[Transcript pp. 397-403; Exhibit BTM-A, p. 0005; Exhibit BTM-1, p. BTM 055 (three entries must be combined for Mr. Coates’ value)]. The County Board could see that the administration building was not an inexpensive building even when originally constructed, and that the reproduction cost/trended historical cost calculated by Mr. Coates is substantially higher than that of Mr. Hendrix. The principal difference in the final values lies in the long application of depreciation by Mr. Coates, who chooses to ignore the market indicator of the 1998 sale. There was substantial evidence from which the County Board could have concluded that the value calculated by Mr. Hendrix, anchored in a professional allocation based upon a recent sale value, was more reliable than the reduced value claimed by Mr. Coates, as buttressed by Mr. Zabel. (We have taken depreciation into account in reaching our conclusion. Depreciation addresses the steps from trended historical cost to final value, and is considered in detail below.)

ISSUES RELATED TO PHYSICAL DEPRECIATION AND FUNCTIONAL OBSOLESCENCE

36.     Where the depreciated value of improvements to land is estimated by a cost approach, depreciation must be applied “beginning at the first assessment date after the property is acquired.” Rules, Wyoming Department of Revenue, Chapter 9, § 6(b)(iv)(C). For personal property, depreciation “means a loss of utility and hence value from any cause. Depreciation may take the form of physical depreciation, function obsolescence, or economic obsolescence.” Rules, Wyoming Department of Revenue, Chapter 9, § 6(b)(v)(D). Physical depreciation “means the physical deterioration as evidenced by wear and tear, decay or depletion of the property.” Rules, Wyoming Department of Revenue, Chapter 9, § 6(b)(v)(D)(I). Although the Department Rules contemplate that the Ad Valorem Tax Division will provide tables of depreciation, “Other rates of depreciation may be developed by the appraiser.” Rules, Wyoming Department of Revenue, Chapter 9, § 6(b)(iv)(A).

37.     Functional obsolescence “means the impairment of functional capacity or efficiency, which reflects a loss in the value brought about by such factors as defects, deficiencies, or super adequacies, which affect the property item itself or its relation with other items comprising a larger property.” Rules, Wyoming Department of Revenue, Chapter 9, § 6(b)(v)(D)(II).

38.     Mr. Hendrix accounted for physical depreciation by using a single declining balance method of depreciation based on assigned service lives. [Transcript p. 361]. Mr. Hendrix applied the depreciation percentage for each asset against trended historical costs. [Transcript pp. 352, 358-360]. Mr. Hendrix used a residual value of thirty percent (30%). His residual value was based on the research and experience of Thos. Y. Pickett & Co., Inc. [Transcript pp. 358, 381].

39.     Mr. Coates determined annual physical depreciation and functional obsolescence percentages based on his own analysis of sales data. [Transcript pp. 192-193, 206-209]. The sales data includes sales made by Thunder Basin, sales made by other mining companies, and information from equipment resellers. [Transcript pp. 206-209]. Of nearly one hundred data points catalogued by Mr. Coates, seventy are from sales of Thunder Basin equipment in 2000. [Exhibit BTM-1, pp. BTM 049-051]. Another twenty-six are sales by Peabody (another producer) in 1999 and 2000. [Exhibit BTM-1, pp. BTM 049-051]. So, almost all of Mr. Coates’ data was based on equipment recently taken out of service at two mines. Mr. Coates plainly considered these items to be a sound representative sample to apply to the 1400 items being valued [Thunder Basin Proposed Findings, ¶ 35], but this point was assumed, not demonstrated. Using this universe of information, Mr. Coates established residual values ranging between six (6%) and twenty-four percent (24%). [Exhibit BTM-1, pg. 29].

40.     The Rules of the Department state that, “[t]he residual value shall be considered to be 25% for all personal property, unless the property tax appraiser has collected sufficient market information to indicate a different residual value.” Rules, Wyoming Department of Revenue, Chapter 9, Section 6(b)(iv)(D). Neither appraiser used the mandated 25%. Nonetheless, there is substantial evidence in the record for the County Board to accept the Assessor’s value, in the form of the expert testimony of Mr. Hendrix. Mr. Coates argued that his analysis justified use of residual values below 25% [Transcript p. 206], but it was up to the County Board to accept or reject that testimony.

41.     Mr. Hendrix specifically accounted for functional obsolescence in the calculation of his “eco factor,” which we discuss below. Infra, ¶ 97. He also testified that his calculation of reproduction cost new effectively took some functional obsolescence into account. [Transcript pp. 365-366]. We note that some of the arguments concerning functional obsolescence are controlled by our ruling for tax year 2001, Thunder Basin 2001 Appeal, id., ¶ 41, based on similar testimony for the two years. Therefore, there is substantial evidence in the record to support the County Board’s decision both based on our ruling in the previous appeal, and for reasons that follow.

ISSUES RELATED TO THE ECONOMIC OBSOLESCENCE COMPONENT OF THE COST APPROACH

42.     The Department’s Rules specifically define economic obsolescence, and in doing so, specifically address the measurement of economic obsolescence. Rules, Wyoming Department of Revenue, Chapter 9, § 6(b)(v)(D)(III). The analysis required by the Department’s Rules answers two questions at once: whether there is economic obsolescence, and if so, how much.

The methods to measure economic obsolescence may include, but are not limited to:

(1.) Capitalization of the income...attributable to the negative influence;

(2.) Comparison of sales of similar properties which are subject to the negative influence with others which are not;

(3.) Identification of factors specifically analogous to the property, i.e., investments, capacities, and/or industry relationships.

Rules, Wyoming Department of Revenue, Chapter 9, § 6(b)(v)(D)(III). The second and third methods are not at issue in this case.

43.     The Department’s Rules are grounded on established appraisal principles. One recognized authority describes the measurement of economic obsolescence this way:

Two methods can be used to measure external [economic] obsolescence. The appraiser should select the procedure that is best supported by market evidence. The appraiser can either 1) capitalize the income or rent loss attributable to the negative influence, or 2) compare sales of similar properties that are subject to the negative influence with others that are not...

The Appraisal of Real Estate (10^th Edition), Appraisal Institute (1992), p. 358.

44.     Generally speaking, the capitalized income method estimates economic obsolescence as a shortfall in income, by comparing (1) actual operating income from the operating assets of a firm with (2) the operating income that would be expected from the same assets in the absence of the impairment. The expected operating income is determined by multiplying the value of the operating assets of the firm by a capitalization rate. See: Property Assessment Valuation, 2d. Edition, International Association of Assessing Officers (1996), p. 173-174.

45.     The County Board found that Mr. Coates calculated economic obsolescence “by using a capitalized income shortfall method.” [County Board Findings, ¶ 24].

46.     In contrast, Mr. Hendrix calculated economic obsolescence with an amalgam of four approaches. Regrettably, Mr. Hendrix identified these approaches as “Cost Approach #1, Cost Approach #2, Income Approach #1, and Income Approach #2.” [Exhibit BTM-B, p. 0025]. The names of these approaches are unfortunate because the names may be easily confused with the Appraisal Methods authorized by the Department. Supra, ¶ 5. They instead represent components of a single step in the Cost Approach, which is one authorized Appraisal Method. Id. at ¶ –. However, we recognize the second of the four approaches used by Mr. Hendrix, his “Cost Approach #2,” as the capitalized income method. [Exhibit BTM-B, p. 0026].

47.     We will be analyzing the capitalized income method calculations of the two appraisers. It follows that we will be concerned only with the capitalized income method component of Mr. Hendrix’ calculation of economic obsolescence. By limiting our analysis in this way, we serve two purposes. First, we consider the record from the perspective of a method for measuring economic obsolescence that is specifically authorized by the Department’s Rules, and recognized by established appraisal theory. Supra, ¶¶ 42-43. Second, we can pursue a meaningful comparison of the calculations of the two appraisers.

48.     In this case, Mr. Coates and Mr. Hendrix described their respective capitalized income calculations with commendable clarity. However, we will conclude that neither calculation was entirely correct. In doing so, we note that Mr. Coates and Mr. Hendrix appeared before the County Board as experts. The purpose of an expert is to assist, not to supplant, the trier of fact. See: Wyoming Rules of Evidence, Rule 702. To generally find that the Assessor’s valuation should be sustained, the County Board had to carefully evaluate the details of the competing opinions, and reach a conclusion that did accept the entire opinion of either Mr. Coates or Mr. Hendrix.

Calculating the Value of Thunder Basin Assets

49.     Both experts began the economic obsolescence calculation with a depreciated value for assets. In both instances, this value was the previously calculated value for reproduction cost new less depreciation (RCNLD). These are the assets which produce operating income, and against which the capitalization rate is applied. The respective calculations of this figure were:

Supra, ¶ 19. The difference between the two values is $53,713,539. As we shall see, this starting point will affect all subsequent aspects of the calculation of economic obsolescence. The County Board clearly preferred the value calculated by Mr. Hendrix, and we have found that the County Board’s preference is supported by substantial evidence. It follows that Mr. Coates’ RCNLD value would be one ground for rejecting the economic obsolescence calculation of Mr. Coates.

Calculating a Capitalization Rate

50.     Both experts developed a capitalization rate. The Rules of the Department define “capitalization rate,” and prescribe the limits of an acceptable method of deriving the rate:

(c) “Capitalization rate” is a ratio between anticipated future income, either accounting income or cash flow and present value. Capitalization rates can be derived from any income level, but once they have been so derived they can only be applied to a comparable income level. Such rates may be developed by generally accepted appraisal methods, to include but not be limited to the following:

(ii) By deriving a weighted average for the cost of debt and equity capital, as reflected in appropriate money markets (band-of-investment method), and adding increments, when appropriate, for expenses that are excluded from outgo because they (expenses) are based on the value that is being sought or the income that is being capitalized. The rates of debt and equity capital shall be weighted by the respective proportion of such capital usually employed by typical prospective purchasers and a capital recapture rate added.

Rules, Wyoming Department of Revenue, Chapter 9, § 4(c). The language of the Rule is regrettably difficult. The derivation of the capitalization rate is much easier to see if we consider what each of the experts actually did. In form, both appraisers are consistent with the Department’s Rule.

51.     Mr. Hendrix turned to Ibbotson Associates, a familiar published source of information regarding cost of capital for Thunder Basin’s industry. [Transcript p. 368]. Mr. Hendrix prepared a band of investment based on the relative weight of debt and equity in the capital structure of a typical industry participant. [Transcript p. 368]. From his published source, Mr. Hendrix then looked up a capital rate for debt and equity, respectively. [Transcript p. 368]. He then did the standard calculation: he multiplied the percentage of debt times the typical percentage rate for debt to get a typical weighted cost of debt, and repeated that calculation for equity. Finally, he added the weighted cost of debt to the weighted cost of equity to calculate an overall capitalization rate. In summary, this was the calculation:

[Exhibit BTM-B, p. 0026, 0028; Transcript p. 368].

52.     Mr. Coates turned to another familiar published source, Value Line Investment Survey Data. Mr. Coates derived his band of investment from the details of debt and equity information of companies situated similarly to Arch Minerals, rather than typical industry participants. He next prepared the same information using information specific to Arch Minerals. Unlike Mr. Hendrix, Mr. Coates then added a recapture rate to each calculation; we will consider this below. Finally, Mr. Coates selected a rounded midpoint between the results for his sample companies, and for Arch Minerals. The calculation is slightly more complex than that of Mr. Hendrix:

[Exhibit BTM-1, p. BTM 037]. As we shall demonstrate shortly, a higher overall rate is more desirable for the taxpayer in an economic obsolescence calculation. A higher overall rate will increase the expected return from a given set of assets, and hence result in a greater shortfall when compared to actual operating revenue.

The Recapture Rate Component of the Capitalization Rate

53.     Most of the difference between the two capitalization rates lies in the recapture rate that Mr. Coates has included in his capitalization rate. Without the recapture rate, the weighted cost of capital computed by Mr. Hendrix (12.9%) is more favorable to the taxpayer than that computed by Mr. Coates (18.0% less 6.67%, or 11.33%), by 1.57%.

54.     The recapture rate is not defined in the Rules of the Department. Mr. Coates testified to his opinion of the purpose of the recapture rate:

Q. And so what is the recapture rate actually allowing you to recover?

A. That’s the return of investment. For example, let’s say somebody invested $100,000 in piece of machinery and the estimated life is 10 years. He would recover 10 percent per year, so the recapture rate would be 10 percent.

Q. Is this a well-recognized appraisal theory?

A. Yes, it is. Particularly when you’re valuing depreciable property.

[Transcript p. 224]. Mr. Coates described recapture in a way that sounds a lot like depreciation, but did not describe what relationship recapture has to depreciation. The explanation is easier to understand when we consider what the appraiser actually did.

55.     Mr. Coates derived his recapture rate by assuming that the mine had a remaining life of fifteen years, then simply divided fifteen into one hundred percent to determine what percentage of investment had to be recovered each year to fully recover the investment (i.e., 100/15=6.67%). [Transcript p. 223; Exhibit BTM-1, p. BTM 037]. Mr. Coates implicitly assumed that the assets being valued for tax purposes would be worthless after fifteen years, so that the only way for Thunder Basin to recover its investment in those assets would be from an annual income stream.

56.     Mr. Coates’ assumption that the assets of Black Thunder Mine will have no value after fifteen years is contrary to the record. At the very least, we know that any specific piece of equipment at the Black Thunder Mine will either have reached its residual value, or will have a remaining value greater than its residual value. ¶¶ 17, 38-40. We know that the Black Thunder Mine was recently included in a transaction worth $1.14 billion. [Exhibit BTM-22]. We know that Thunder Basin has mining plans that extend to 2024, that is, plans that extend beyond the fifteen years used by Mr. Coates. [Exhibit BTM-L].

57.     For perspective, we turn to a standard explanation of recapture. Investment capital may be recovered (recaptured) through resale of the property at the termination of the investment. The Appraisal of Real Estate, 10^th Edition, Appraisal Institute (1992), p. 416. If the value of a property does not change between the time of the initial investment and the time the property is sold, the investor can recapture all of the capital invested at the time of sale. Id. In other words, if the value of the property does not change between the initial investment and the eventual sale of the property, the recapture rate should be 0%. An income stream to cover return of investment, in the form of a recapture rate, only becomes necessary if the property value is expected to decrease over time. Id.

58.     In making sense of the recapture rate, it is important to focus on the objective of the capitalized income method for measuring economic obsolescence. We are attempting to compare actual income and expected income. To do an accurate comparison, we have to know how a return is being computed.

59.     There are two ways to look at income in Mr. Coates’ example of the $100,000 piece of machinery with a ten year life. Let us assume that the machine brings in $20,000 of revenue each year, and that it deteriorates at a uniform rate of 10% per year (or $10,000), becoming worthless at the end of the tenth year. If we ignore the annual deterioration in value, the machine is bringing in a 20% return overall ($20,000/$100,000). However, calculating a return in this way ignores the distinction between return on and return of investment. If we do not include a recapture rate of 10%, or a mathematical equivalent such as physical depreciation, we will be mistaken about the return on the investment because we will fail to account for return of investment capital. If we instead subtract $10,000 from our revenues each year to account for the reduction in value of the machine, we will be recovering our investment over time. However, our annual return will be only 10% (i.e., ($20,000-$10,000)/$100,000).

60.     A recapture rate is needed to make a correct comparison of actual and expected income when the calculation of actual income does not provide for return of investment through depreciation. This directs our attention to a significant difference between the actual income calculations of the two appraisers. Mr. Hendrix takes a net operating income figure directly from the profit and loss statement for the Black Thunder Mine, as reflected on a pollution control exemption form. Mr. Hendrix’ net operating income figure includes a deduction for depreciation. Infra, ¶ 78. Mr. Coates starts with the same profit and loss information to calculate a net operating income, but does so in a way that stops short of using the amount listed for depreciation. Infra, ¶¶ 63-66.

61.     Based on these facts, both appraisers were consistent with sound appraisal theory, in view of the different ways that each treated depreciation. Mr. Coates was consistent with sound theory when he used a recapture rate, because he did not subtract depreciation from Direct Operating Income. Mr. Hendrix was consistent with sound theory when he excluded recapture from his capitalization rate, because his net operating income figure reflected a deduction for depreciation.

Expected Income

62.     To compute the income against which actual income will be measured, both appraisers multiplied reproduction cost new less depreciation (RCNLD), supra ¶ 19, by the capitalization rate, supra ¶¶ 50-61. Mr. Coates refers to this as required income, and Mr. Hendrix refers to this as expected income, but the result for both appraisers is to state the income against which actual income will be measured. These are their respective calculations:

[Exhibit BTM-1, p. 033b; Exhibit BTM-B, p. 0026; Transcript pp. 368-369].

Comparing the Calculations of Actual Income

63.     Mr. Coates and Mr. Hendrix calculated the actual operating income of Thunder Basin from essentially the same information, which is a profit and loss statement of Thunder Basin for calendar year 2001. [Exhibit BTM-1, pp. 043 (a monthly statement for December, including year-end information); Exhibit BTM-E (a summary of year-end information for four years)]. Mr. Hendrix relied on this information as it appeared on the pollution control exemption form filed by Thunder Basin. [Exhibit BTM-9] A comparison of the pollution control exemption form and the pertinent profit and loss statements shows that the data content of these documents is essentially the same. [Exhibit BTM-1, p. 043; Exhibit BTM-9]. However, the formats of the profit and loss statements and the pollution control exemption form differ with respect to capitalized expense.

64.     We cannot reproduce the confidential details of these documents here, which constrains our discussion. However, the calculations used by Mr. Coates and Mr. Hendrix to reach a net annual income figure were not marked confidential. We will review the appraisers’ calculations in turn, identify the issues raised by the different approaches, and resolve the issues after comparing the two approaches.

A. Mr. Coates’ actual income calculation

65.     Mr. Coates began with a total annual income from operations, which was taken directly from the profit and loss statement. He then subtracted amounts for Total Direct Cash Costs and Total Other Cash Costs (rounded slightly). The source of these amounts was the profit and loss statement. The result of his calculation was an amount for Income Less Direct Operating Expenses.

66.     Mr. Coates then reduced this income amount by subtracting (1) amounts for income attributed to coal reserves, and (2) income attributed to working capital, net of parts and supplies. This adjustment was made by taking book values for the two items, and deriving an expected income for each item by use of a risk-free rate for capital (rather than the capitalization rate described above, supra, ¶ 52). The end result is a figure for Net Annual Income Attributed to Improvements. In summary form, this is Mr. Coates’ calculation:

Coates calculation of actual income

                     * Book value, $345,326,000, times 7.50% risk free rate

                     **Book value, $75,664,600, times 7.50% risk free rate

[Exhibit BTM-1, p. BTM 033b; Transcript pp. 213-219]. As we noted in our discussion of the recapture rate, Mr. Coates does not make any deduction for depreciation, although an entry for depreciation appears on the profit and loss statements. Supra ¶ 60.

67.     From our review of this calculation, we conclude that the use of both deductions was incorrect, and that there is substantial evidence to support the County Board’s rejection of Mr. Coates’ calculation.

68.     The deduction for coal reserves is incorrect because economic obsolescence is allocated to improvements:

...In the cost approach the total loss in value due to economic obsolescence is allocated to the improvements. Therefore, an appraiser must first estimate the income attributable to the improvements. Then the income imputable to the improvements is capitalized at the building capitalization rate to estimate external obsolescence.

The Appraisal of Real Estate, 10^th Edition, Appraisal Institute (1992), p. 358.

69.     If Thunder Basin wants to account for the contribution of coal reserves to economic obsolescence, it must do so as an allocation of economic obsolescence between “coal lands and mineral rights” (this is the description of the assets in Thunder Basin’s books) on one hand, and the personal property of the mine on the other, after economic obsolescence has been measured. The Appraisal of Real Estate, 10^th Edition, Appraisal Institute (1992), pp. 358-359. Such an allocation must follow both the calculation of actual income, and the comparison of actual and expected income to determine whether there is economic obsolescence. Mr. Coates’ approach conflicts with recognized authority, and the County Board could properly have given little weight to his expert testimony on this point.

70.     There is another difficulty with Mr. Coates’ coal reserves calculation. Generally speaking, a correct calculation requires the use of a value that is stated in terms comparable to RCNLD for personal property. There is nothing in the record to show that the book value of coal lands and mineral rights reflects a current (lien date) market value, as RCNLD does. Further, Thunder Basin redacted information about the market value of the coal reserves from the Pricewaterhouse Coopers LLP appraisal [Exhibit BTM-2], so we cannot tell how closely book value relates to a recent appraised market value.

71.     The principal problem with the working capital deduction is different. Mr. Coates reached his figure for Income Attributed to Working Capital, net of parts and supplies, by reference to three items in the Thunder Basin books. He began with the book value for Current Assets; subtracted a subtotal book value for Repair Parts and Supplies; and subtracted the book value for Total Current Liabilities. Superficially, the result is the difference between current assets and liabilities, exclusive of repair parts and supplies.

72.     Mr. Coates’ calculation masked the fact that the book value for Current Assets includes a value of over one hundred million dollars in an entry entitled, “total investments, intercompanies [sic].” [Exhibit BTM-1, p. BTM 047]. In other words, Mr. Coates buried a very large investment in his Working Capital calculation.

73.     The only revenues taken into account by Mr. Coates and Mr. Hendrix were revenues related to coal operations. [Exhibit BTM-1, p. BTM 043]. The revenues used for valuation did not include revenues from outside investments, or from operations unrelated to coal. To evaluate Mr. Coates’ calculation of Capital Assets, the County Board needed to know what income is associated with the large intercompany investment. If, for example, the intercompany investment were in parent company stock that was being held in anticipation of capital appreciation, the anticipated return would be independent of coal operations, and anticipated from a source other than coal operations.

74.     Thunder Basin had the burden to demonstrate that coal revenue income should be associated with this investment of over one hundred million dollars. Mr. Coates made no such demonstration in his testimony. [Transcript pp. 219-220]. In his report, he merely asserted that he was eliminating “income attributed to components not subject to ad valorem taxation.” [Exhibit BTM-1, p. BTM 014]. Where the income attributable to a specific component is not included in the revenues used for an income method, an adjustment should be made. In this case, one correct approach is to ignore that component entirely. Based on the explanations offered by Mr. Coates, the County Board could have properly concluded that Mr. Coates’ Income Attributed to Working Capital should neither have been deducted nor allocated, and given little weight to Mr. Coates’ testimony on this point.

75.     If the intercompany investment is eliminated from the current liabilities Mr. Coates used to reach his book value of $75,664,600, Thunder Basin’s current liabilities exceed its current assets. The Working Capital calculated using Mr. Coates’ method would be a negative number.

76.     We can now consider the effect of these two changes, even without any adjustment to the recapture rate to account for sale of assets at the end of fifteen years. If the deductions related to coal reserves and working capital are eliminated, economic obsolescence is likewise eliminated. Actual income exceeds expected income:

Coates calculation of actual income, revised

                     * entered as zero

                     **entered as zero

Revised form of Coates Calculation of Actual Income ¶¶ 62, 66, supra. Since there is no economic obsolescence, there is nothing to allocate.

B. Mr. Hendrix’ actual income calculation

77.     Mr. Hendrix began his calculation with information from the pollution control exemption form used by Campbell County and filed by Thunder Basin. [Exhibit BTM-9; Transcript pp. 370, 377]. This form begins with an amount for total income. This total income is the same as the Total Annual Income from Operations used by Mr. Coates, i.e., $328,734,000, supra, ¶ 66. The form then calls for listing of Total Direct Operating Expenses (this total of direct operating expenses differs from the Direct Operating Expenses of Mr. Coates, by the amount of an item entitled “capitalized expense”). The form next calls for a subtotal entitled Total Income, less Direct Operating Expenses.

78.     To reach a final figure for profit, the form calls for Total Indirect Operating Expenses, an amount which includes $26,130,000 for depletion of the coal reserve, and depreciation. These Total Indirect Operating Expenses are subtracted from Total Income, Less Direct Operating Expenses. The result is Total Company Reported Net Operating Income (NOI) – $12,453,000. This last figure is the same as the final Profit/Loss figure on the profit and loss statement. [Exhibit BTM-1, p. BTM 043]. That is, the bottom line on the profit and loss statements is the same as the bottom line on the pollution control exemption form.

79.     Unlike Mr. Coates, Mr. Hendrix began his calculation with the bottom line profit, as reported on the pollution control exemption form. Mr. Hendrix then made two adjustments. [Transcript p. 370]. First, he added back the amount for depletion, to calculate an adjusted net operating income. Second, he subtracted 24% of that total as an estimated federal income tax (FIT) expense. He refers to the final result as 2001 Final Adjusted Net Operating Income. In summary form, this is Mr. Hendrix’s calculation:

Hendrix calculation of actual income

[Exhibit BTM-B, p. 0026]. This compares with Mr. Coates’ Net Annual Income Attributed to Improvements, or $26,759,705, supra, ¶ 66. The calculation of Mr. Hendrix raises three issues.

80.     The first issue is whether or not Mr. Hendrix has improperly included an amount related to capital investment. [See Thunder Basin Proposed Findings, ¶ 81]. Mr. Hendrix used Direct Operating Expenses taken from the pollution control exemption form. Mr. Coates calculated Direct Operating Expenses by reference to Thunder Basin’s profit and loss statements. The difference between their respective figures is attributable to only one item, a negative amount of $5,371,000 for unspecified “capitalized expense” on the pollution control exemption form. [Exhibit BTM-9; compare Exhibit BTM-1, p. 043 (identified as “capitalized costs” on the profit and loss statement); see Thunder Basin Proposed Findings, ¶ 45]. Mr. Coates states that the $5,371,000 represents a capital improvement and should be disregarded. [Transcript pp. 264-266].

81.     If we were to adjust the calculation of Mr. Hendrix to delete the $5,371,000 credit, the 2001 Total Company Reported Net Operating Income of $12,435,000 would be reduced by $5,371,000, because the $5,371,000 reduces overall expenses. If we were to otherwise use Mr. Hendrix’ same method, this change would decrease Mr. Hendrix’s final result by about $4,000,000. Since this is a decrease in actual income, the difference between expected income and actual income would be larger. The result would be a substantial increase in the percentage of economic obsolescence calculated by Mr. Hendrix’ method.

82.     Mr. Coates and Thunder Basin say that the capitalized expense amount must not be considered in the calculation of Direct Operating Expense because doing so is contrary to established appraisal principles. They quote the following authority in support of their position:

Capital improvements. Capital improvements include additions to the property that may be made at any time and are not necessary to maintain the level of income at any given time. Capital improvements ordinarily result in an increase in the total value of the property, in the economic life of the property, in the income of the property, or in all three. Therefore, these expenditures are not considered annual charges and should not be deducted from the effective gross income.

Property Assessment Valuation, 2d Edition, International Association of Assessing Officers (1996), p. 219; [Transcript p. 393; Thunder Basin Proposed Findings, ¶ 81].

83.     The authority plainly contemplates expenditures for capital improvements. Expenditures imply increases in total direct operating expenses, and a corresponding reduction in net operating income. One problem addressed by the capital improvement standard is that a large capital purchase could distort operating income by causing an overstatement of expenses, and a corresponding understatement of operating income. However, the capitalized expense credit which appeared on the pollution control exemption form did not increase total direct operating expense. Instead, the entry reduced direct operating expense, and increased net operating income. There is substantial evidence to support a conclusion by the County Board that the capitalized expense, whatever it was, did not have the effect of an expenditure.

84.     Perhaps more important, there was no testimony in the record about what the capitalized expense was for, or what it represents, other than being an accounting entry. Neither we nor the County Board could tell from the record whether the capitalized expense represented capital improvements at all. Since the burden of persuasion rested with Thunder Basin, the County Board could have found that Thunder Basin failed to provide sufficient evidence to demonstrate that the entry was indeed a capital improvement as contemplated by Property Assessment Valuation, 2d Edition, Id.

85.     The second issue is the treatment of the entry related to depletion of the coal reserves. Mr. Hendrix added depletion to Total Company Reported Net Operating Income to reach an adjusted Net Operating Income. Depletion is the loss of value of property due to consumption, and is distinct from depreciation, which is the loss in value, from all causes, of property having a limited economic life. Property Assessment Valuation, 2d Edition, International Association of Assessing Officers (1996), p. 153. (In its customary sense, depletion therefore differs from the use of the word “depletion” for personal property. Rules, Wyoming Department of Revenue, Chapter 9, §6(b)(v)(D)(I)).

86.     Mr. Hendrix testified that he added depletion back to the bottom line, and thereby removed depletion from his calculation of net operating income, because he intended to value the personal property of the coal mine taxpayers in Campbell County, not the value of the coal reserves of those taxpayers. [Transcript pp. 382, 384-388]. Consistent with this expressed intent, Mr. Hendrix did not attempt to allocate any economic obsolescence to coal reserves. Compare Mr. Coates, supra, ¶ 66. Mr. Hendrix allowed all other indirect expenses found on the pollution control exemption form, including reclamation costs. [Transcript p. 387; Exhibit BTM-9].

87.     In support of Mr. Hendrix, we note that the record does not contain any information regarding the source of the depletion figure found on the pollution control exemption form. It is likely related to a federal income tax allowance. 26 U. S. C. § 611 et seq.; 26 C. F. R. § 1.611-1 et seq. If so, the amount listed for depletion is based on historic costs which may have been adjusted in complex ways, and therefore bear an obscure relation to market value. It was within the sound judgment of Mr. Hendrix, in this mass appraisal context and consistent with the manner in which he approached his mass appraisal of fair market value, to remove depletion from his calculation of actual income by adding depletion to the bottom line profit.

88.     We have stated a concern about whether depletion as shown on the pollution control exemption form reflects a market value. A similar concern might be stated about the figure for depreciation, which Mr. Hendrix accepted. With respect to depreciation, however, we can perform a simple check. If we apply Mr. Coates’ recapture rate of 6.67%, supra, ¶ 55, to reproduction cost new less depreciation (RCNLD) as calculated by Mr. Hendrix and Mr. Coates, supra, ¶ 19, in both instances the result is less than the amount for depreciation on the pollution control exemption form. [Exhibit BTM-9]. The difference between the amount on the pollution control exemption form and the amounts resulting from a mathematical check favors the taxpayer in an economic obsolescence calculation. It was within the sound judgment of Mr. Hendrix to accept this difference in a mass appraisal context.

89.     The third issue raised by Mr. Hendrix’ calculation is the deduction for federal income taxes. We note that Mr. Coates made no similar deduction. Supra, ¶ 66. More important, the capitalization rate that Mr. Hendrix used to determine expected operating income was not calculated on an after-tax basis. There is accordingly a mismatch between Mr. Hendrix’ calculation of expected income and his calculation of actual income. For an appropriate comparison, there is no substantial evidence for the County Board to accept Mr. Hendrix’ deduction for federal income tax in order to reach a final net operating income. We reject Mr. Hendrix’ deduction.

The measurement of economic obsolescence

A. The unadjusted calculations of economic obsolescence

90.     The last step in the economic obsolescence calculation by the capitalized income method is to determine an income shortfall. Dividing the shortfall by expected income determines the adjustment that must be made to each item for economic obsolescence. These were the respective shortfall calculations of Mr. Coates and Mr. Hendrix, using the capitalized income method:

Supra, ¶¶ 20, 46, 62, 66, 79. For reasons that we have discussed at length, neither of these capitalized income measurements of economic obsolescence is correct.

B. An adjusted calculation of actual income and economic obsolescence

91.     There are numerous grounds on which the County Board could have rejected the calculations of Mr. Coates. However, there is only one error in Mr. Hendrix’ calculation that the County Board could not accept. The County Board could correct Mr. Hendrix’ error by arithmetic to reach a conclusion regarding the measurement of economic obsolescence. That correction is simply to eliminate Mr. Hendrix’ adjustment for federal income tax (FIT). Once this correction is made, there is a corresponding change in the shortfall calculation:

Hendrix calculation of actual income, with FIT correction

Hendrix calculation of shortfall, with FIT correction

If there is no shortfall, then there would be no economic obsolescence to apply against Mr. Hendrix’ calculation of reproduction cost new less depreciation (RCNLD) of $266,210,390.

92.     In sum, the County Board could have concluded that no economic obsolescence was indicated. Supra, ¶¶ 76, 91. The Rules of the Department do not require an appraiser to make an allowance for economic obsolescence when it is not present. Depreciation may include economic obsolescence, Rules, Wyoming Department of Revenue, Chapter 9, § 6(b)(iv), or it may not. An appraiser is merely required to test for the presence of economic obsolescence, In the Matter of the Appeal of Coastal Chem, Inc., Docket No. 99-123, March 22, 2000, 2000 WL 353783 (Wy. St. Bd. Eq.), not to prejudge that economic obsolescence is present.

C. Other evidence of economic obsolescence

93.     However, both of the appraisers were prepared to make an adjustment for economic obsolescence. We therefore review the background evidence in the record.

94.     Mr. Coates broadly supported the existence of economic obsolescence by arguing that information in the media indicated a national decline in the coal industry. [Transcript pp. 210, 283-287; Exhibit BTM-1, p. BTM 006]. However, the examination by Commissioner Weakly developed evidence to support an opposite conclusion. Commissioner Weakly asked Mr. Coates whether he had adequately accounted for the possibility that increased production in Wyoming was a sign of regional strength at the expense of other coal producing regions. (This could be consistent with a falling average price per ton, as a manifestation of a superior competitive position.) [Transcript pp. 304-306]. In response to Mr. Weakly, Mr. Coates stated that the issue was a reasonable return to investors, which could be measured by such indices as “the price per ton that they’re getting.” [Transcript p. 306].

95.     The confidential profit and loss statements of Thunder Basin provided information that the County Board could use to test Mr. Coates’ proposed measurement for 1999, 2000, 2001, and a part of 1998. [Exhibit BTM-1, pp. BTM 043-046]. Production at the Black Thunder Mine in 2001 was substantially greater than in 2000, and production in 2000 was substantially greater than in 1999. If one divides total profit by tons produced, the profit per ton in 2001 was greater than in 2000 even though the average price per ton was less in 2001. 1999 was a year of losses. The profit per ton for 2001 and 2000 exceeded the profit per ton in the partial year of 1998. [Exhibit BTM-1, pp. BTM 043-046].

96.     In other words, there was substantial evidence for the County Board to conclude that the effect of a reduction in the average price for coal between 2001 and 2000 was more than offset by increased production. It would follow that the County Board could conclude that there was in fact no market decline. Under the definition of economic obsolescence in the Department’s Rules, which focuses on uniform impairment of all items of personal property due to external factors such as market decline, there would be no economic obsolescence. Rules, Wyoming Department of Revenue, Chapter 9, § 6(b)(v)(D)(III).

Mr. Hendrix’ Functional Obsolescence

97.     If we return to the overall result reached by Mr. Hendrix, the matter of functional obsolescence remains. The eco factor applied by Mr. Hendrix was intended, at least in part, to account for functional as well as economic obsolescence. [Transcript pp. 367, 400]. There is substantial evidence to support a finding that the difference between Mr. Hendrix’ RCNLD of $266,210,390 and final indicated value of $253,547,380 would be adequate to cover for any functional obsolescence. Stated another way, the 5 % eco factor is adequate to address any functional obsolescence not otherwise addressed by annual valuation procedures. We take into account the relatively recent sale of all Thunder Basin assets, and the annual revision of equipment lists since the 1998 sale. We also take into account the County Board’s duty, similar to our own when sitting as a trier of fact, to decide the dispute between the parties. See Amoco Production Company v. Wyoming State Board of Equalization, 12 P.3d 668 (Wyo. 2000). Acting in that capacity may be an imperfect art.

98.     To sum up, there is substantial evidence to support the County Board’s final determination that Assessor’s value of $253,547,380, should be affirmed. This conclusion may be reached by relying solely on the economic obsolescence calculation found in Mr. Hendrix’ Cost Approach #2, with adjustments, which is a capitalized income method authorized by the Department’s Rules. The record also supports the conclusion that an allowance was made for functional obsolescence in Mr. Hendrix’ final indicated value.

WHETHER THE COUNTY BOARD’S DECISION MUST OTHERWISE BE REMANDED

99.     We have thus far considered whether the record contains substantial evidence to support the result reached by the County Board. We now turn to a problem presented by Mr. Hendrix’ method for reaching that result.

A. Mr. Hendrix’ weighting is contrary to law

100.   The County Board generally based its findings and conclusions on the testimony of the Assessor’s appraisal expert, Mr. Hendrix. Mr. Hendrix calculated economic obsolescence using an amalgam of four approaches. Only one of Mr. Hendrix’ four approaches was a capitalized income method expressly authorized by the Department’s Rules for use in measuring economic obsolescence under the Cost Approach. Supra, ¶ 42. We have already considered this single component at length, and shown how, when adjusted, this single component supports the result reached by the Assessor.

101.   However, Mr. Hendrix used three other components in his calculation, which he identified with the confusing names, Cost Approach #1, Income Approach #1, and Income Approach #2. Supra, ¶ 46.

102.   Cost Approach #1 was simply Mr. Hendrix’s calculation of reproduction cost new less depreciation (RCNLD), and therefore includes no allowance at all for economic obsolescence. [Exhibit BTM-B, pp. 0025-0026]. Since Mr. Hendrix weighted his four approaches [Exhibit BTM-B, pp. 0025-0026, Transcript pp. 369-376], we know that RCNLD was weighted against the result of the capitalized income approach to reach a final result. Any weighting which combines RCNLD with a correct capitalized income method simply dilutes the result of the capitalized income method, because RCNLD was the starting point of the capitalized income method.

103.   Mr. Hendrix went on to combine the first two cost approaches with two income approaches, and weighted the income approaches at 35% and 30%, respectively, of final value. [Transcript P. 409]. Each income approach was a form of discounted cash flow. [Transcript p. 371]. The Department’s Rules do not specifically authorize a discounted cash flow method for calculating economic obsolescence. Supra, ¶ 42. Nor do the Rules specifically authorize a weighted amalgam of two discounted cash flow methods, the capitalized income method, and RCNLD. Id.

104.   We conclude Mr. Hendrix’ use of an amalgam of methods was contrary to law. The County Board therefore did not apply the correct rule of law. Laramie County Board of Equalization v. Wyoming State Board of Equalization, 915 P.2d 1184, 1188 (Wyo. 1996). The Rules of the Department specifically authorize the capitalized income approach. The Rules do not permit an appraiser to dilute the results of an authorized method at will, which has plainly occurred in this case. If we were to decide otherwise, we would undermine the force and effect of the Department’s Rules. If an Assessor believes the Rules unduly restrict the proper determination of value, the remedy is to initiate changes to the Rules.

105.   A central premise of the County Board conclusions of law is that “the County Assessor assessed the Taxpayer’s property in accordance with law and Department of Revenue rules and regulations.” [County Board Conclusions, ¶ 37]. Since we have concluded that this is not so, we must likewise conclude that Thunder Basin met its burden of presenting sufficient evidence to overcome the presumption that the value assigned by the Assessor was valid, accurate, and correct. Teton Valley Ranch v. State Board of Equalization, 735 P.2d 107, 113 (Wyo. 1987); Colorado Interstate Gas Co. v. Wyoming Dept. of Revenue, 20 P.3d 528, 531 (Wyo. 2001). We accordingly remand this matter to the County Board.

B. Two limits on appraisal judgment

106.   From the record, we infer that both the Assessor and the County Board believed that wide deviations from the letter of the Department’s Rules may be allowed if the deviations can be characterized as matters of appraisal judgment. To justify his amalgam of methods, Mr. Hendrix stated that, “[r]econciling is a generally accepted method. It’s appraiser judgment.” [Transcript p. 375].

107.   Weighting and reconciliation are a customary part of the exercise of appraisal expertise. However, reconciliation is specifically recognized by Chapter 9 of the Department’s Rules only with respect to the final results of different approaches to value:

Reconciliation. The appraiser shall weight the relative significance, applicability and appropriateness of the indications of value derived from the approaches to value or methods outlined above, and will place the most weight and reliance on the value indicator which, in his professional judgment, best approximates the overall value of the subject property. The appraiser shall evaluate all alternative conclusions and reconcile the value indicators to arrive at a final estimate of value. For market value, the final estimate is that value which most nearly represents what the typical, informed, rational purchaser would pay for the subject property and a rational seller would accept if it were available for sale on the open market as of the date of the appraisal, given all of the data utilized by appraisers in their analyses.

Rules, Wyoming Department of Revenue, Chapter 9, § 7.

108.   Reading Section 7 in the context of the other provisions of Chapter 9, this express authority for reconciliation applies only to specific approaches that are recognized as appraisal methods, and that yield an indicated value for the property. These approaches include the Sales Comparison Approach, the Cost Approach, and the Income or Capitalized Earnings Approach. Rules, Wyoming Department of Revenue, Chapter 9, § 6(a), 6(b), 6(c); supra, ¶ 5. The Department’s Rules do not address reconciliation of lower level components of an Approach, and therefore do not govern the facts of concern here.

109.   We must turn to the definition of economic obsolescence for the source of latitude that the Department’s Rules afford an appraiser in measuring economic obsolescence. The Rules state that appraisers may rely on methods other than the three that are specified: “[t]he methods to measure economic obsolescence may include, but are not limited to... .” Rules, Wyoming Department of Revenue, Chapter 9, § 6(b)(v)(D)(III). However, there are at least two limitations on the appraiser’s latitude to use alternative methods.

110.   First, the appraiser’s judgment cannot supplant the Rule itself. An expert cannot rewrite the law under the guise of expertise. The Department has recognized the capitalized income method by Rule, and the expert is not at liberty to rewrite the capitalized income method. This has plainly occurred when the results of the capitalized income method are treated as less than a third of the measurement of economic obsolescence.

111.   Second, any exercise of judgment in support of an unorthodox method of measuring economic obsolescence must be explained in terms that facilitate review of the County Board’s decision. The record must include a rational basis upon which to review the ultimate findings and conclusions of the County Board. Supra, at Standard of Review. If the County Board’s decision rests on a method specified in the Department’s Rules, we have an established framework for analyzing the result reached by the County Board. An established framework assists us in understanding what the County Board did, and why.

112.   When the County Board accepts a method of measuring economic obsolescence that is a method of the appraiser’s own design, under circumstances in which a method authorized by Department Rule would apply, we cannot turn to the Rules for guidance. Further, when, as here, the method provided by the Department’s Rules rests on established appraisal principles, supra, ¶¶ 42-43, we will not assume that an unorthodox method of the appraiser’s own design is well grounded in appraisal theory or experience. When these circumstances occur, as they have in this case, it is not enough for the appraiser or the County Board to broadly invoke appraisal judgment. The record must contain evidence to show: (1) that the unorthodox method is well grounded in theory and/or experience; (2) that the unorthodox method reaches a sound result; and (3) how the unorthodox method compares to the methods specifically provided by the Department’s Rules.

CONCLUSION

113.   The principal question on remand is whether Thunder Basin proved, by a preponderance of the evidence, that the County Assessor’s value was not derived in compliance with constitutional, statutory, and administrative standards for valuation of locally assessed property. While we believe that the County Assessor’s value can be sustained consistent with the Rules of the Department, and there was substantial evidence to support the rejection of Mr. Coates’ valuation, the County Assessor’s value cannot be sustained by the present decision of the County Board.

114.   We acknowledge the possibility that some inferences we have drawn about the County Board’s intentions may be incorrect. This is for the County Board to determine. We also leave it to the County Board to determine whether there is sufficient evidence in the record to issue a revised ruling, or whether a rehearing is necessary.

THIS SPACE INTENTIONALLY LEFT BLANK

ORDER

IT IS THEREFORE HEREBY ORDERED:

          The decision of the County Board affirming the Assessor’s valuation of Petitioner’s property shall be and the same is, hereby remanded.

Pursuant to Wyo. Stat. Ann. § 16-3-114 and Rule 12, Wyoming Rules of Appellate Procedure, any person aggrieved or adversely affected in fact by this decision may seek judicial review in the appropriate district court by filing a petition for review within 30 days of the date of this decision.

          DATED this 31^st day of December, 2003.

                                                                STATE BOARD OF EQUALIZATION

                                                                _____________________________________

                                                                Roberta A. Coates, Chairman

                                                                             _________________________________________

                                                                Alan B. Minier, Vice-Chairman

                                                                _____________________________________

                                                                Thomas R. Satterfield, Member

ATTEST:

_______________________________

Wendy Soto, Executive Secretary