UPDATED december 2018
Seneca Sustainable Energy, LLC v. Department of Revenue
Seneca Sustainable Energy, LLC v. Department of Revenue, (TC 5193, 5208) (S064613)
On appeal from a judgment of the Oregon Tax Court, Henry Breithaupt, Judge. 22 OTR 263 (2016). The judgment of the Tax Court is affirmed.
The Supreme Court held that the Tax Court had jurisdiction to hear challenges by Seneca Sustainable Energy, LLC, to the Department of Revenue’s determinations of the real market value of its industrial property, that Seneca had standing to bring those challenges, and that the Tax Court was correct to determine that the department’s appraisal supporting its real market value determination of Seneca’s industrial property for 2012-2013 was erroneous, insofar as it relied on above-market rates that Seneca received under a power purchase agreement with one of its customers. Further, it affirmed the Tax Court decision setting the real market values of Seneca’s industrial property on the assessment dates at significantly lower amounts that the department’s valuations.
Seneca began operating a biomass cogeneration facility in Eugene, Oregon, in 2010. Before the facility was completed, Seneca entered into a power purchase agreement with Eugene Water and Electric Board (EWEB), which, among other things, set the rates that EWEB would pay for electricity. Seneca’s facility is located in an enterprise zone, and Seneca sought and obtained from the enterprise zone sponsors an exemption from taxes on certain of its industrial property for the first three years of its operation. The exemption was granted under certain conditions, including the condition that Seneca pay a public benefit contribution if it failed to meet certain economic and development goals. The public benefit contribution was calculated as a percentage of the property taxes that Seneca would have had to pay if its industrial property had not been tax exempt, and the amount of property taxes due, in turn, was calculated based on the department’s determination of the real market value of Seneca’s industrial property.
Seneca failed to meet its economic and development goals in tax year 2012-2013 and again in tax year 2013-2014, and for each of those years, the zone sponsors imposed public benefit contributions based on the department’s real market value determinations. Seneca considered the real market value determinations in those years to be excessive and filed actions in the Tax Court to challenge those determinations. The department filed a motion to dismiss the actions on the ground that the Tax Court did not have jurisdiction to hear the challenges, insofar as Seneca was actually challenging the imposition of the public benefit contributions by the enterprise sponsors and that type of claim did not arise out of the tax laws of the state. The department also argued that Seneca did not have standing to bring its claims, because it was not a taxpayer and it was not aggrieved by an action of the department, insofar as it was exempt from taxation. The tax court ruled that it did have jurisdiction over Seneca’s challenges to the real market value determination and that Seneca had standing to bring its claims.
The Tax Court conducted a trial on the merits of Seneca’s claims, during which the parties submitted appraisals of Seneca’s industrial property to support their respective views on an appropriate real market value determination. The department’s appraiser based his determination of real market value on his understanding that the rates set out in Seneca’s power purchase agreement with EWEB were rates that a purchaser of the facility could expect to receive for electricity during the tax years at issue and into the future. Seneca presented evidence that, for various reasons, as of the assessment dates, the power purchase agreement produced revenues significantly above what a purchaser of the property on those dates could have obtained. The Tax Court agreed with Seneca and found, as a factual matter, that, because of changes to the market after Seneca had entered into the power purchase agreement, the rates in the power purchase agreement would not have been available to a purchaser of the facility as of the assessment dates. The Tax Court also found that the department’s appraisal contained certain significant errors and adopted an incorrect approach, which rendered it unpersuasive. The Tax Court generally agreed with Seneca’s approach and set real market values for the property consistent with that approach.
The department appealed the Tax Court’s determination of the real market value of Seneca’s cogeneration facility to the Supreme Court, arguing that the Tax Court erred in denying its motion to dismiss Seneca’s complaints and that the Tax Court erred in determining the real market value of Seneca’s industrial property without reference to the terms of the power purchase agreement.
In a unanimous opinion authored by Justice Adrienne C. Nelson, the Supreme Court affirmed the decisions of the Tax Court. With respect to the department’s procedural arguments, the Court held that the Tax Court had had jurisdiction over Seneca’s claims for relief – a determination that the real market value did not exceed a certain value and an order requiring the department to place the correct real market value on the tax rolls – because both those claims arose under the tax laws of the State of Oregon. Further, it ruled that Seneca had standing to bring those challenges, because it was a “taxpayer” for purposes of the tax laws, even if most of its property was exempt from taxation, and it was “aggrieved and affected’ by the department’s real market value determination, because that determination affected the amount of property tax that Seneca had been required to pay on its non-exempt industrial property.
Regarding the determinations of the real market value of Seneca’s property, the Court agreed with the Tax Court’s conclusion that it was inappropriate to consider the power purchase agreement between Seneca and EWEB. The value of intangible contract rights cannot be taken into account to the extent that they produce returns in excess of those obtainable in the market. The Tax Court had found as a fact that the agreement did not reflect market rates as of the assessment dates, and the Court accepted that factual finding because it was supported by substantial evidence in the record. The Court also noted that the Tax Court had concluded that the department’s appraiser had made other serious errors in valuing Seneca’s property, which made the department’s appraisal unpersuasive, and that the department had not challenged that conclusion on appeal. Because many of the department’s arguments were predicated on its contention that its appraiser correctly determined that Seneca’s power purchase agreement with EWEB reflected market rates, and because the department’s appraisal contained other serious errors, the Court affirmed the Tax Court’s real market value determinations for Seneca’s industrial property.
Cynthia M. Fraser
Garvey Schubert Barer P.C.
American Property Tax Counsel (APTC)