by BLM, and other non-taxable/exempt property such as inventory.
Section 137.115 RSMo, requires that property be assessed based upon its true value in money which is defined as the price a property would bring when offered for sale by one willing or desirous to sell and bought by one who is willing or desirous to purchase but who is not compelled to do so. St. Joe Minerals Corp. v. State Tax Commission, 854 S.W.2d 526, 529 (Mo. App. E.D. 1993); Missouri Baptist Children’s Home v. State Tax Commission, 867 S.W.2d 510, 512 (Mo. banc 1993). True value in money is defined in terms of value in exchange and not value in use. Daly v. P. D. George Company, et al, 77 S.W.3d 645, 649 (Mo. App E.D. 2002), citing, Equitable Life Assurance Society v. STC, 852 S.W.2d 376, 380 (Mo. App. 1993); citing, Stephen & Stephen Properties, Inc. v. STC, 499 S.W.2d 798, 801-803 (Mo. 1973). It is the fair market value of the property on the valuation date. Hermel, Inc. v. STC, 564 S.W.2d 888 (Mo. banc 1978). Market value is the most probable price in terms of money which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeable and assuming the price is not affected by undue stimulus.
Implicit in this definition are the consummation of a sale as of a specific date and the passing of title from seller to buyer under conditions whereby:
- Buyer and seller are typically motivated.
- Both parties are well informed and well advised, and both acting in what they consider their own best interests.
- A reasonable time is allowed for exposure in the open market.
- Payment is made in cash or its equivalent.
- Financing, if any, is on terms generally available in the Community at the specified date and typical for the property type in its locale.
- The price represents a normal consideration for the property sold unaffected by special financing amounts and/or terms, services, fees, costs, or credits incurred in the transaction. Real Estate Appraisal Terminology, Society of Real Estate Appraisers, Revised Edition, 1984; See also, Real Estate Valuation in Litigation, J. D. Eaton, M.A.I., American Institute of Real Estate Appraisers, 1982, pp. 4-5; Property Appraisal and Assessment Administration, International Association of Assessing Officers, 1990, pp. 79-80; Uniform Standards of Professional Appraisal Practice, Glossary.
Approach to Value
Missouri courts have approved the comparable sales or market approach, the cost approach and the income approach as recognized methods of arriving at fair market value. St. Joe Minerals Corp. v. STC, 854 S.W.2d 526, 529 (App. E.D. 1993); Aspenhof Corp. v. STC, 789 S.W.2d 867, 869 (App. E.D. 1990); Quincy Soybean Company, Inc., v. Lowe, 773 S.W.2d 503, 504 (App. E.D. 1989), citing Del-Mar Redevelopment Corp v. Associated Garages, Inc., 726 S.W.2d 866, 869 (App. E.D. 1987); and State ex rel. State Highway Comm’n v. Southern Dev. Co., 509 S.W.2d 18, 27 (Mo. Div. 2 1974). Proper methods of valuation and assessment of property are delegated to the Commission See, Nance v. STC, 18 S.W.3d 611, at 615 (Mo. App. W.D. 2000); Hermel, supra; Xerox Corp. v. STC, 529 S.W.2d 413 (Mo. banc 1975).
Mining properties are complex to value. They may not lend themselves to the development of a single approach for valuing the property for ad valorem purposes. In this appeal, the cost approach cannot be used to value the property in its entirety because of the nature of mineral leases. Because of the unique nature of mines and quarries, which are seldom alike as they differ in ore, reserves, size, geology, depth, costs, and location, the sales comparison approach alone is not adequate. Caution should be exercised when valuing mining property using the income approach as it may capture income earned from the personal property or intangibles.
Both parties developed all three approaches to value; the parties developed those approaches differently. For example, Complainant developed a commercial property sales comparison approach to value the land and improvements but used the royalty income approach to value the mineral interest. Respondent utilized an unitary income approach to value all of the property belonging to Complainant. Respondent’s income approach was based upon income generated by the production of the concentrates and therefore included income from the entire mining operation – real property, personal property and intangibles.
The Commission reviews the valuation of the property subject to this appeal: (1) land owned by Complainant; (2) improvements owned by Complainant; and (3) Complainant’s mineral rights.
Land Valuation
Complainant owns over 20,000 acres of land in fee simple in Reynolds County. To determine the value of the land, the mineral interest was calculated separately from the other rights in fee simple. In other words, each party developed a valuation for the land without consideration for the market value of the mineral rights. To determine a land value, the appraisers considered the sub-classification of the property. Respondent’s appraiser considered the classification of the properties as set forth in Section 137.016 RSMo and the productivity value for agricultural land as set forth in Section 137.021 RSMo. The appraiser opined the value for the land by determining market values for the land in which commercial improvements and activities were located and applied the agricultural productivity values as set forth in the Missouri’s State Code of Regulations for the remaining land. Respondent classified over 16,000 acres as agricultural and graded them Grade #7. Agricultural land at Grade #7 are soils generally unsuited for cultivation and may have other severe limitations for grazing and forestry that cannot be corrected. The productivity value of the land as set by 12 CSR 30-4.010 in 2011 for Grade #7 was $75 per acre. The Respondent valued and classified over 3800 acres of land as commercial. The appraiser reviewed sales in the area and concluded on a market value of $700 per acre of land. The Respondent’s appraisers calculations are:
Acres Value
Agricultural Parcels at Grade 7 ($75) 16,566.74 $1,242,506
Commercial Parcels At $700 3853.14 $2,697,198
20,419.88 $3,939,704
Complainant’s appraiser determined that all of the land acreage should be classified and valued as commercial. He determined the total acreage to be 20,566.48. The appraiser reviewed sales of land and concluded a market value of $500 per acre. His final conclusion of market value was $10,283,240. (20,566.48 acres x $500)
The Constitution mandates that real property and tangible personal property be assessed at its value or such percentage of its value as may be fixed by law for each class and for each subclass. Article X, Sections 4(a) and 4(b), Mo. Const. of 1945. The constitutional mandate is to find the true value in money for the property under appeal. By statute real and tangible personal property are assessed at set percentages of true value in money. Section 137.115.5, RSMo – residential property at 19% of true value in money; commercial property at 32% of true value in money and agricultural property at 12% of true value in money. Under Missouri statutory law, the classification of the property is determined by the actual use put to the property. Section 137.016.1(2) RSMo. For example, property used for residential living by human occupants is classified as residential. Property used for raising and harvesting of crops or for the feeding, breeding and management of livestock is classified as agricultural property. Commercial property is all other real property not included in the statutory definitions of agricultural or residential subclasses.
The Property should be classified as commercial real property as there was no evidence presented that the land was being used for harvesting or raising of crops. The land is properly considered commercial. Mining requires a substantial amount of land and may require large acreage for the business enterprise as buffer which would be deemed excess or surplus for other commercial or industrial endeavors.
The Complainant properly classified the property as commercial. The Respondent’s evidence as to the market value of land in Reynolds County of $700 per acre is substantial and persuasive. The market valuation of the land using Complainant’s acreage figure is determined to be:
$700 per acre x 20,556.48 acres = $14,390,000 (rounded)
Improvements
The improvements on the property are commercial, industrial, manufacturing properties. Like all manufacturing properties, the property improvements have been designed for a particular business. The property’s improvements have a limited market appeal given its design and remote location.
The appraisers have developed all three approaches to value; however, the Respondent’s income approach was developed valuing the entire mining operation or a unitary approach. The most persuasive approach as to the improvements was Complainant’s approach as it values the improvements using the sales comparison approach and cost approach.
Complainant’s approach opined values for the improvements ranging from $1,179,890 to $1,272,852 through the development of the cost and sales comparison approaches to value. For the cost approach, the appraiser determined the replacement cost new using the recognized authoritative Marshall Valuation Service. The appraiser then developed depreciation for the property by reviewing sales of similar properties. The appraiser concluded on an indication of value of $1,179,890 for the improvements. The appraiser also developed an indication of value using the sales comparison method. The appraiser selected five sales of industrial properties ranging from 118,000 – 465,000 square feet. He made a qualitative comparison for an indicated range of values. The appraiser concluded on an indication of value of $1,272,852 for the improvements. The appraiser placed the most weight on the sales comparison approach and the cost approach supported his conclusion of value.
The Respondent’s appraiser also developed the cost approach for determining the value of the improvements[3]. The appraiser used the State of Arizona’s Department of Revenue’s “cost new less depreciation” as set forth in their Appraisal Manual for Centrally Assessed Valued Natural Resource Property. The appraiser opined that the valuation of the improvements was $13,727,912. The appraiser stated that 59 assets were included in the Fletcher-West Fork properties, but did not include the number of assets for the other properties. It is unknown what was included in the valuation or how the depreciation was determined. The State of Arizona’s Appraisal Manual for Centrally Valued Natural Resource Property is not recognized as an authoritative manual for appraisal practice and was designed for a particular state. It is unknown if their natural resource mining properties have any similarities or comparability to the mining on-going at the subject property. It is unknown if they are processing and manufacturing properties. It is unknown if the states ad valorem taxations are similar.
The Respondent’s appraisal provides analysis with which to review the Complainant’s appraisal. Complainant’s appraiser did not include a valuation determination for all improvements in his appraisal. As the appraiser testified, many of the improvements would have been implicitly included in his valuation. Those improvements would have included roads to access buildings, etc. Some improvements such as tailing ponds and dams were not valued. According to Complainant’s appraiser, the value of those improvements would have been negated by the remediation costs. There were improvements such as fixtures that were not valued and should have been included. Further, the appraiser should have included such items as the construction work in progress and presented a supportable position as to their market value, or stated why those items do not have a market value. These items are not maintenance of the improvements, but betterment in which the owner anticipates deriving a financial reward. The Respondent’s appraiser made a determination of value for the construction work in progress at each mine ($6,058,105, $7,200,258, and $3,007,691, or a total of $16,266,054). Complainant failed to present evidence to refute the determinations made by the Respondent.
Upon review of the appraisal approaches, and the evidence presented as to the improvement value as opined by the Complainant’s appraiser and the construction work in progress values as opined by the Respondent’s appraiser, the valuation of the improvements is determined to be $17,540,000 (rounded).
Mineral Interest
The company not only owns real property with the entire “bundle of rights” but also has interests in mineral rights in land belonging to others. Mineral interests are classified as real property, and are taxed based on the appraised fair market value. In its simplest form, fair market value is the price a willing buyer from the open market will pay for a mineral interest within the currently prevailing market conditions. Complainant’s appraiser developed an opinion of value of the leased mineral rights utilizing the Royalty Income Approach. Royalty income is based on a lease agreement in which the property owner is paid for the right to explore for mineral bodies and extract ore. General accepted appraisal procedure is to value royalty income or the receivable from the mineral estate thereby excluding the value of the business of extraction (also known as benefication of minerals). The royalty stream is capitalized for an indication of value. The appraiser used discounted cash flow and the direct capitalization methods. The appraiser used the actual lease payments in place when valuing the Complainant’s leased mineral rights; the royalty rate is 5% of value to the lessee or 5% of the net smelter return. The royalty rate was utilized to value the mineral rights leased from the privately owned properties. Royalty fees were imputed to land owned by the Complainant in fee simple to opine a value for the mineral rights of those properties.
Complainant’s methodology is substantial and persuasive as it relied more heavily on historical information of the property and it required less subjective determinations and adjustments. The royalty rate was based upon mineral leases in place and actual market rates. Complainant’s method provides for supportable segregation of the mineral rights value from the value of the enterprise producing the minerals and concentrates. In other words, capitalizing the royalty income stream captures only the income attributable to the mineral estate without capturing any of the business enterprise value attributable to the extraction of the mineral estate. Capitalizing the net operating income stream resulting from mining, handling, milling and concentrating the ore would necessarily capture business enterprise value. Personal property including severed ore, stockpiles, rolling stock and equipment and the income generated from those items should not be included in this valuation. The valuation of those items and the property tax paid on those items were not appealed and not subject to this valuation.
Although Complainant’s appraiser developed the approach utilizing both direct capitalization and discount cash flow, the appraiser relied on the discounted cash flow in his royalty income approach. The use of discounted cash flow can be problematic. The discounted cash flow requires additional assumptions and subjective determinations by the appraiser. The subjective determinations include the price of the various metals over the period of the mine. The evidence was that the price was difficult to establish and estimate. One court held: “The DCF method, as applied to tax valuation proceedings, is an amalgam of interdependent, attenuated assumptions of limited probative value.” University Plaza Realty Corp. v. City of Hackensack, 12 N.J. Tax 354 (N.J. Tax 1991), aff. 264 N.J. 343, 624 2d 1000 (App. Div.) In short, there is a great deal of guesswork that goes into a discounted cash flow analysis. The fact that some investors rely on this methodology does not increase its accuracy or reliability.
The direct capitalization approach is an appropriate and persuasive approach to capture the true value of a property on the statutorily set valuation date – January 1, 2011. As stated by the Complainant’s appraiser, “[d]irect capitalization …is applicable to level income streams, and to income streams that are anticipated to generally increase over the economic life or generally decline over the economic life. That makes Direct Capitalization applicable in this case to a generally declining royalty income stream.”
To estimate value with direct capitalization, a property’s stabilized net operating income (NOI) is divided by the market capitalization rate. The Complainant’s appraiser estimated the royalty income as to each mine as follows:
| Brushy Creek | $341,808 |
| Fletcher/West Fork | $3,794,747 |
| Sweetwater | $2,124,675 |
The next step is to apply the appropriate capitalization rate. The Complainant’s appraiser developed his direct capitalization rate after deriving his discount rate for his discounted cash flow, ie, the direct capitalization rate was developed mathematically from the discount rate. His discount rate was developed using the weighted average cost of capital (WACC). The WACC may not accurately reflect the royalty position. The royalty position has a lower risk. The evidence established that the orebody would be sustained for additional decades. The replacement of mined ore by exploration would extend the life of the mine thereby reducing the risk and should be reflected in the capitalization rate. The evidence presented in this appeal establishes that the Complainant’s appraiser overestimated the risk. Testimony and exhibits indicates that the orebody reserves and revenues are anticipated for 30 years. Further, the rate selected by the appraiser has not been sufficiently supported by any market information. The Commission is not persuaded by the testimony of the witness that the capitalization rate developed and presented is appropriate. A review of the market, government, industry information presented in both appraisals as well as the evidence presented regarding the property provides ample evidentiary basis for development of a capitalization rate of 8.5%.
The value of the mineral interest property in this appeal is $73,660,000 (rounded).
Bureau of Land Management
BLM is a federal agency which administers over 258 million acres of public lands and 700 million acres of subsurface minerals nationwide. Lands owned by the Federal Government are not subject to ad valorem taxation. (Mo. Const. Art. 3, Section 43)
Art. 3, Sec. 43 provides:
The general assembly shall never interfere with the primary disposal of the soil by the United States, nor with any regulation which Congress may find necessary for securing the title in such soil to bona fide purchasers. No tax shall be imposed on lands the property of the United States; nor shall lands belonging to persons residing without the state ever be taxed at a higher rate than lands belonging to persons residing within the state.
In and of itself, this constitutional provision prohibits ad valorem taxation of Federal property. This is in keeping with case law. Varney River Drainage Dist. v. Spidel, 152 S.W. 2d 54 (Mo. banc 1941).
Leaseholds in government owned estates are taxable if they have value. Frontier Airlines, Inc, et al. v. State Tax Commission, 528 S.W. 2d 943 (Mo. Banc 1975) A lease of tax exempt property does not have a value for ad valorem taxation purposes unless the lease has a bonus value. Bonus value exists only when the contract rent actually being paid is less than the market rent for the leased property. The evidence on the record established that the rent secured by the lease with BLM is the market rent for the leased property. There is no bonus value to the lessee under the lease.
The assessment for any severed ore body located at the BLM mining areas and the market value of that property is not before the Commission in this appeal.
The Appropriateness of Assemblage
The Respondent argues that the property should be evaluated as an assemblage. Missouri recognizes that different properties may be valued together if one is an integral part of the other and there is a marketplace for the property when sold together. Bussmann Div. of Cooper Indus. V. State Tax Comm’n of Missouri, 802 SW 2d 543 (Mo. App. E.D. 1991); P.D. George v. Daly, App. No. 99-20262 Mo. Tax Comm. 2/2/01); HYCEL Partners LLP v. Morton, App. No. 90-10798 (Mo. Tax Comm. 9/l1/93).
In Doe Run Company v. Holman, 1999 WL 1253948, App. No. 97-34016 (Mo. Tax Comm. 12/23/99) we looked at a 235 acre parcel improved with a lead smelter plant and found:
The subject smelter is not likely to be purchased on a standalone basis. Rather, its specific highest and best use is as part of an integrated lead producing company. In light of the subject smelter’s specific refining process, the subject smelter’s value is maximized where it operated in an integrated process with Missouri lead mines.
In that appeal, not only did we value the subject property along with other property to which it was fully integrated, but we valued the subject property as part of a going concern of an entire lead producing company that included assets and properties that were not included in the appeal with the subject property nor located anywhere near the subject property. The fair market value of relevant property was measured by appraising the whole property as a going concern because it derived its true value from the integrated use of the parts to perform its integrated functions and from the investors’ standpoint, generate income. Under such an approach, the appraiser estimates the value of the integrated system and allocates a portion of the value to the specific unit in question. Under the approach, the entire value of the company was determined and 25% of that value was allocated to the smelter.
In the appeal before us, we were not presented substantial and persuasive evidence of the entirety of the property as an assemblage and with a determination of allocation of the market value to the appealed assets.
Conclusion
The Commission reaches its findings based upon the evidence presented by the parties in this appeal. The evidence relied upon by the Commission to conclude a true value was substantial and persuasive. Substantial evidence can be defined as such relevant evidence that a reasonable mind might accept as adequate to support a conclusion. Cupples Hesse Corp. v. State Tax Commission, 329 S.W.2d 696, 702 (Mo. 1959). Persuasive evidence is evidence that has sufficient weight and probative value to convince the trier of fact. Cupples Hesse Corp., 329 S.W.2d at 702. The persuasiveness of evidence does not depend on the quantity or amount thereof but on its effect in inducing belief. Brooks v. General Motors Assembly Division, 527 S.W.2d 50, 53 (Mo. App. 1975). See also, Westwood Partnership v. Gogarty, 103 S.W.3d 152 (Mo. App. E.D. 2003); Daly v. P. D. George Co., 77 S.W.3d 645 (Mo. App. E.D. 2002); Reeves v. Snider, 115 S.W.3d 375 (Mo. App. S.D. 2003).
The Commission did not find the “Arizona Method” substantial and persuasive in establishing true value. The “Arizona Method” is a business enterprise approach for valuing properties utilizing discounted cash flow. It captures the business value from the extraction, production, and sales of the final product. In this method, one uses the income method to determine the value of all income producing property, including improvements, personal property, management, good will, etc. Once the valuation is concluded, the appraiser makes deductions for income not attributable to the property included in the appeal. In this appeal, after calculation of value of the business entity, Respondent made a deduction for the personal property based upon the determination of value by the County BOE. The appraiser also made a deduction for the properties not appealed. The deduction made was based upon the BOE’s conclusion of value and not utilizing a valuation methodology or a determination of value by the appraiser making the valuation determination of the entire property.
Complainant’s approach of capitalizing the royalty income stream captures only the income attributable to the mineral estate without capturing any of the business enterprise value attributable to the extraction of the mineral estate. The method provides for a supportable segregation of the mineral rights value from the value of the enterprise producing the minerals. Personal property including severed ore, stockpiles, rolling stock and equipment and the income generated by these properties were not included. By adding in the valuations of the other properties appealed, the determination only captured the valuation determinations before the Commission in this appeal and required less subjective determinations by the appraiser. The Commission found the methodology substantial and persuasive.
The evidence presented was substantial and persuasive to rebut the presumption of correct assessment and that the BOE’s valuation was erroneous. The evidence presented was substantial and persuasive to establish the fair market value of the properties that were part of the appeal. The evidence presented did not provide substantial and persuasive evidence as to the value of all the entirety of the property as an assemblage or with sufficient evidence to allocate a market value to the appealed assets.
ORDER
Complainant sought review of the value determinations of some of the properties or parcels located within Reynolds County. The parcels are parts of a larger mining operation – the appeal did not address or seek to address the valuation of all the property belonging to the Complainant. Upon review of the record and Decision and Order in this appeal, the Commission finds grounds upon which the Decision and Order of the Senior Hearing Officer should be modified. Substantial and persuasive evidence was presented in order to reach a determination of true value as to the parcels or properties before the STC in this appeal. The true value of the properties as of January 1, 2011 is set at $105,600,000; $33,792,000 assessed value.
Judicial review of this Order may be had in the manner provided in Sections 138.432 and 536.100 to 536.140, RSMo within thirty days of the mailing date set forth in the Certificate of Service for this Order.
If judicial review of this decision is made, any protested taxes presently in an escrow account in accordance with this appeal shall be held pending the final decision of the courts unless disbursed pursuant to Section 139.031.8, RSMo.
If no judicial review is made within thirty days, this decision and order is deemed final and the Collector of Reynolds County, as well as the collectors of all affected political subdivisions therein, shall disburse the protested taxes presently in an escrow account in accord with the decision on the underlying assessment in this appeal.
SO ORDERED June 28, 2016.
STATE TAX COMMISSION OF MISSOURI
Bruce E. Davis, Chairman
Victor Callahan, Commissioner
Certificate of Service
I hereby certify that a copy of the foregoing has been emailed this 29th day of June, 2016, to: Thomas Campbell, Richard Reed, County Assessor, Collector and Clerk.
Jacklyn Wood
Legal Coordinator
Contact Information for State Tax Commission:
Missouri State Tax Commission
P.O. Box 146
301 W. High Street, Room 840
Jefferson City, MO 65102
573-751-2414
573-751-1341 FAX
[1] Doe Run also owns and operates Buick Mines in Reynolds County which is not subject to this appeal.
[2] The Complainant owns land in fee simple. The value of the mineral interests will be calculated separately from the value of the other interests of the land.
[3] Respondent’s income and sales comparison approach were developed for the unit and therefore did not render an indication of value for the improvements alone.
State Tax Commission of Missouri
| DOE RUN COMPANY | ) | |
| ) | ||
| Complainant, | ) | |
| ) | ||
| -vs- | ) | Appeals 11-82500, 11-82502 thru 11-82505 |
| ) | ||
| RICK PARKER, ASSESSOR | ) | |
| REYNOLDS COUNTY, MISSOURI | ) | |
| ) | ||
| Respondent. | ) |
DECISION AND ORDER
HOLDING
Decision of the Reynolds County Board of Equalization is AFFIRMED.
An evidentiary hearing was held March 10, 11, and 12, 2015. Complainant was represented by Thomas J. Campbell and Robert Droney. Respondent was represented by Richard D. Reed. Case heard and decided by Senior Hearing Officer Luann Johnson.
ISSUE
Complainant appeals, on the ground of overvaluation, the decision of the Reynolds County Board of Equalization, setting value as follows:
| Appeal No. | Parcel No. | TVM | Assessed Value |
| 11-82500 | 04-0.6-023-000-000-001.00000 | 69,096,940 | 22,107,321 |
| 11-82502 | 06-0.6-013-000-000-004.00000 | 57,157,580 | 18,288,060 |
| 11-82503 | 14-0.5-021-000-000-001.00000 | 5,375,910 | 1,710,941 |
| 11-82504 | 14-0.5-022-000-000-001.00000 | 6,733,610 | 2,146,417 |
| 11-82505 | 14-0.7-035-000-000-002.00000 | 5,408,060 | 1,722,492 |
| TOTAL | $143,772,100 | $45,975,231 |
Complainant asserts a value of $60,056,000. Respondent asserts a value of $264,365,599; $130,028,629 for the Brushy Creek parcel no. 4-6-23-1; $89,293,556 for the Fletcher Westfork parcel no. 6-6-13-4; $13,823,238 for the Sweetwater Mill and Mine parcel no. 14-5-21-1, $17,314,283 for parcel no. 14-5-22-1; and $13,905,893 for parcel no. 14-7-35-2. The proposed values breakdown as follows:
| Appeal No. | BOE | Respondent | Complainant |
| 11-82500 | 69,096,940 | 130,028,629 | |
| 11-82502 | 57,157,580 | 89,293,556 | |
| 11-82503 | 5,375,910 | 13,823,238 | |
| 11-82504 | 6,733,610 | 17,314,283 | |
| 11-82505 | 5,408,060 | 13,905,893 | |
| TOTAL | $143,772,100 | $264,365,599 | $60,056,000
($48,500,000 capitalized royalties and $11,556,000 surface improvements) |
Discussion of Valuation Problems/Interests
The property is composed of (1) surface land; (2) surface improvements; (3) ore body-leasehold interest; (4) mineral rights-leased fee interest; and (5) underground improvements.
The surface land is owned by Complainant, private individuals and the Bureau of Land Management (BLM). The royalties (mineral rights) paid for the right to mine are 5% of net smelter returns (NSR). As Complainant points out, the royalties can be compared to rents. Thus, they can be capitalized to determine the value of the leased fee interest. In the case of BLM, this interest is exempt from taxation. However, the leasehold interest in the ore body would be taxable.
The surface also has mining improvements. The mining improvements cannot be valued under the sales comparison approach because there are no sales of similar mining improvements. The improvements are super-adequate for any other use, but are not super-adequate for mining purposes. There is no functional obsolescence for highest and best use but significant functional obsolescence if they were to be converted to a secondary use. Additionally, there are significant environmental problems that would have to be corrected for conversion to a secondary use but no environmental problems associated with the highest and best use.
Because of its direct ownership or because of leases, the ore body below ground belongs to Complainant. The ore body is separate and apart from the surface estate and is totally taxable to Complainant regardless of the ownership of the surface estate. There are three components of the ore body: (1) proven and probable; (2) measured and indicated, and (3) inferred (Ex. A-1, p. 23). The “proven and probable” is that portion that is expected to be reached through the mining process. However, proven and probable changes as exploration, testing and mining opens up new mining possibilities. For ad valorem purposes, the entire value of the ore body on the tax day is taxable. But, market conditions, depletion and further exploration causes the value of the ore body to be constantly changing.
The final valuation problem is the underground improvements. These consist of passageways created by the actual mining process and various enlargements/expansions created to make these areas more functional. The value/expense of these improvements runs to Doe Run – the ore body owner, not the surface land owners. Thus, it is not appropriate to offset the costs of these improvements against any royalty paid to the surface owners. To properly account for the costs and value of these improvements, they must be offset against the income derived from the ore itself.
The uniqueness of the property makes a sales comparison approach impossible. Likewise, the cost approach is not possible because not only are the improvements older but there are no sales available to test depreciation. The only possible approach to value is the income approach. The only income available is the income from the royalties (mineral rights) and the income generated by the business (surface improvements, ore body, underground improvements). By deducting the royalties (and other expenses) from the income generated by the business, we determine the income of the business. But, as Complainant points out, this potentially includes an element of intangible value, not included in transmissible value, which would not be taxable under Missouri law.
Methodologies
Central to the determination of value is the determination of the proper methodology to use to reach value. Respondent advocates using the same methodology used to centrally assess mines in Arizona, which measures historic profit from the sale of concentrates. Complainant argues that the Arizona method measures value in use. Complainant further argues that the appropriate way to measure value in exchange is by calculating the market value of the real property, the market value of the improvements, and the market value of the ore body.
Applicable Appraisal Principles
- “Utility, industrial, commercial, railroad and other real property”, [includes] all real property used directly or indirectly for any commercial, mining, industrial, manufacturing, trade, professional, business, or similar purpose, . . .All other real property not included in the property listed in subclasses (1) and (2) of section 4(b) of article X of the Missouri Constitution, as such property is defined in this section, shall be deemed to be included in the term “utility, industrial, commercial, railroad and other real property. Section 137.016(3).
- All rights and interests in or to oil, gas or other minerals underlying land, whether created by or arising under deed, lease, reservation of rights, or otherwise, which rights or interests are owned by any person other than the owner of the land, shall be assessed and taxed separately to the owner of such rights or interests in the same manner as other real estate. The taxes on such rights or interests which are not owned by the owner of the land shall not be a lien on the land. Section 259.220.
- “[T]he general rule [is] that mineral deposits are not to be valued separately and are considered only to the extent which they enhance the land’s value, but . . .[t]he values are to be separately stated if the surface and mineral rights have been severed into separate estates.” State ex rel. State Highway Comm’n of Missouri v. Foeller, 396 S.W.2d 714, 719 (Mo.1965); P. Green Refractories Co. v. Duncan, 659 S.W.2d 19, 21 (Mo.App.1983); City of Blue Springs v. Central Development Ass’n, 831 S.W. 2d 655 (Mo. App. 1992).
- Property is to be valued at its true value in money (market value). Section 137.115 RSMo. “Ad valorem property taxation is the oldest form of taxation used by states and localities for collecting revenue. The tax base is usually defined as the market value of reserves. This market value depends on the quantity of reserves remaining in the deposit and the average grade at the time of assessment.” Taxation of Mineral Resources, Conrad and Hool, 1980, p. 40. (Resp. Ex. 6)
- “Because subsurface minerals can never be fully and absolutely quantified until they are extracted, and their extent and quality are subject to many variations, appraisers should recognize the risks and uncertainties associated with mineral properties. It is also important to remember that the activity of mineral extraction is a business activity and the real property interests must be separated from those of a business.” The Appraisal of Real Estate, 14th Edition, Appraisal Institute, 2013, p. 217.(Resp. Ex. 42).
- “Mineral rights cover the underground portion of the land and usually refer to the right to extract underground minerals or to use underground caverns or reefs for storage.” The Appraisal of Real Estate, 14th Edition, Appraisal Institute, 2013, p. 362. (Resp. Ex. 42).
- The “Arizona method”, where the present value of the operation is calculated on the basis of estimates of reserves and production, is a feasible methodology for valuing mining assets. Instead of projecting prices and costs, a profit-margin formula is used to convert the extraction profile into an income stream which is then discounted to obtain the present value. The profit margin formula is based on the average margins for the preceding five years to even out fluctuations. While this method has a