BEFORE THE STATE BOARD OF EQUALIZATION

FOR THE STATE OF WYOMING

IN THE MATTER OF THE APPEAL OF                     )

GREEN RIVER CABLE FROM A NOTICE OF       )

VALUATION FOR TAXATION PURPOSES              )         Docket No. 2008-74

FROM THE PROPERTY TAX DIVISION OF             )

THE DEPARTMENT OF REVENUE                           ) 

IN THE MATTER OF THE APPEAL OF                     )

SWEETWATER CABLE TV CO. FROM A             )

NOTICE OF VALUATION FOR TAXATION             )         Docket No. 2008-75

PURPOSES FROM THE PROPERTY TAX                )

DIVISION OF THE DEPARTMENT OF REVENUE  )

FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER

APPEARANCES

Steven F. Freudenthal, Freudenthal & Bonds, P.C., for Green River Cable [2008-74], and Sweetwater Cable TV Co. [2008-75] (Petitioners).

William F. Russell, Senior Assistant Attorney General, Office of the Wyoming Attorney General, for the Wyoming Department of Revenue (Department).

JURISDICTION

The State Board of Equalization (Board) shall review final decisions of the Department on application of any interested person adversely affected, including boards of county commissioners. Wyo. Stat. Ann. §§ 39-11-102.1(c). The person assessed by the Department is specifically authorized to appeal final decisions of the Department. Wyo. Stat. Ann. § 39-13-109(b)(iii). Any appeal must be filed with the Board within thirty days of the Department’s final decision. Wyo. Stat. Ann. §§ 39-13-102(n), 39-13-109(b)(iii); Rules, Wyoming State Board of Equalization, Chapter 2, § 5(a). By Notice of Appeal filed effective July 18, 2008, Green River Cable (Green River) timely appealed a 2008 Notice of Valuation for Property Tax Purposes issued by the Department on June 19, 2008. By Notice of Appeal filed effective July 18, 2008, Sweetwater Cable TV Co. (Sweetwater) timely appealed a 2008 Notice of Valuation for Property Tax Purposes issued by the Department on June 19, 2008. The Board accordingly has jurisdiction to hear these matters. The two separate appeals were consolidated by Board Order dated September 22, 2008.

A hearing was held February 9 and 10, 2009, before the Board, consisting of Thomas R. Satterfield, Chairman, and Thomas D. Roberts, Vice Chairman.

STATEMENT OF THE CASE

These appeals concern the valuation of Petitioners’ property for 2008 tax purposes by the Department pursuant to Wyo. Stat. Ann. § 39-13-102(m)(ix) [effective January 1, 2008].

A preliminary 2008 appraisal report for each Petitioner was issued by the Department on May 20, 2008. Petitioners held an informal conference with the Department on May 28, 2008, and submitted additional information by letter dated May 30, 2008. The Department, by letter dated June 5, 2008, issued a revised appraisal report for each Petitioner. The revised report incorporated adjustments with respect to federal income tax amounts, but declined to make adjustments for franchise value, cash, and programming purchased from third parties. The Department issued its 2008 Notice of Valuation for Property Tax Purposes for each Petitioner on June 19, 2008.

We reverse and remand for the reasons set forth herein.

CONTENTIONS AND ISSUES

Petitioners, in their Issues of Fact and Law and Exhibit List, stated the Contested Issues of Fact as:

1.Whether the Cable Companies are small companies with a unique capital structure and higher business risks such that the capitalization rates from the Capitalization Rate Study - Cable and Satellite - 2008 are inapplicable.

2.Whether the fact that the Cable Companies are stand-alone independents that have never been purchased by third-parties render the DOR’s “one-size fits-all” documentation requirements for intangibles inapplicable.

[Petitioners’ Issues of Fact and Law and Exhibit List, pp. 1-2].

Petitioners stated their issues of law as:

A.Whether the taxpayer is entitled to the exemptions provided by W.S. § 39-11-105(b)(ii)(E) (“supplier based intangible”), W.S. § 39-11-105(b)(iii) (“municipal cable franchise”), and W.S. § 39-11-105(b)(vi)(A) and (B) (“money and cash”).

B.Whether using different weighting of the appraisal methodologies for similar cable television systems to reach a predetermined and higher tax values violates the equal and uniform provision of the WYO. CONST. Article 15, Section 11 ....

C.Whether altering the weighting of the different appraisal methodologies to reach a predetermined and higher tax values is arbitrary and capricious.

D.Whether the HCLD model and the YCM models were properly applied and/or weighted in the valuation of the Cable Systems.

E.Whether the selected capitalization rates are proper for these Cable Systems (as well as whether the underlying income numbers were properly derived) or were they applied in violation of the applicable statute and rules... .

[Petitioners’ Issues of Fact and Law and Exhibit List, pp. 2-11].

Petitioners’ post-hearing brief concentrates on a discussion of valuation models and capitalization rates as well as the issue of intangibles. [Petitioners’ Brief].

The Department, in its prehearing pleadings, identified three contested issues of fact and three contested issues of law. The Department stated the issues of fact as:

1.Whether the inputs used by the Department in the Historical Cost Less Depreciation (HCLD) model are consistent with the financial data reported to the Department by Sweetwater Cable (SW) and Green River Cable (GR).

2.Whether SW and/or GR attended the 2008 Capitalization Rate Input Meeting or in any way participated in the 2008 Capitalization Rate Study for the cable and satellite industry.

                      3.        Whether SW and/or GR reported any usable information regarding the existence and value of exempt intangible property prior to the Department’s final appraisals.

[Department’s Issues of Fact and Law and Exhibit Index, pp. 1-2].

The Department stated its issues of law as:

4.Whether the HCLD model used by the Department was a proper method for valuing cable TV companies.

5.Whether the 2008 capitalization rate used by the Department to appraise the cable and satellite industry was developed in accordance with Department of Revenue rules.

6.Whether the Department’s treatment of Petitioners’ alleged intangible property was consistent with Department policy, Wyoming Statutes, and associated caselaw [sic].

[Department’s Issues of Fact and Law and Exhibit Index, p. 2].

FINDINGS OF FACT

1.        The Department, in its preliminary and final valuations for both Sweetwater and Green River, derived a system value using what the Department terms as the Historical Cost Less Depreciation (HCLD) method as a cost method, and a Yield Capitalization method as an income method. The Department did not use a sales comparison method based on a lack of sufficient sales to establish a valid market analysis. Through counsel and testimony at the Board hearing, the Department conceded use of the Yield Capitalization model as a valuation method was inappropriate. The model, as applied to both Sweetwater and Green River, contained an input error. The Department thus stated it was relying solely on the HCLD model for valuing both Sweetwater and Green River. [Exhibits 100-C, pp. 97, 99, 102; 100-G, pp. 153, 155, 158; 100-J, pp. 248, 250, 253; 100-K, pp. 276, 278, 281; Transcript Vol. I, pp. 16-17, 33-39, 87-88, 114-116, 148-149; Department’s Post-Hearing Brief, p. 3].

2.        Cayse Cummings testified on behalf of the Department. Ms. Cummings, at the time of the hearing, was no longer employed by the Department. She had previously worked four years in the Department with responsibility for valuation of telecommunications, airlines, and for one year, 2008, cable and satellite systems. [Transcript Vol. I, pp. 23-25].

3.        Ms. Cummings was the principal appraiser for both Green River and Sweetwater. A review of the appraisals for both companies was successfully completed. [Transcript, Vol. I, pp. 77-78].

4.        Ms. Cummings acknowledged pages 59 through 62 of Exhibit 100-B were not part of the Sweetwater Cable Annual Report for the year ending December 31, 2007 (Sweetwater Report). Those pages were material she independently acquired and did not have a role in her 2008 appraisal of Sweetwater. [Exhibit 100-B, pp. 59-62; Transcript Vol. I, pp. 25-26].

5.        The Sweetwater Report indicated a beginning and ending cash balance of approximately $2.6 million, and no long-term debt. [Exhibit 100-B, p. 35; Transcript Vol. I, pp. 26-27].

6.        After an informal conference with the Department, the income amount indicated in the Sweetwater Report was adjusted by the Department by deducting an amount of federal income tax as supplied by Petitioners. [Exhibit 100-B, p. 49; Transcript Vol. I, pp. 27-28].

7.        The Cable and/or Satellite Companies Annual Report form issued by the Department contained instructions on page 45 and a form on page 46 for reporting intangible property. The account number column on page 46 requested the account numbers on the books of the taxpayer. Ms. Cummings stated the account number column also allows the Department to identify where intangibles are being reported on page 36 of the form although there is no reference on page 46 to page 36, nor are there any instructions specific to such a cross reference. [Exhibit 100-B, pp. 36, 45-46; Transcript Vol. I, pp. 28-29].

8.        The preliminary appraisal of Sweetwater, under the Direct Capitalization Model, concluded it was not comparable to any of the six companies reviewed by the Department to develop a direct capitalization rate of 10.65 percent for the cable and satellite industry for 2008 valuation purposes. [Exhibit 100-C, p. 100; Exhibit 500; Transcript Vol. I, pp. 29-31, 33].

9.        The direct capitalization valuation method takes into consideration industry-identified gross revenue percentages and effects on stock, and also utilizes the capitalization rate of 10.65 percent developed by the Department. This approach was not applicable to Sweetwater or Green River since neither is a publicly traded company. [Exhibit 500; Transcript Vol. I, pp. 31-33].

10.      Ms. Cummings acknowledged pages 233 through 245 of Exhibit 100-I were not part of the Green River Cable Annual Report for the year ending December 31, 2007 (Green River Report). Those pages were material she independently acquired and did not have a role in her 2008 appraisal of Green River. [Exhibit 100-I, pp. 233-245; Transcript Vol. I, pp. 34-35].

11.      The Green River Report indicated a beginning cash balance of approximately $59,000, an ending cash balance of approximately $45,000, and no long-term debt. [Exhibit 100-I, p. 208; Transcript Vol. I, p. 35].

12.      After an informal conference with the Department, the income amount indicated in the Green River Report was adjusted by the Department by deducting an amount of federal income tax as supplied by Petitioners. [Exhibit 100-I, p. 222; Transcript Vol. I, p. 36].

13.      The Green River Report contained the same form with regard to intangibles as the Sweetwater Report. Facts, ¶ 7; [Compare Exhibit 100-I, p. 219 with Exhibit 100-B, p. 46; Transcript Vol. I, p. 36].

14.      The preliminary appraisal of Green River also included a Yield Capitalization Model which used a 10.65 percent capitalization rate developed by the Department for the cable and satellite industry for 2008 valuation purposes. [Exhibit 100-J, p. 250; Exhibit 500; Transcript Vol. I, pp. 37-38].

15.      The yield capitalization model, as described by Ms. Cummings, takes into consideration either a company's current income or income stream, and makes adjustments for the producer price index. The model also compares income to the company’s book investment to identify performance ratio. The appraiser chooses the income they feel best represents the company, taking into consideration the information provided by the company to ensure performance ratios are related to the chosen income stream. The income stream then has deductions taken out, and is multiplied by the capitalization rate to identify a value. [Exhibit 100-C, p. 99; Exhibit 500; Transcript Vol. I, p. 37].

16.      The preliminary and final Department appraisals of both Sweetwater and Green River each included a Historical Cost Less Depreciation (HCLD) Model. [Exhibit 100-C, p. 97; Exhibit 100-G, p. 153; Exhibit 100-J, p. 248; Exhibit 100-K, p. 276]. This Model, using Exhibit 100-K, p. 276 as an example, takes into consideration the total purchase price of all assets. [Operating Property and Equipment, Line I - J ]. It deducts accumulated depreciation [Operating Property and Equipment, Line I - K] to derive a value for the total net physical plant [Operating Property and Equipment, Line I - L]. The total net physical plant, plus non-capitalized lease assets, net [Operating Property and Equipment, Line III] is subject to economic obsolescence or enhancement based on the income stream it generated [Operating Property and Equipment, Line V]. A return on average operating property and equipment [Valuation, Line V] is calculated by dividing the net operating income [Valuation, Line IV] by the total plant value [Operating Property and Equipment, Line V; Valuation, Line I]. An adjustment percentage for either enhancement or economic obsolescence is then determined by dividing the return on average operating property and equipment [Operating Property and Equipment, Line V] by the capitalization rate of 10.65 percent for the industry as developed by the Department. The resulting enhancement percentage is multiplied times the Total Plant Subject to Obsolescence [Valuation, Line I] to determine the enhancement amount [Valuation, Line VII], which is then added to the Total Plant [Valuation, Line I] to reach an HCLD value [Valuation, Line VIII]. [Exhibit 100-C, p. 97; Exhibit 100-G, p. 153; Exhibit 100-J, p. 248; Exhibit 100-K, p. 276; Exhibit 500; Transcript Vol. I, pp. 39-45, 141-142].

17.      The enhancement percentage, using a capitalization rate of 10.65 percent, in the final Department appraisal for Sweetwater was 357.6761 percent:

[Exhibit 100-G, p. 153].

18.      The enhancement percentage, using a capitalization rate of 10.65 percent, in the final Department appraisal for Green River was 355.7080 percent:

[Exhibit 100-K, p. 276].

19.      The enhancement or adjustment percentage will decrease if the Wyoming capitalization rate increases. [Transcript Vol. I, p. 45].

20.      The weight percentages or weighting factors in the preliminary appraisal of Green River were 90 percent for Adjusted HCLD, and 10 percent for Income - Yield Cap Model. The weight percentages or weighting factors in the preliminary appraisal of Sweetwater were 50 percent for Adjusted HCLD, and 50 percent for Income - Yield Cap Model. The weight percentages are based on an appraiser’s judgement and the confidence the appraiser has in each model. Ms. Cummings, in the preliminary appraisal of Green River, had more confidence in the Adjusted HCLD Model than in the Income - Yield Cap Model. [Exhibit 100- C, p. 105; Exhibit 100-J, p. 256; Transcript, Vol. I, pp. 46-51].

21.      The weight percentages or weighting factors in the final appraisal of Green River were changed to 80 percent for Adjusted HCLD, and 20 percent for Income - Yield Cap Model. The weight percentages or weighting factors in the final appraisal of Sweetwater were changed to 10 percent for Adjusted HCLD, and 90 percent for Income - Yield Cap Model. A reduction in net income in the final appraisal based on deduction of the amount of federal income tax provided to the Department after the preliminary appraisals were completed for both Sweetwater and Green River was the only change in analysis from the preliminary appraisals. Ms. Cummings testified she changed the weight factors in both final appraisals because she believed the information in the Income - Yield Cap Model was more complete after receiving the federal income tax information. She had previously testified, however, in her deposition, the federal income tax information she received did not indicate to her a need to adjust the weights between the two models. Ms. Cummings did not recall if she had final authority on the weighting factors used in the final appraisal of each company. [Exhibit 100-K, p. 284; Exhibit 100-G, p. 162; Transcript, Vol. I, pp. 51-57, 142-144].

22.      Ms. Cummings was responsible for the Department 2008 Capitalization Rate Study for the Cable and Satellite Industry (Rate Study) although the Rate Study was reviewed by the Department’s property tax group. [Exhibit 500; Transcript, Vol. I, pp. 58-59].

23.      Ms. Cummings selected the six companies in the Rate Study population through research of public financial publications such as ValueLine, a publication which reviews the financials of publicly traded companies, and assigns them a risk-based “beta.” She estimated she initially reviewed fifteen companies out of which she selected the six used in the Rate Study. [Exhibit 500; Transcript, Vol. I, pp. 130-132].

24.      The six companies in the Rate Study population were Charter Communications, Comcast Corporation, DirecTV Group, Inc., EchoStar, Time Warner, and Time Warner Cable. All six companies are public utility entities; are not rate regulated; are not guaranteed any particular rate of return; are publicly traded; and operate in multiple states and in multiple communities. Ms. Cummings indicated DirecTV Group, Inc., Echo Star, and Time Warner Cable operate in Wyoming. The equity in the companies ranged from a minimum of 2 percent to a maximum of 89 percent. The debt ranged from a minimum of 11 percent to a maximum of 98 percent. Ms. Cummings used the mean percentages of equity (42%) and debt (58%) to reach her capitalization rate of 10.65 percent. A flotation cost factor was also applied. [Exhibit 500, pp. 4, 11, 20-23; Transcript, Vol. I, pp. 61-63, 71, 73-75, 147].

25.      The Public Utilities Financing Tracker was the source for all data used to derive a flotation cost in the Rate Study. Ms. Cummings was not the individual who compiled the flotation cost data. [Exhibit 500, pp. 24-34; Transcript, Vol. I, pp. 75-77].

26.      Green River and Sweetwater both had zero debt and 100 percent equity, and operate only in Wyoming. [Exhibit 100-I, p. 208; Exhibit 100-B, p. 35; Exhibit 108; Transcript, Vol. I, pp. 63, 64].

27.      None of the six companies in the Rate Study population had zero debt and 100 percent equity. [Transcript, Vol. I, p. 130].

28.      Ms. Cummings stated both Green River and Sweetwater had significantly different capital structures and operations from the companies in the Rate Study population. [Exhibit 100-G, p. 156; Exhibit 100-K, p. 279; Transcript, Vol. I, pp. 63, 64, 65, 74].

29.      Ms. Cummings also agreed both Green River and Sweetwater had different or noncomparable risks from the companies in the Rate Study population. [Exhibit 100-I, p. 208; Exhibit 100-B, p. 35; Exhibit 500, pp. 4, 11, 20; Transcript, Vol. I, pp. 64, 65].

30.      The Department Rate Study developed an industry capitalization rate which Ms. Cummings agreed was not applicable to Sweetwater. She testified she could not, without additional analysis, determine a rate applicable to Sweetwater. Rules, Wyoming Department of Revenue, Chapter 7, § 7(a.); [Transcript, Vol. I, p. 160].

31.      The cost of debt indicated by the Rate Study was 7.39 percent. This amount was obtained from the Mergent Bond Record and Standard and Poors Data in Exhibit B to the Rate Study. Ms. Cummings was not involved in developing this debt rate, nor had she ever done a debt rate calculation. [Exhibit 500, pp. 4, 12-14; Transcript, Vol. I, pp. 65-67, 145-146].

32.      The cost of equity portion of the Rate Study was based on the six companies in the study population, none of which were rate regulated. The discounted cash flow model (DCF) was not used to value either Sweetwater or Green River based on a lack of information on projected dividends. [Exhibit 500, pp. 5-6, 20; Transcript, Vol. I, pp. 67-70].

33.      The capital asset pricing model (CAPM) employs the concept that value is composed of a safe rate of return such as treasury bonds or government bonds, plus an add-on for equity risk. The market risk premium is the difference between the expected rate of return in a given investment and the risk free (safe) rate. The model also takes into consideration the “beta” which is a gauge of the company’s risk with one (1) being standard. Any beta below one (1) indicates minimal risk. The higher the beta above one (1) the higher the risk. [Exhibit 500, p. 5; Transcript, Vol. I, p. 70].

34.       The Sweetwater Report indicated Aerial Cable and Underground Cable as having zero (0) “Net Cost” based on depreciation calculated for income tax purposes. Ms. Cummings calculated an adjusted depreciation allowance for property tax purposes of $1,146,201 for the combined categories Aerial Cable and Underground Cable based on the AUS Telephone Plant Study Guide for 2008. The Net Cost for the combined categories was thus $844,498 rather than zero (0) as indicated by the Sweetwater Report. The AUS Telephone Plant Study Guide was used to determine depreciation because, according to Ms. Cummings, the type of cabling used by telephone companies is similar to that used by cable and satellite companies, and there is no guide specifically for cable and satellite companies. [Exhibit 100-C, p. 96; Exhibit 100-B, pp. 36, 38; Transcript, Vol. I, pp. 79-82, 88, 140-141].

35.      The only intangible asset listed in the Sweetwater Report was end of year cash of $2,609,956. [Exhibit 100-B, p. 35; Transcript, Vol. I, pp. 78-79, 83-84].

36.      The Sweetwater Report did not list any value for franchises. [Exhibit 100-B, p. 36 (Line 3); Transcript, Vol. I, p. 82].

37.      The Sweetwater Report stated “Not Applicable” under the heading Itemized Intangible Assets - SYSTEM. Cash need not be reported again under this heading. [Exhibit100-B, p. 46; Transcript, Vol. I, pp. 82-84].

38.      Green River and Sweetwater both supplied federal income tax information to the Department before the revised final appraisal for each company was issued. [Exhibit 100-D, pp. 110-111; Transcript, Vol. I, pp. 84-85].

39.      Ms. Cummings asserted the information on franchise value as an intangible supplied by both Green River and Sweetwater after the initial valuations did not fulfill the requirements of the Department’s instructions for reporting intangibles as part of a company’s annual report. [Exhibit 100-D, pp. 111-112; Transcript, Vol. I, pp. 85-87].

40.      Ms. Cummings testified that even assuming Sweetwater, for example, had properly reported a franchise value as an intangible, the Total Telephone Plant Subject to Economic Obsolescence, Line V under Operating Property and Equipment, Exhibit 100-G, would be the same as the Department calculation without inclusion of such value. The franchise value would be included under Intangibles, Line I -I, Telephone Plant in Service. The value would also be subject to depreciation if Sweetwater was depreciating the value on its books, with the appropriate depreciation amount included in Accumulated Depreciation, Line I-K, Telephone Plant in Service. The franchise value, either with depreciation or without depending on how it was treated by Sweetwater on its books, would then be deducted as System Exempt Intangibles, NET, Line IV under Operating Property and Equipment. The Total Telephone Plant Subject to Economic Obsolescence, Line V under Operating Property and Equipment would thus be the same as calculated by the Department. [Exhibit 100-G, p. 153; Transcript, Vol. I, pp. 88-91].

41.      The Department’s annual reporting form allows a company to claim an amount of net operating income which it asserts is attributable to intangible assets. [Exhibit 100-B, p. 46]. The Department does not have enough information to calculate this amount independently. If an amount of net operating income attributable to intangibles is provided, it would be deducted from Gross Operating Revenues in the calculation of Adjusted Net Operating Income. The deduction would appear, for example in Exhibit 100-G, p. 154, as a line directly above Line VII on the Income and Expense Analysis page of the Department’s appraisal. The result would be to reduce the Adjusted Net Operating Income, and thus reduce a company’s valuation. [Exhibit 100-B, p. 46; Exhibit 100-G, p. 154; Transcript, Vol. I, pp. 91-96, 133-136].

42.      Cash is intangible property. Cash was not included within the appraisal process of the Department’s HCLD valuation model. Ms. Cummings stated that if cash was included in the HCLD valuation model, it would be included as an Intangible, Line I -I, Telephone Plant in Service, and deducted as System Exempt Intangibles, NET, Line IV under Operating Property and Equipment, the same as described for franchise value. Facts, ¶ 40; [Exhibit 100-G, p. 153; Transcript, Vol. I, pp. 96-100, 161].

43.      Ms. Cummings testified any programming costs claimed as an intangible would be treated in the HCLD valuation model the same as cash and franchise value. The programming cost would be included as an intangible asset and then removed as system exempt. There would once again be a net zero gain or loss. Facts, ¶¶ 40, 42; [Exhibit 100-G, p. 153; Transcript, Vol. I, pp. 100-105].

44.      Ms. Cummings testified there would be no change in her final appraisal of Green River, as there was no change in her final appraisal of Sweetwater, even if Green River had also properly reported cash, franchise value, and programming costs as intangibles. The inclusion and deduction of those intangible values would be the same for Green River as described for Sweetwater. Facts, ¶¶ 40, 42, 43; [Exhibit 100-I, pp. 208-209, 219; Exhibit 100-D, p. 110-112, 115; Exhibit 100-K, p. 276; Transcript, Vol. I, pp. 106-114].

45.      The Department asserts the requirement in Chapter 7, Section 8, of the Department Rules that intangible assets “shall be removed from the fair market value” does not require the value of the intangible assets be removed from the final fair market value as determined by the HCLD model for each company. [Exhibit 100-G, p. 153; Exhibit 100-K, p. 276; Transcript, Vol. I, pp. 149-157].

46.      The Department conceded the yield capitalization model as applied to both Green River and Sweetwater was flawed, and thus should be removed from the final appraisal of both companies. The correlated value of each company, after removal of the yield capitalization model, would simply be 100 percent of the HCLD model which Ms. Cummings asserted was fair market value. [Exhibit 100-K, p. 274; Exhibit 100-G, p. 152; Transcript, Vol. I, pp. 114-116, 148-149].

47.      The Department sent a memorandum dated January 15, 2008, to all state assessed property owners giving notice of a 2008 Capitalization Rate Input Meeting on March 4, 2008. Ms. Cummings stated the purpose of the meeting was to allow taxpayers to provide information to the Department to help with the capitalization rate process. She stated neither Green River nor Sweetwater attended the meeting, and neither submitted written comments prior to the final determination of the cable and satellite industry capitalization rate. There also was no one from the cable or satellite industry who requested to speak at the meeting. [Exhibit 501; Transcript, Vol. I, pp. 119-122].

48.      The Department notified all state assessed property owners of the 2008 capitalization rates for each industry by memorandum dated March 26, 2008. The memorandum indicates the Band-of-Investment method was used to estimate the capitalization rates, not individual company embedded rates of return and capital structure. Ms. Cummings testified the cable and satellite industry capitalization rate was based on the industry as a whole. She stated the intent is to develop a capitalization rate for a fictitious company. [Exhibit 501, p. 39; Transcript, Vol. I, pp. 122-127].

49.      The Department values each company individually, not in a mass appraisal manner as occurs with residential real property. [Transcript, Vol. I, pp. 132-133].

50.      The Department held an informational meeting on October 17, 2007, pursuant to a notice sent October 1, 2007. The purpose of the meeting was to notify the cable and satellite companies operating in Wyoming that effective tax year 2008, they would be assessed by the Department, and to identify what methods and models would be used for valuation. A second informational letter was sent November 27, 2007. [Exhibit 502; Transcript, Vol. I, pp. 136-140].

51.      Al Carollo testified on behalf of Green River and Sweetwater. He has been involved in the cable television business since 1953. [Transcript, Vol. I, p. 163].

52.      The cable system in Rock Springs (Sweetwater) was activated in 1956. The Green River system was activated in 1958. [Transcript, Vol. I, p. 163].

53.      The beginning and ending cash balances indicated in Exhibit 100-D are as a consolidated account with two-thirds attributable to Sweetwater, and one-third attributable to Green River. [Exhibit100-D, p. 112; Transcript, Vol. I, p. 167-168].

54.      Neither Green River or Sweetwater have a tax department. Both companies engage a certified public accountant to prepare tax returns. The accountant also completed the 2007 Annual Reports for both Sweetwater and Green River as filed with the Department. [Exhibit 100-B; Exhibit 100-I; Transcript, Vol. I, pp. 168-170; Vol. II, p. 211].

55.      Neither Green River or Sweetwater has been bought or sold, thus there has not been a purchase or sale which required determination of a franchise value, of a value for programming, or any other intangible value. [Transcript, Vol. I, p. 170].

56.      Carollo testified when he received the 2007 Annual Report from the Department, he completed the form as best he could, making three phone calls to Cummings. He stated he did not understand some of the terminology since it referred to telephone lines which are different from cable lines. A cable line has a single center conductor while some telephone lines have thousands of conductors. Carollo stated he got no assistance from the Department. He said he was told to “figure it out.” [Transcript, Vol. I, pp. 171-172].

57.      The fair market value for Green River in 2006, as determined by the Sweetwater County Assessor based on an annual report filed by Green River was $521,832. The fair market value in 2007 was $510,411. The assessed value in 2006 was $49,574. The assessed value in 2007 was $48,489. [Exhibit 105; Transcript, Vol. I, pp. 172-173, 192-193].

58.      The fair market value for Sweetwater in 2006 as determined by the Sweetwater County Assessor based on an annual report filed by Sweetwater was $1,203,989. The fair market value in 2007 was $1,187,832. The assessed value in 2006 was $114,379. The assessed value in 2007 was $112,844. [Exhibit 106; Transcript, Vol. I, pp. 173-174, 192-193].

59.      Sweetwater Television Company and Sweetwater Cable are one and the same company. [Exhibit 100-B, p. 63; Exhibit 107; Transcript, Vol. II, pp. 197-198].

60.      The 2008 fair market value derived by the Department, prior to removal of the yield capitalization model, for Green River was $3,463,000, and for Sweetwater, $7,788,322. These values represented an increase of 678.5 percent for Green River, and 655.7 percent for Sweetwater over the 2007 fair market value for each system as determined by the Sweetwater County Assessor. [Exhibit 107; Transcript, Vol. I, pp. 174-175].

61.      There have been no major changes or modifications to either Green River or Sweetwater since 2007. Both companies, however, have been adding channels and Internet service with VOIP (Voice Over Internet Protocol). [Transcript, Vol. I, pp. 175; Vol. II, p. 213].

62.      The biggest competition for both Green River and Sweetwater are the satellite systems - Dish, DirecTV, and Echo Star. [Transcript, Vol. I, pp. 175-176].

63.      Carollo stated that even though the population in the areas served by Green River and Sweetwater has been increasing, the number of subscribers for both companies has been decreasing. [Exhibit 108 ; Transcript, Vol. I, pp. 177-179].

64.      Carollo testified both Green River and Sweetwater have accumulations of cash in order to avoid having any debt. Both companies use cash to pay for everything. [Transcript, Vol. I, pp. 179-181].

65.      Sweetwater does not own any real property. [Transcript, Vol. II, p. 200].

66.      Carollo did not supply the Sweetwater County Assessor Personal Property List dated August 6, 2007, for Sweetwater to the Department. [Exhibit 100-B, pp. 63-94 ; Transcript, Vol. II, pp. 207-209].

67.      The Sweetwater County Assessor did not ask either Sweetwater or Green River to report buried or aerial cable as personal property. [Exhibit 100-B, p. 36; Transcript, Vol. II, pp. 209-210].

68.      The personal property detail which both Green River and Sweetwater provided the Sweetwater County Assessor each year did not include licensed vehicles since ad valorem tax is paid on a licensed vehicle when it is registered. [Exhibit 100-B, p. 36 ; Transcript, Vol. II, pp. 210-211].

69.      The amount of state and local property taxes indicated in Exhibit 100-B, p. 49 (Sweetwater Report), may include use tax payments to the Department as well as ad valorem tax payments to Sweetwater County. [Exhibit 100-B, p. 49; Transcript, Vol. II, pp. 211-213].

70.      Blaine B. Baker, a certified public accountant and certified valuation analyst, testified on behalf of Petitioners as an expert witness on asset valuations. His analysis and testimony considered Petitioners as a combined entity which he referred to as Sweetwater (hereafter Sweetwater Combined). [Exhibit 103; Exhibit 104, pp. 325-326; Transcript, Vol. II, pp. 220-227].

71.      Baker, in preparation of his portion of the valuation report presented by Petitioners, Exhibit 104, Valuation of Sweetwater & Green River Cable Systems Report, relied on the Department’s original and revised valuations, the Ibbotson Stocks, Bonds and Inflation Book published by MorningStar, the working trial balances for Sweetwater Combined for the prior five years, and the annual reports for both Green River and Sweetwater filed with the Department. His portion of the Valuation Report was a calculation report rather than a valuation report as differentiated by the National Association of Certified Valuation Analysts. [Exhibit 104; Transcript, Vol. II, pp. 259-263].

72.      Baker stated the Wyoming statutory definition of fair market value was very similar to IRS Revenue Ruling 5960, the fair market standard used by the valuation community. Baker was asked by Petitioners to, in effect, do what the Department is charged with doing, that is, derive a fair market value for Green River and Sweetwater for tax purposes. Wyo. Stat. Ann. § 39-11-101(a)(vi); [Transcript, Vol. II, pp. 280-282].

73.      Baker testified the capitalization rate used by the Department was much lower than he would have expected for a small company such as Sweetwater Combined. He stated the capitalization rates for such companies rarely go lower than 20 percent. [Transcript, Vol. II, pp. 228-230].

74.      Baker stated his opinion the Department’s historical cost less depreciation model (HCLD) is actually a capitalization model, a capitalization of an earnings stream. It is an income model. [Exhibit 104, pp. 325-326; Transcript, Vol. II, pp. 230-231, 239-240, 272, 279].

75.      The capitalization rate used by the Department was 10.65 percent. The Department 2008 HCLD value for Sweetwater was $5,000,491. [Exhibit 100-G, p. 153 ; Transcript, Vol. II, pp. 232-233].

76.      Baker testified that in a straight capitalization model, the working net income is divided by the capitalization rate to reach a value. The working net income for Sweetwater, $532,552, divided by the Department capitalization rate of 10.65 percent, yields a value of $5,000,487. He attributed to minor rounding differences the difference of $4.00 between the Department HCLD value of $5,000,491, and his straight capitalization model calculation of $5,000,387. [Exhibit 100-G, p. 153; Transcript, Vol. II, pp. 233-234, 273].

77.      Baker, and Dr. Sherrill Shaffer, Facts, ¶ 96, used a “build-up”method based on the Ibbotson Stocks, Bonds and Inflation Book published by MorningStar to develop a proposed capitalization rate for Sweetwater Combined. Their “build-up”method started with a risk-free 20-year Treasury bond rate of 4.5 percent. An equity risk premium of 7.1 percent was added in recognition of the fact investors in the cable industry are not investing in a risk-free asset, and thus look for a higher rate to compensate for the risk. An industry-specific risk premium was also considered, which for cable television was a negative 0.65 percent. Finally, a firm size premium of 9.73 percent for firms with less than $211.59 million in market capitalization was added. The net capitalization rate which Baker and Shaffer calculated as appropriate for Sweetwater Combined was thus 20.68 percent (4.5 + 7.1 - 0.65 + 9.73). [Exhibit 104, p. 317; Transcript, Vol. II, pp. 245-250, 263-264].

78.      The use of a capitalization rate of 20.68 percent instead of 10.65 percent in the Department HCLD valuation model for Sweetwater yields a value of $2,575,204. [Exhibit 101; Transcript, Vol. II, pp. 234-235].

79.      The use of a capitalization rate of 20.68 percent instead of 10.65 percent in the straight capitalization model calculation for Sweetwater yields a value of $2,575,203, one dollar ($1.00) less than the Department HCLD value using 20.68 percent. [Transcript, Vol. II, pp.235-236].

80.      Baker asserted the comparison of the results of the Department’s HCLD model using both its 10.65 percent capitalization rate and the proposed rate of 20.68 percent with the results of a straight capitalization model using the same two rates indicates the Department’s calculation of an “enhancement” amount has no bearing on the resulting fair market values. [Exhibit 100-G, p. 153; Transcript, Vol. II, pp. 235-236].

81.      The amount of cash attributable to Sweetwater from the combined cash for both Sweetwater and Green River is $1,778,340. If that amount of cash was included as “Intangibles” in the Department’s HCLD model using a capitalization rate of 10.65 percent, and was not subtracted as under “System Exempt Intangibles, Net,” the resulting HCLD value would be $5,000,502. This value is $11 more than the value derived by the Department’s HCLD model, $5,000,491, using 10.65 percent when cash is not included as an intangible. Subtracting cash of $1,778,340 from the HCLD value of $5,000,502, yields a final value of $3,222,162. Facts, ¶ 75. [Exhibit 100-G, p. 153, Lines I-I, IV, and VIII; Transcript, Vol. II, pp. 236-238].

82.      The inclusion of $1,778,340 in cash as “Intangibles” in the Department’s HCLD model with a capitalization rate of 20.68 percent, and not subtracting that cash under “System Exempt Intangibles, Net,” results in an HCLD value of $2,575,209. This is $5.00 more than the valued derived by the Department’s HCLD model, $2,575,204, using 20.68 percent when cash is not included as an intangible. Subtracting cash of $1,778,340 from the HCLD value of $2,575,209 yields a final value of $796,869. The change in capitalization rate thus lowers the overall fair market value. Facts, ¶ 78, 81. [Exhibit 100-G, p. 153, Lines I-I, IV, and VIII; Transcript, Vol. II, p. 239].

83.      Baker, based on his review of the Department’s HCLD model, agreed with the combined gross operating revenues and gross expenses. He also agreed, in theory, with the inclusion of federal income tax although he had a concern over the percentage used. [Exhibit 104, pp. 326, 327; Transcript, Vol. II, pp. 242-243].

84.      Baker, based on his review of the Department’s HCLD model, did not agree with the add back of lease payments and the corresponding income tax. He also did not agree with the income tax rate used by the Department. He asserted the correct income tax rate should have been a 34 percent flat rate. Finally, he asserted the Department capitalization rate was too low, and should be the proposed rate of 20.68 percent. [Exhibit 104, pp. 327-328; Transcript, Vol. II, pp. 243-244].

85.      Baker testified his research indicated the cable industry, in determining the value of a business, most commonly considers the income stream known as EBITDA - Earnings Before Interest, Taxes, Depreciation, and Amortization. This income stream is similar to the net operating income used by the Department, but does not take into consideration interest, taxes, depreciation, and amortization. Baker was able to calculate EBITDA for Sweetwater Combined as it had no interest and no amortization expense. It paid federal income tax as a single subchapter S corporation. The income tax it did pay was easily identified along with any depreciation, thus both could be added back to net operating income to reach EBITDA. [Exhibit 104, p. 328; Transcript, Vol. II, pp. 244-245, 274].

86.      Baker’s proposed capitalization rate of 20.68 percent was an after-tax rate. The EBITDA, which Baker considered to be the industry standard for valuation, uses a pre-tax rate. He thus converted his 20.68 percent after-tax capitalization rate to a pre-tax rate of 31.33 percent by dividing the after-tax rate of 20.68 by one minus the federal tax rate of 34 percent (20.68%/1-.34 = 31.33%). The 31.33 percent represents the “pre-tax” capitalization rate which should be applied to the EBITDA (cash flow stream to capitalize). [Exhibit 104, p. 329; Transcript, Vol. II, pp. 251-252].

87.      Baker, using the EBITDA of Sweetwater Combined of $1,208,167, and his calculated pre-tax capitalization rate of 31.33 percent, calculated a fair market value for Sweetwater Combined of $3,855,852 ($1,208,167/.3133). [Exhibit 104, p. 339; Transcript, Vol. II, pp. 252-254].

88.      Baker allocated the Sweetwater Combined fair market value 70 percent to Sweetwater and 30 percent to Green River based on their respective reported revenues. He applied these allocated percentages to a Wyoming Adjusted Value, i.e. a value net of the value of intangibles, to reach a fair market value for Sweetwater of $1,482,736, and for Green River of $639,807. [Exhibit 100-G, p. 154; Exhibit 100-I, p. 277; Exhibit 104, pp. 336, 340, 341; Transcript, Vol. II, pp. 254-257].

89.      Baker used a fair market value approach with no discounts in his analysis of Sweetwater Combined. He did not consider levels of competition as he would in a complete valuation. [Exhibit 104 ; Transcript, Vol. II, pp. 267-268].

90.      The Department capitalization rate of 10.65 percent is an after-tax rate. The equivalent pre-tax rate is 16.14 percent (10.65%/1-.34 = 16.14%). The fair market value for Sweetwater Combined using the Department’s pre-tax capitalization rate of 16.14 percent, and the EBITDA of Sweetwater Combined of $1,208,167, would be $7,485,545 ($1,208,167/.1614). [Exhibit 104, p. 339; Transcript, Vol. II, pp. 276-277].

91.      Dr. Sherrill Shaffer testified on behalf of Petitioners as an expert on valuation. He is the Guthrie Professor of Banking and Financial Services at the University of Wyoming. [Exhibit 102; Transcript, Vol. II, pp. 285-291].

92.      Dr. Shaffer prepared a portion of Exhibit 104, Valuation of Sweetwater & Green River Cable Systems Report. He understood his purpose in the report was to evaluate the fair market value of Sweetwater and Green River, and as part of that process to make an independent assessment of the Department’s valuation for both. He was also asked to provide an estimate for tax purposes of the value of intangible assets which are identified as deductible from taxable value under the Wyoming statutes. He stated he had reviewed the applicable Wyoming statutes as well as the appropriate Department regulations. [Exhibit 104; Transcript, Vol. II, pp. 291-292].

93.      Dr. Shaffer testified the Department HCLD model basically divides net operating income by a capitalization rate, and therefore functions as what he termed a discounted cash flow model. The inputs in the Department HCLD model represent the traditional HCLD model, however, the manner in which the line items are utilized makes it a discounted cash flow model (DCF). [Exhibit 100-G, p. 153; Exhibit 100-K, p. 276; Exhibit 104, pp. 313-314 Transcript, Vol. II, pp. 293-296].

94.      Dr. Shaffer stated the literature he reviewed which discussed cable television companies, as well as IRS Revenue Ruling 5960, specifically recommended the use of a discounted cash flow method to value a company. He also indicated that Revenue Ruling 5960, in Section 6, states that because rates of return vary widely across companies, and also vary from year to year, it is not possible to provide an accurate valuation based on a standardized table of capitalization rates for an industry when attempting to value a closely held company. [Transcript, Vol. II, pp. 296-297].

95.      Dr. Shaffer testified the discounted cash flow model has only two inputs, net operating income or net cash flow, and the capitalization rate. The ratio of these two numbers is the value of the business. It is a fair market value because the capitalization rate reflects the stream of future earnings which is what a willing buyer would purchase, from a financial perspective, in buying a business. The capitalization rate thus reflects what a willing buyer should pay and a willing seller accept for a business. The value derived would equal the total business value which is the sum of the book value plus the value of intangibles. [Exhibit 104, p. 314; Transcript, Vol. II, pp. 298-299, 316-318].

96.      Dr. Shaffer reiterated the applicability of the capitalization rate “build-up method” comprising a risk-free rate, an equity premium, an industry adjustment, and a size category adjustment as described by Mr. Baker. Facts, ¶ 77. Dr. Shaffer noted that, based on a lack of adequate data, he and Mr. Baker did not include a fifth component representing a firm-specific risk rate which would be included in a complete valuation. The rate they developed would therefore apply to a group of companies of similar size operating in the cable industry. [Exhibit 104, p. 317; Transcript, Vol. II, pp. 300-305].

97.      Dr. Shaffer asserted that in valuing a company, the industry practice was to use the equity and debt weighting which described the company under consideration rather than an industry average. [Exhibit 104, pp. 315-317; Transcript, Vol. II, pp. 302-303].

98.      Dr. Shaffer asserted the proper equity-to-debt or capital-to-debt ratio for Sweetwater and Green River should be 100 percent equity and 0 percent debt using a capitalization rate of 20.68 percent since neither company has any debt. [Exhibit 104, p. 338; Transcript, Vol. II, pp. 305-307].

99.      Dr. Shaffer testified that even though Green River and Sweetwater had not been sold, and thus goodwill and other intangibles had not been separately listed on a balance sheet, there were accepted methods for imputing the contribution to value by intangibles. He stated that pursuant to economic theory, and under Section 4 of IRS Revenue Ruling 5960, any fair market value in excess of a company’s net book value is attributable to intangible assets. Although work force in place was in the list of intangibles under Wyoming statutes, Dr. Shaffer did not include a work force in place value as an exempt asset in his calculations since it was not enumerated in Petitioners’ appeals. [Exhibit 104, pp. 330-331; Transcript, Vol. II, pp. 307-309, 324-326].

100.    Dr. Shaffer testified that economic theory would not typically include cash as an intangible asset. Under Wyoming statutes, however, cash is enumerated as deductible, along with other items which are universally recognized as intangible assets. [Transcript, Vol. II, p. 308].

101.    The value for exempt assets calculated by Dr. Shaffer ranged from $2,002,438, based on an economically defensible total business value, to $9,128,779, based on the Department’s revised valuation. Dr. Shaffer stated he reached these figures by first deducting cash. He then subtracted the net book value from the fair market value, and from that result subtracted an imputed value for work force in place to reach a collective value for franchise value, customer-based intangibles, and supplier-based intangibles. He indicated if he had not calculated and deducted an imputed value for work force in place, the intangibles to be deducted from business value consistent with the Wyoming statutes would have been $2 million higher. [Exhibit 104, pp. 331, 333, 340; Transcript, Vol. II, pp. 308-309, 311-315].

102.    Dr. Shaffer, using two separate methods, calculated what he characterized as “Wyoming Adjusted Value” for Sweetwater Combined of $2,122,543. In his first method, he deducted intangibles of $2,002,438 from an economically defensible value of $4,124,981 [Exhibit 104, p. 338, Table 1, Last Line ($2,575,203 + $1,549,778)] to arrive at a value for Sweetwater Combined of $2,122,543. In his second method, he deducted intangibles of $9,128,779 from the Department’s revised combined valuation of $11,251,322 [Exhibit 100-G, p. 152 - Wyoming Adjusted Value - Sweetwater, $7,788,322, plus Exhibit 100-K, p. 275 - Wyoming Adjusted Value - Green River, $3,463,000] which yielded the same value, $2,122,543. This combined taxable value of $2,122543 is 27 percent greater than the corresponding 2007 combined fair market value for Petitioners as determined by the Sweetwater County Assessor. Dr. Shaffer attributes the increase in value to normal business growth, and the impact of a more comprehensive and refined valuation methodology. Facts, ¶¶ 57, 58; [Exhibit 104, pp. 334, 338, 340; Exhibit 105; Exhibit 106; Transcript, Vol. II, pp. 308-309].

103.    Dr. Shaffer attributed $1,482,736 of the total Sweetwater Combined fair market value of $2,122,543, to Sweetwater, and $639,807 to Green River, based on an allocation of revenue. The assessed value for Sweetwater would thus be $140,860 (9.5% x $1,482,736). The assessed value for Green River would be $60,782 (9.5% x $639,807). [Exhibit 104 pp. 334, 341; Transcript, Vol. II, pp. 309-311].

104.    Any portion of the Statement of the Case or Contentions and Issues set forth above, or any portion of the Conclusions of Law - Principles of Law or the Conclusions of Law - Application of Principles of Law set forth below which includes a finding of fact, may also be considered a Finding of Fact and, therefore, is incorporated herein by reference.

CONCLUSIONS OF LAW - PRINCIPLES OF LAW

105.    A taxpayer “aggrieved by any final administrative decision of the department may appeal to the board.” Wyo. Stat. Ann. § 39-13-109(b)(iii). State assessed taxpayers are entitled to this remedy:

Following [the Department’s] determination of the fair market value of property the department shall notify the taxpayer by mail of the assessed value. The person assessed may file written objections to the assessment with the board within thirty (30) days of the date of postmark and appear before the board at a time specified by the board. . . .

            Wyo. Stat. Ann. § 39-13-102(n).

106.    The role of this Board is strictly adjudicatory:

It is only by either approving the determination of the Department, or by disapproving the determination and remanding the matter to the Department, that the issues brought before the Board for review can be resolved successfully without invading the statutory prerogatives of the Department.

Amoco Production Company v. Wyoming State Board of Equalization, 12 P.3d 668, 674 (Wyo. 2000). The Board’s duty is to adjudicate the dispute between taxpayers and the Department.

107.    “The burden of proof is on the party asserting an improper valuation.” Amoco Production Company v. Wyoming State Board of Equalization, 899 P.2d 855, 858 (Wyo. 1995); Teton Valley Ranch v. State Board of Equalization, 735 P.2d 107, 113 (Wyo. 1987); Britt v. Fremont County Assessor, 2006 WY 10, ¶ 17, 126 P.3d 117, 123 (Wyo. 2006); Thunder Basin Coal Company v. Campbell County, Wyoming Assessor, 2006 WY 44, ¶ 13, 132 P.3d 801, 806 (Wyo. 2006); Chevron U.S.A., Inc. v. Department of Revenue, State of Wyoming, 2007 WY 79, ¶ 30, 158 P.3d 131, 139(Wyo. 2007). The Board’s Rules provide:

[T]he Petitioner shall have the burden of going forward and the ultimate burden of persuasion, which burden shall be met by a preponderance of the evidence. If Petitioner provides sufficient evidence to suggest the Department determination is incorrect, the burden shifts to the Department to defend its action….

Rules, Wyoming State Board of Equalization, Chapter 2 § 20.

108.    The Wyoming Supreme Court has summarized the procedure the Board must follow when a state-assessed taxpayer challenges the fair market value determined by the Department:

The Department’s valuations for state-assessed property are presumed valid, accurate, and correct. Chicago, Burlington & Quincy R.R. Co. v. Bruch, 400 P.2d 494, 498-99 (Wyo. 1965). This presumption can only be overcome by credible evidence to the contrary. Id. In the absence of evidence to the contrary, we presume that the officials charged with establishing value exercised honest judgment in accordance with the applicable rules, regulations, and other directives that have passed public scrutiny, either through legislative enactment or agency rule-making, or both. Id.

        The petitioner has the initial burden to present sufficient credible evidence to overcome the presumption, and a mere difference of opinion as to value is not sufficient. Teton Valley Ranch v. State Board of Equalization, 735 P.2d 107, 113 (Wyo. 1987); Chicago, Burlington & Quincy R.R. Co., 400 P.2d 499. If the petitioner successfully overcomes the presumption, then the Board is required to equally weigh the evidence of all parties and measure it against the appropriate burden of proof. Basin [Electric Power Coop. Inc. v. Dep’t of Revenue, 970 P.2d 841,] at 851 [(Wyo. 1998)]. Once the presumption is successfully overcome, the burden of going forward shifts to the Department to defend its valuation. Id. The petitioner however, by challenging the valuation, bears the ultimate burden of persuasion to prove by a preponderance of the evidence that the valuation was not derived in accordance with the required constitutional and statutory requirements for valuing state-assessed property. Id.

Amoco Production Company v. Department of Revenue et al., 2004 WY 89, ¶¶ 7-8, 94 P.3d 430, 435-436 (Wyo. 2004). Accord, Airtouch Communications, Inc. v. Department of Revenue, State of Wyoming, 2003 WY 114, ¶ 12, 76 P.3d 342, 348 (Wyo. 2003); Colorado Interstate Gas Company v. Wyoming Department of Revenue, 2001 WY 34, ¶¶ 9-11, 20 P.3d 528, 531 (Wyo. 2001). The presumption the Department correctly performed the assessment rests in part on the complex nature of taxation. Airtouch Communications, Inc., supra, 2003 WY 114, ¶ 13, 76 P.3d at 348.

109.    “The phrase, ‘preponderance of the evidence,’ has been given various definitions by different courts but, according to McCormick et al. on Evidence 2nd Ed. H.B., § 339, p. 794, the most acceptable meaning seems to be proof which leads the trier of fact to find that the existence of the contested fact is more probable than its non-existence.” Scherling v. Kilgore, 599 P.2d 1352, 1359 (Wyo. 1979).

110.    This appeal falls within a statute which does not establish any specific standard to guide the Board’s review. Wyo. Stat. Ann. § 39-13-109(b)(iii). In the absence of specific standards set by statute or rule, we judge the Department’s valuation by the general standard that the valuation must be in accordance with constitutional and statutory requirements for valuing state-assessed property. Amoco Production Company v. Department of Revenue et al., 2004 WY 89, ¶¶ 7-8, 94 P.3d 430; Wyo. Stat. Ann. § 39-13-102(n). In doing so, we must take into account “the rules, regulations, orders and instructions prescribed by the department.” Wyo. Stat. Ann. § 39-11-102.1(c)(iv). We also consider the case in the context of the Board Rule governing the burdens of going forward and of persuasion. Rules, Wyoming State Board of Equalization, Chapter 2, § 20. Chevron U.S.A., Inc., et al., Docket No. 2002-54 (January 25, 2005), 2005 WL 221595 (Wyo. St. Bd. Eq.).

111.    “As we have often stated, our rules of statutory construction focus on discerning the legislature’s intent. In doing so, we begin by making an ‘inquiry respecting the ordinary and obvious meaning of the words employed according to their arrangement and connection.’ Parker Land and Cattle Company v. Wyoming Game and Fish Commission, 845 P.2d 1040, 1042 (Wyo.1993) (quoting Rasmussen v. Baker, 7 Wyo. 117, 133, 50 P. 819, 823 (1897)). We construe the statute as a whole, giving effect to every word, clause, and sentence, and we construe together all parts of the statute in pari materia. State Department of Revenue and Taxation v. Pacificorp, 872 P.2d 1163, 1166 (Wyo.1994).” Chevron U.S.A., Inc. v. Department of Revenue, 2007 WY 79, ¶ 15, 158 P.3d. 131, 136 (Wyo. 2007).

112.    The Wyoming Supreme Court has previously summarized a number of useful precepts concerning statutory interpretation:

Statutes must be construed so that no portion is rendered meaningless. (citation omitted) Interpretation should not produce an absurd result. (citation omitted) We are guided by the full text of the statute, paying attention to its internal structure and the functional relation between the parts and the whole. (citations omitted) Each word of a statute is to be afforded meaning, with none to be rendered superfluous. (citation omitted) Further, the meaning afforded to a word should be that word’s standard popular meaning unless another meaning is clearly intended. (citation omitted) If the meaning of a word is unclear, it should be afforded the meaning that best accomplishes the statute’s purpose. (citation omitted) We presume that the legislature acts intentionally when it uses particular language in one statute, but not in another. (citations omitted) If two sections of legislation appear to conflict, they should be given a reading that gives them both effect. (citation omitted)

Rodriguez v. Casey, 2002 WY 111, ¶ 10, 50 P.3d 323, 326-327 (Wyo. 2002); quoted in Hede v. Gilstrap, 2005 WY 24, ¶ 6, 107 P.3d 158, 163 (Wyo. 2005).

113.    “The omission of words from a statute must be considered intentional on the part of the legislature. (citation omitted) Words may not be supplied in a statute where the statute is intelligible without the addition of the alleged omission. (citations omitted) Words may not be inserted in a statutory provision under the guise of interpretation. (citations omitted) The Supreme Court will not read into laws what is not there. (citations omitted)” Matter of Adoption of Voss, 550 P.2d 481, 485 (Wyo. 1976).

114.    It is an elementary rule of statutory interpretation that all portions of an act must be read in pari materia, and every word, clause and sentence of it must be considered so that no part will be inoperative or superfluous. Also applicable is the oft-repeated rule it must be presumed the Legislature did not intend futile things. Hamlin v. Transcon Lines, 701 P.2d 1139, 1142 (Wyo. 1985). See also, TPJ v. State, 2003 WY 49, ¶ 11, 66 P.3d 710, 713 (Wyo. 2003).

115.    Administrative rules have the force and effect of law. Wyo. Dep’t of Revenue v. Union Pacific Railroad Co., 2003 WY 54, ¶ 18, 67 P.3d 1176, 1184 (Wyo. 2003); Painter v. Abels, 998 P.2d 931, 939 (Wyo. 2000).

116.    “Basis of tax. The following shall apply:

* * *

(ii) All taxable property shall be annually valued at its fair market value. Except as otherwise provided by law for specific property, the department shall prescribe by rule and regulation the appraisal methods and systems for determining fair market value using generally accepted appraisal standards;”

Wyo. Stat. Ann. § 39-13-103 (b)(ii).

117.    “The department shall annually value and assess the following property at its fair market value for taxation:

* * *   (iii) Property of cable or satellite televisions companies.”

Wyo. Stat. Ann. § 39-13-102 (m)(ix).

118.    “Annually, on or before the dates hereafter indicated, any person whose property is subject to W.S. 39-13-102(m) shall sign under oath and submit a statement listing the information relative to the property and affairs of the company as the department may require to assess the following property:

           (A) May 1, rail car companies;

           (B) April 1, pipeline companies, electric utilities, telephone and telegraph companies and other public utilities;

           (C) May 1, railroad companies.”

Wyo. Stat. Ann. § 39-13-107 (a)(ii).

119.    The Department’s Rules provide:

                                               These rules are intended to describe the valuation methodology to be used to determine the taxable value of Division-assessed utility, railroad and telecommunications properties for ad valorem tax purposes. The formula, methods, systems, standards, and criteria to be used by the Department of Revenue, Property Tax Division, to determine fair market value are set forth herein. Unless otherwise provided by law, these rules also prescribe the level of assessment to be applied to all Division assessed property to determine assessed value.

Rules, Wyoming Department of Revenue, Chapter 7, § 2.

120.    The Department’s Rules provide:

Each Division-assessed company as specified in W.S. 39-13-102(m)(ii)-(ix) shall submit an annual report to the Department of Revenue, Property Tax Division, on or before the mandatory dates specified by statute. Any request for extension of the filing deadline with the Department shall be submitted in writing prior to the statutory due date. Extensions shall not be granted for greater than thirty (30) calendar days. . . .

Rules, Wyoming Department of Revenue, Chapter 7, § 5(a.).

121.    “Following determination of the fair market value of property the department shall notify the taxpayer by mail of the assessed value. The person assessed may file written objections to the assessment with the board within thirty (30) days of the date of postmark and appear before the board at a time specified by the board….” Wyo. Stat. Ann. § 39-13-102 (n).

122.    The Department’s Rules provide the following pertinent definitions:

Section 4. Definitions. For the purpose of ad valorem taxation under these rules, the definitions set forth in Title 39, as amended, are incorporated herein by reference. In addition, the following definitions shall apply:

* * *(b.) “Capitalization rate” means a ratio between anticipated future income, either accounting income or cash flow and present value. Capitalization ratios can be derived from any income level, but once they have been so derived they can only be applied to a comparable income level.

* * *

(d.) “Depreciation” means a loss of utility and hence value from any cause. Depreciation may take the form of physical depreciation, functional obsolescence, or external obsolescence.

(i) “Physical Depreciation” means the physical deterioration as evidenced by wear and tear, decay or depletion of the property.

(ii) “Functional obsolescence” means the impairment of functional capacity or efficiency, which reflects a loss in 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.

                                 (iii) “External obsolescence” means impairment of desirability or useful life arising from factors external to the property, such as economic forces or environmental changes which affect supply-demand relationships in the market. The methods to measure economic obsolescence may include, but are not limited to:

(A.) Capitalization of the income or rent loss attributable to the negative influence;

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

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

* * *

(g.) “Fair market value” is defined as the amount in cash, or terms reasonably equivalent to cash, that a well informed buyer is justified in paying for a property and a well informed seller is justified in accepting, assuming that neither of the parties thereto are acting under undue compulsion and assuming further that the property has been offered in the market place for a reasonable length of time.

* * *

(k.) “Unitary valuation” is the process of determining the value of a company as a whole without reference to individual parts. The unitary approach is used in the valuation of properties which derive their value from interdependent assets working together. The market value is not a summation of fractional appraisals, but the value of a company as an operating unit.

Rules, Wyoming Department of Revenue, Chapter 7, § 4 (b.), (d.), (g.), (k.).

123.    The Department’s Rules provide:

Section 6. Appraisal Methods. The appraisal techniques which may be used by the Department of Revenue, Property Tax Division include the approaches described in this section. Each approach used shall be an appropriate method for the type of property being valued; that is, the property shall fit the assumptions inherent in the appraisal method in order to calculate or estimate the fair market value of the property. Each approach used shall also consider the nature of the property or industry, and the regulatory and economic environment within which the property operates.

(a.) All taxable property shall be annually valued at its fair market value, using generally accepted appraisal standards as prescribed in W.S. 39-13-103(b)(ii) and by this Chapter.

(b.) Department assessment appraisers shall estimate the fair market value utilizing specific appraisal standards which reflect three distinct methods of data analysis: i.e. sales comparison or market; cost; and income capitalization. One or more of these approaches shall be used in all determinations of value, except when utilizing the “best information available method”.

(c.) All Department appraised and assessed properties as specified in W.S. 39-13-102 (m)(ii-ix) shall be annually reported by the taxpayer, valued and assessed as required by subsection (a) of this section or as specifically prescribed in these rules

* * *

(ii) Cost Approaches to Value

* * *

(C.) Historical Cost. The historical cost approach is a method of estimating the value of property based upon the actual or first cost of the property at the time it was originally constructed and placed in service. In an assembled property, the historical cost as of any date means, the first cost as defined, plus all subsequent additions and replacements less deduction or removals. The historical cost shall consider all forms of depreciation and appreciation. Items such as construction work in progress, plant held for future use, acquisition adjustments, non-capitalized lease property, materials, supplies and other items shall also be included to the extent they are taxable and not otherwise valued.

(iii) Income Capitalization to Value* * *(B.) The Income or Capitalized Earnings Approach. The income or capitalized earnings approach is a method of estimating the value of property by converting anticipated benefits to be derived from the ownership of the property into a value estimate as is reflected or accomplished by yield capitalization. These benefits can be reflected through the net operating income…of a company. …Both direct and yield capitalization methodologies are considered to be the income or capitalized earnings approach as discussed in this subsection.

* * *

(2.) Net operating income…is discounted to fair market value using a capitalization rate developed by the methods described in Section 7 of this chapter.

Rules, Wyoming Department of Revenue, Chapter 7, § 6, 6(a.), 6(c.)(ii)(C.), 6(c.)(iii)(B.)(2.).

124.    The Department’s Rules provide:

Section 7. Capitalization Rate Development

(a.) The capitalization rate is any rate used to convert an income stream into a present worth of future benefits. The rate reflects the relationship between one year’s income or an annual average of several years’ income and the corresponding value. The Department of Revenue, Property Tax Division, shall annually calculate capitalization rates based upon the band of investment method as defined by these rules for all Department-assessed industries. The primary components of the rate shall include capital structure (book, market and/or regulatory) as determined for the industry and/or company being appraised (if industry data is not available or applicable) and cost of capital (debt, preferred, and equity) as developed in appropriate money markets.

* * *

(b.) Not later than the 15^th day of March each year the Department of Revenue, Property Tax Division, shall conduct a public meeting for presentation of the capitalization rates to be used for the current year in valuation of Department-assessed property…. A final determination of the capitalization rates shall be made available to industry representatives, County Assessors, and other interested parties annually by the Property Tax Division on or before March 31^st or as soon thereafter as possible. This final determination of rates shall not affect the rights of a taxpayers [sic] to object in accordance with contested case procedures of the Administrative Procedure Act (W.S. 16-3-101 et seq.) and the Rules of Practice and Procedure for Appeals Before the Wyoming State Board of Equalization Involving Taxation Matters.

Rules, Wyoming Department of Revenue, Chapter 7, § 7(a.), (b.).

125.    The Wyoming statutes provide:

The following property is exempt from property taxation:

* * *

(xxix) Intangible personal property as provided by subsection (b) of this section, and except as specified in W.S. 39-13-103(b)(xi);

* * *

(b) The following shall be exempt from property taxation:

(i) Goodwill if established and separately identified on a company's books and records, or affirmed by generally accepted accounting, or appraisal, principles;

(ii) Any of the following intangible items:

(A) Workforce in place including its composition and terms and condition, contractual or otherwise, of its employment;

(B) Business books and records, operating systems or any other information base including lists or other information with respect to current or prospective customers;

(C) Any patent, copyright, formula, process, design, pattern, know-how, format, proprietary computer software or other similar items;

(D) Any customer-based intangible. As used in this subparagraph, "customer-based intangible" means composition of market, market share and any other value resulting from future provision of goods or services pursuant to relationships, contractual or otherwise, in the ordinary course of business with customers. In the case of a financial institution, "customer-based intangible" includes deposit base and similar items;

(E) Any supplier-based intangible. As used in this subparagraph, "supplier-based intangible" means any value resulting from future acquisitions of goods or services pursuant to relationships, contractual or otherwise, in the ordinary course of business with suppliers of goods or services to be used or sold by the taxpayer.

(iii) Any license, permit or other right granted by a person, or by a governmental unit or an agency or instrumentality thereof;

(iv) Any covenant not to compete, or other arrangement to the extent such arrangement has substantially the same effect as a covenant not to compete, entered into in connection with an acquisition directly or indirectly of an interest in a trade or business or substantial portion thereof;

(v) Any franchise, trademark or trade name;

(vi) Any of the following intangible items:

(A) Money and cash on hand including currency, gold, silver and other coin, bank drafts, certified checks and cashier's checks;

(B) Money on deposit;

(C) Accounts receivable and other credits;

(D) Bonds, promissory notes, debentures and other evidences of debt;

(E) Shares of stock or other written evidence of ownership;

(F) Judgments for the payment of money;

(G) Annuities and annuity contracts.

Wyo. Stat. Ann. §§ 39-11-105(a)(xxix), (b)(i)-(vi).

126.    The Department’s Rules provide:

Section 8. Intangible Assets.

Intangible assets as specified in W. S. 39-11-105 (b) (i-vi) shall be removed from the Fair Market Value, to the extent that the taxpayer can establish and document, to the satisfaction of the Department, the contributory value to the unit, using generally accepted appraisal standards or generally accepted accounting principles, as appropriate. Chapter 14, Section 10 “Ad Valorem Tax Exemption Standards” of these rules identifies the criteria requirements for exemption of intangibles, statutory conditions and the types of exemptions for consideration.

Rules, Wyoming Department of Revenue, Chapter 7, § 8.

127.    The Department’s Rules provide:

Section 9. Reconciliation. The appraiser shall consider the relative significance, applicability and appropriateness of the indications of value derived from the approaches to value or methods outlines above, and will place the most consideration and reliance on the value of the indicator which, in his professional judgment, best approximates the value of the subject property. The appraiser shall evaluate all alternative conclusions and correlate the value indicators to arrive at a final estimate of fair market value.

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

128.    The Department’s Rules provide:

Section 14. Appraisal Basis Explanations to Taxpayer. Any taxpayer whose property is appraised pursuant to W. S. 39-13-102(m)(ii)-(ix) will be notified of a preliminary estimate of fair market value of the subject property. The taxpayer shall receive:

(a.) A statement indicating those methods set forth in Section 6 of this Chapter which were used in arriving at the value; and, upon request,

(b.) The identification and values of all elements and data used in each method, as well as any simplifying assumptions which have been made or deviations from the method as set forth in these Rules. This includes identification of any industry-wide or other data not specific to the taxpayer’s property and the utilization of such data.

Rules, Wyoming Department of Revenue, Chapter 7, § 14.

129.    “The proper application of appraisal methods to the facts is an issue of ultimate fact requiring de novo review [on appeal from the Board]…. An ultimate fact is a mixture of fact and legal precept.” PacifiCorp, Inc., v. Department of Revenue, 2001 WY 84, ¶6 , 31 P.3d 64, 65(Wyo. 2001).

CONCLUSIONS OF LAW: APPLICATION OF PRINCIPLES OF LAW

130.    The Board has jurisdiction to consider and decide these combined appeals. Wyo. Stat. Ann. § 39-11-102.1(c).

131.    The primary issues of capitalization rates and the treatment of intangible property in these consolidated appeals have been the subject of prior Board and Wyoming Supreme Court decisions. Airtouch Communications, Inc. v. Department of Revenue, State of Wyoming, 2003 WY 114, 76 P.3d 342 (Wyo. 2003); Pacificorp, Inc. v. Department of Revenue, 2001 WY 84, 31 P.3d 64 (Wyo. 2001); RT Communications, Inc, v. State Board of Equalization, 11 P.3d 915 (Wyo. 2000). These issues in the context of the valuation of cable televisions systems are, however, a matter of first impression as 2008 was the first year in which the Department valued cable and satellite systems as stated-assessed property. Wyo. Stat. Ann. § 39-13-102(m)(ix); 2007 Wyo. Sess. Laws, Ch. 4. This being the first year for state assessment also explains why forms for the valuation of telephone companies were modified for use by the Department in its analysis of Petitioners rather than forms designed specifically for cable and satellite systems. [Transcript, Vol. I, p. 141]. Cable and satellite systems, prior to 2008, were valued by Wyoming county assessors. Facts, ¶¶ 57, 58, 67, 68.

132.    Petitioners filed these consolidated appeals pursuant to Wyo. Stat. Ann. § 39-13-102(n). We presume the appeals were also filed pursuant to Wyo. Stat. Ann. § 39-13-109(b)(iii) under which “[a]ny person aggrieved by any final administrative decision of the department may appeal to the state board of equalization.” We thus judge the Department’s valuation decisions by the general standard that the valuation must be in accordance with constitutional and statutory requirements for valuing state-assessed property. Amoco Production Company v. Department of Revenue et al., 2004 WY 89, ¶¶ 7-8, 94 P.3d 430, 435-436; Wyo. Stat. Ann. § 39-13-102(n). The burden of going forward and the burden of ultimate persuasion rests with Petitioners. Rules, Wyoming State Board of Equalization, Chapter 2 § 20. Conclusions, ¶¶ 105, 107, 108, 110.

133.    In applying these review standards, the Board must presume the Department’s valuations are valid, accurate, and correct. BP America Production Company v. Department of Revenue, 2005 WY 60, ¶ 26, 112 P.3d 596, 608 (Wyo. 2005). Petitioners had the burden of presenting credible evidence to overcome the presumption. Id.; Chevron U.S.A., Inc. v. Department of Revenue, 2007 WY 79, ¶ 30, 158 P.3d 131, 139 (Wyo. 2007). A taxpayer’s burdens of proof and persuasion are further articulated in the Board’s Rules. Rules, Wyoming State Board of Equalization, Chapter 2 § 20. Conclusions, ¶¶ 107, 108, 109.

134.    These consolidated appeals present two distinct issues for consideration. The first is the appropriate capitalization rate for valuing Sweetwater and Green River. The second is the method of accounting, in the valuation process, for statutorily-defined intangible assets.

CAPITALIZATION RATE

135.    The Department, in valuing state-assessed property, which now includes cable and satellite systems, establishes a “unitary valuation”which determines the value of a company as a whole without reference to its individual parts. Wyo. Stat. Ann. §§ 39-13-102(m)(ii-ix); Rules, Wyoming Department of Revenue, Chapter 7, § 4(k.); Conclusions, ¶ 122.

136.    The Department Rules also authorize use of one or more of three methods of determining the value of a company - sales comparison or market; cost; and income capitalization. Rules, Wyoming Department of Revenue, Chapter 7, § 6(b.); Conclusions, ¶ 123.

137.    The Department Rules further provide for development of a capitalization rate to be used, as necessary, in each valuation methodology. Rules, Wyoming Department of Revenue, Chapter 7, § 7; Conclusions, ¶ 124.

138.    The Department Rules concerning development of capitalization rates require the primary components of such rates:

shall include capital structure (book, market and/or regulatory) as determined for the industry and/or company being appraised (if industry data is not available or applicable) and cost of capital (debt, preferred, and equity) as developed in appropriate money markets.

Rules, Wyoming Department of Revenue, Chapter 7, § 7(a.) (emphasis added); Conclusions, ¶ 124.

139.    The Department 2008 capitalization rate of 10.65 percent for cable and satellite systems was developed based on an analysis of six companies chosen by Ms. Cummings from her research of public financial publications such as ValueLine. The mean (average) percentage of equity (42%), and mean percentage of debt (58%) of the six companies was used by the Department in reaching a capitalization rate of 10.65 percent. Facts, ¶ 24

140.    The Department acknowledged, however, both Green River and Sweetwater had zero percent (0%) debt, and 100 percent (100%) equity. Ms. Cummings, in fact, stated in her analysis of each company that both Green River and Sweetwater had capital structures and operations which were not comparable to, and were significantly different from, the six companies in the Rate Study. She specifically stated the industry capitalization rate was not applicable to Sweetwater. Facts, ¶¶ 26-30.

141.    The Department Rules clearly provide that if industry data on capital structure “is not available or applicable,” then the components of the capitalization rate shall include the capital structure for the company being appraised. Rules, Wyoming Department of Revenue, Chapter 7, § 7(a.)(emphasis added); Conclusions, ¶¶ 124, 138.

142.    The Department’s use of a capital structure of 42 percent (42%) equity and 58 percent (58%) debt in its Rate Study based on six publicly traded companies operating in multiple jurisdictions as opposed to the zero percent (0%) debt and 100 percent (100%) equity of Sweetwater and Green River operating in a relatively small geographic area clearly raises a concern as to the “applicability” of the industry data to Green River and Sweetwater, and therefore use of the Department’s capitalization rate in valuing those companies. The only acceptable response to such a concern, particularly in light of the sharp differences in capital structures and operations between Green River and Sweetwater and the six companies in the Rate Study as acknowledged by the Department, is that the industry data was not “applicable,” and thus the Department’s industry capitalization rate should not have been used to value Green River and Sweetwater. The Department Rules therefore required development of an appropriate capitalization rate based on the capital structure of Green River and Sweetwater to be used in valuing both companies.

143.    Having concluded the Department cable and satellite industry capitalization rate of 10.65 percent was not an appropriate rate to use in valuing Green River and Sweetwater, the obvious next question is what rate should have been used?

144.    The two primary witnesses for Petitioners with regard to the appropriate capitalization rate to value each company were both qualified as expert witnesses. Blaine B. Baker is a certified valuation analyst. Dr. Sherrill Shaffer is a banking and financial services professor at the University of Wyoming. Their joint report set out an analysis of the Department HCLD valuation model as well as a discussion of what they assert should have been the appropriate capitalization rate for valuing Petitioners, and a description of how that rate should be calculated. Facts, ¶¶ 70-71, 77, 91-92, 94, 96.

145.    Baker and Shaffer each testified to, and highlighted by example calculations, their respective conclusions the Department HCLD valuation model was actually a capitalization model, a capitalization of an earnings stream or discounted cash flow model, under which a value is derived by dividing working net income by the appropriate capitalization rate. Facts, ¶¶ 74-76, 78-80, 93-95.

146.    Baker and Shaffer also both testified to use of a “build-up” method to develop an appropriate capitalization rate for valuing Petitioners. Such method takes into consideration a risk-free rate, an equity premium, an industry adjustment, and a size category adjustment. Baker and Shaffer did not include a fifth firm-specific rate based on lack of adequate data. The capitalization rate they derived using a build-up method for valuing Petitioners was 20.68 percent (20.68%). Facts, ¶¶ 77, 96.

147.    Once the capitalization rate has been established, the value of a business can be calculated by dividing the working net income by the capitalization rate. The capitalization rate reflects a value for a future stream of earnings which a buyer is willing to purchase, and a seller is willing to accept, in a market sale of a business. Facts, ¶¶ 76, 79, 93, 94, 95.

148.    The expert opinion testimony by Baker and Shaffer, including their comparison calculations as well as their joint report, coupled with the testimony of Ms. Cummings with regard to the lack of comparability of Green River and Sweetwater with the six companies in the Rate Study, was sufficient to fulfill Petitioners’ burden of going forward, and their burden of proof on the issue of the capitalization rate. The evidence presented by Petitioners was basically not rebutted by the Department, arguably in part because Ms. Cummings did not calculate either the flotation costs or the debt rate used in developing the capitalization rate. She was thus was not completely familiar with all elements used to arrive at the Department’s capitalization rate of 10.65 percent. Facts, ¶¶ 24, 25, 31. Petitioners’ evidence supports a conclusion the appropriate capitalization rate for valuing Petitioners for 2008 tax purposes was the proposed rate of 20.68 percent.

149.    The Department asserts use of a capitalization rate different from the industry rate would violate the uniformity requirements of the Wyoming statutes and constitution, and also the requirements of the Department Rules. The only authority cited by the Department in support of this assertion is a 1999 State Board decision reviewing the Department’s valuation of two pipelines regulated by the Federal Energy Regulatory Commission (FERC). Colorado Interstate Gas Company and ANR Pipeline Company, Docket Nos. 96-74, 96-75, June 9, 1999, 1999 WL 386348 (Wyo. St. Bd. Eq.) (CIG/ANR).

150.    The 1999 State Board decision does not support the Department’s uniformity argument for at least two reasons. First, the Wyoming Supreme Court in 2001, two years after the CIG/ANR State Board decision, stated:

The uniformity requirement of Article 15, Section 11 of the Wyoming Constitution is not violated simply because the Department may use the system ratio for other companies which do not have significantly different state ratios. The constitution simply demands that all property be “uniformly valued at its full value as defined by the legislature.” Wyo. Const. art. 15, § 11. In fact, the Department's failure to consider a situation unique to one taxpayer risks overvaluing or undervaluing its property, which would violate the uniformity requirement. J. Ray McDermott & Co. v. Hudson, 370 P.2d 364, 368-69 (Wyo.1962).

PacifiCorp, Inc. v. Department of Revenue, 2001 WY 84, ¶16, 31 P. 3d 64, 68 (Wyo. 2001).

The failure to use a capitalization rate more appropriate than the industry rate to value Petitioners would itself be a violation of the constitutional uniformity requirement under the facts of this case.

151.    The second reason the State Board decision in CIG/ANR is not supportive of the Department’s uniformity argument is the fact the Board, in rejecting use of the Department’s capitalization rate to value CIG and ANR, recognized the capitalization rate used to value a company should reflect a rate developed through an analysis of companies with similar capital structures. To do otherwise would deny “essential fairness.” The capital structure of Green River and Sweetwater are clearly not similar to the capital structure of the six Rate Study companies. CIG/ANR at ¶¶ 45-46; Facts, ¶¶ 24, 26, 97, 98.

152.    It is also clear from Petitioners’ evidence that contrary to the arguments of the Department in its Post-Hearing Brief, Petitioners’ proposed capitalization rate is not a company specific rate. Neither Baker nor Dr. Shaffer calculated and included a company-specific risk premium in the Petitioners’ proposed capitalization rate. Their rate is for companies similar in capital structure and operations to Petitioners. Facts, ¶¶ 77, 96; Conclusions, ¶ 146.

153.    Finally, with regard to the issue of capitalization rates, the Department implied without ever directly asserting, through testimony at the Board hearing, and in its Post-Hearing Brief, that Petitioners were somehow foreclosed from challenging the capitalization rate before this Board because they did not comment at the capitalization rate hearing held by the Department, and did not submit any written comments. Facts, ¶ 47; [Department’s Post-Hearing Brief, pp. 6-7, 9].

154.    The Department’s Rules clearly provide that an objection to a capitalization rate may be raised in a hearing before this Board:

This final determination of rates shall not affect the rights of a taxpayers [sic] to object in accordance with contested case procedures of the Administrative Procedure Act (W.S. 16-3-101 et seq.) and the Rules of Practice and Procedure for Appeals Before the Wyoming State Board of Equalization Involving Taxation Matters.

Rules, Wyoming Department of Revenue, Chapter 7, § 7(b.); Conclusions,¶ 124.

INTANGIBLE ASSETS

155.    Intangible personal property, by Wyoming statute and Department Rule, is exempt from ad valorem taxation. Wyo. Stat. Ann. § 39-11-105(a)(xxix); Rules, Wyoming Department of Revenue, Chapter 7,§ 8; Conclusions, ¶¶ 125, 126.

156.    Petitioners assert the Department improperly failed to deduct from its fair market value calculations for both companies cash, franchise value, and programming costs as intangibles. They argue the value of their cash, their franchises, and their programming costs as intangibles must be deducted after a final unitary fair market value is determined by the Department. Facts, ¶¶ 44, 45, 100, 101, 102; [Petitioners’ Issues of Fact and Law and Exhibit List, p. 2; Exhibit 104, pp. 330-334; Transcript, Vol. I, pp. 149-157; Vol. II, pp. 317-318].

157.    The Department asserts its process of not including the value of intangibles as an element in the unitary value process complies with the statutory and rules requirement that intangibles not be valued or subject to taxation. The value of intangible personal property therefore need not be separately deducted from the Department’s final unitary fair market valuation. Facts, ¶¶ 40, 41, 42, 43, 44, 45; [Transcript, Vol. I, pp. 161-162].

158.    The unitary method of appraising a company, as used by the Department, values a company as a whole, as a “going concern” or unit, which includes in the value of the unit, at least partially, the value of intangible property to the extent it enhances the value of the tangible property:

Thus, the unitary method values a company as a whole and may utilize intangible property in a valuation to the degree that intangible property enhances the value of tangible property. Beaver County v. WilTel, Inc., 995 P.2d 602, 610-11 (Utah 2000); James A. Amdur, Telecommunications Property Taxation, 46 Fed. Comm. L.J. 219, 228 (1994) ( “Although the intangible property may not be taxed directly, it may ‘enhance’ the value of the tangible property in the unit and may be taxed indirectly as part of such enhanced value”).

* * *

The rationale for allowing taxation of the enhanced value imparted by intangible property is grounded in the concept of valuing a company as a “going concern” or unit, which is to ensure that the entire real value of a company's property is considered.

RT Communications, Inc, v. State Board of Equalization, 11 P.3d 915, 923-924 (Wyo. 2000)(emphasis in original).

159.    The use of intangible property to determine the value of tangible property is justified on two grounds:

First, intangible property can affect the value of tangible property. As one commentator explained:

Trying to separate intangible rights from tangible value is comparable to trying to separate the tangible value of the bricks and mortar of your house from the intangible rights found in your deed and building and occupancy permits to use and occupy the house. In other words, if you do not have the intangible legal right to live in your house and evict others from the premises, what possible value can the house have to you?

     Robert W. Lambert, Cellular Telephone Companies: Property Tax Litigation

    in California, J. Prop. Tax Mgmt. 15, 16 (1991). This leads to the second ground:

    the difficulty of separating intangible property from tangible property.

The value of intangible assets is manifested in their ability to generate profits for the enterprise in excess of those necessary to provide a fair return on the value of the tangible assets and working capital of the business. Some intangible assets have value in their own right, such as franchises, patents, licenses, copyrights and the like. However, many of the intangible assets of a business enterprise derive their value from being a part of the business and thus cannot be severed and sold separately. Some of these types of intangibles include a trained and assembled work force, management systems, customer base, and elements of “going-concern” value.

Michael E. Green & Terrence J. Benshoof, Exclusion of Intangibles From The Unit Value, 1 St. Tax Notes 547, 548-49 (1991).

RT Communications, 11 P.3d at pp. 923-924.

160.    The use of the unitary method, even though it may indirectly partially assess certain intangible property, is a rational valuation method, and when equally applied results in essential fairness. To the extent, however, the intangible property has value beyond adding value to tangible property, it must be excluded to the extent it can be separately identified.

The Department of Revenue's regulations provide, and have provided for a number of years, for the use of the unitary method for valuing public utilities in Wyoming. See Department of Revenue Regular Rules ch. 7, Ad Valorem Valuation Methodology and Assessment (State Assessments) (1996). The Department of Revenue has, in fact, employed the unitary method since at least 1988 to all public utility valuations. As shown by the foregoing authorities, the unitary method is a rational method of appraisal and, when equally applied to all property, results in essential fairness. Although intangible personal property is exempt from taxation, it may add value to taxable, tangible property, and to that extent, it should be included in any assessment in order to properly reflect the true value of the property. Wyo. Const. art. 15, § 11. In utilizing the unitary method, however, to the extent that intangible property has value beyond any enhancing effect on tangible property and is separable from those assets, it must be excluded. GTE Sprint Communications Corporation v. County of Alameda, 26 Cal.App.4th 992, 32 Cal.Rptr.2d 882, 891 (1994); § 39-1-201(a)(xxix).

RT Communications, 11 P.3d at p. 925.

161.    It is a company’s responsibility to identify the separate intangible asset values it claims should be exempt. “If the [companies] could not, or would not, allocate separate values to these intangible assets, they cannot reasonably argue that the Department of Revenue could have or should have done so.” RT Communications, 11 P.3d at p. 924.

162.    The Wyoming Supreme Court, in 2003, expanded on its reasoning in RT Communications, Inc. with regard to the valuation and taxation of intangible property which adds value to a company’s tangible property under the unitary valuation methodology:

This dichotomy-that intangible property is both exempt and yet taxable to the extent it enhances the value of taxable property-creates a mind-bending exercise when one attempts to wrestle with a specific fact situation such as the one presented in this case. The RT Communications decision upheld DOR's and SBOE's decisions to value the taxable property of the telephone company in question by including the value of certain intangible property represented by the “acquisition adjustment” ^FN4 because the evidence proved the intangible property enhanced the value of the tangible property and the company failed to present evidence that the value of the intangible property could be, or had been, identified or separated.

* * *

Even if the FCC licenses and the customer bases were intangible property validly exempt from taxation, the burden falls on the taxpayers to prove the value of that property was identifiable and separable from the enhanced value of the business determined through the unitary method.

Airtouch Communications, Inc. v. Department of Revenue, State of Wyoming, 2003 WY 114, ¶¶ 36, 38, 76 P.3d 342, 355-356 (Wyo. 2003) (footnote omitted).

163.    The evidence presented by Petitioners on the valuation of intangibles consisted primarily of the testimony of Carollo and Dr. Shaffer. Carollo testified neither Sweetwater or Green River had ever been bought or sold, thus there had never been a need to determine a franchise value, a value for programming or any other intangible value. Facts, ¶ 55.

164.    Dr. Shaffer provided the majority of Petitioners’ evidence on the issue of valuing intangibles. He stated that even though neither Sweetwater or Green River, as noted by Carollo, had been bought or sold, there were acceptable methods for imputing the contributory value added by intangibles to the unit value of a company. One of these methods for imputing value acceptable under economic theory and recognized by IRS Revenue Ruling 5960 holds that any fair market value of a company in excess of the company’s net book value is attributable to the company’s intangible assets. Using this method, Dr. Shaffer calculated a range of combined value for Petitioners’ exempt assets - franchise value, customer-based intangibles, and supplier-based intangibles. His calculation did not include a value for the statutorily allowed intangible of work force in place as Petitioners’ had not included that intangible as an issue in their appeals. Facts, ¶¶ 99, 101.

165.    The value of intangible assets calculated by Dr. Shaffer was an aggregate value for the three noted intangibles - franchise, customer-based, and supplier-based. Such an aggregate calculation for those three intangibles does not identify to what extent, if any, the intangible property had value beyond adding value to the tangible property, nor does it fulfill the Petitioners’ burden of proving a value for each intangible which is identifiable and separate from the enhanced value of Petitioners as determined by the unitary valuation methodology. Facts, ¶¶ 99, 101; Conclusions, ¶¶ 160, 161, 162.

166.    The evidence presented by Petitioners with regard to franchise value as well as customer and supplied based intangibles was not sufficient to meet the requirements set out by the Wyoming Supreme Court in RT Communications and Airtouch, and thus was not sufficient to fulfill Petitioners’ burden of proof on the deductible value of those intangibles. Conclusions, ¶¶ 107, 108.

167.    The final question for resolution with regard to intangibles is the appropriate relationship between the cash reported by Petitioners on their annual reports to the Department, and the determination of Petitioners’ respective final fair market valuations by the Department.

168.    Dr. Shaffer noted that under economic theory, cash is not normally considered an intangible asset. Facts, ¶ 100. Cash is, however, identified by Wyoming statute, and Department rule, as an intangible which is exempt from valuation and assessment. Wyo. Stat. Ann. § 39-11-105(b)(vi)(A); Conclusions, ¶¶ 125, 126.

169.    The Department’s calculation of Petitioners’ fair market value did not include cash as an input into the Department’s HCLD methodology. Facts, ¶ 42. The Department thus asserts the requirement of exempting cash was fulfilled as the amount of cash is not part of the Departments fair market value calculation. The Department disagrees with the Petitioners’ assertion that cash, as an intangible, must be deducted from the final fair market value determined by the Department in order to comply with the statutory exemption requirement. Conclusions, ¶¶ 156, 157.

170.    The amount of cash held by Petitioners, as with all Petitioners’ intangible assets, adds to, or at least effects, the overall unitary value derived for each company. The arguably significant amount of cash retained by Petitioners contributes to their overall value since it reduces, or may in fact eliminate, any interest costs. A lower interest cost, or the absence of any such cost, arguably increases Petitioners’ net income which is an element in the fair market value calculation by both the Department’s HCLD methodology, and the capitalization methodology proposed by Petitioners’ expert witnesses. Facts, ¶ ¶ 74, 75, 76, 78-80, 93, 94, 95. Petitioners’ cash therefore has an effect on their unit value just as do all other intangibles.

171.    The cash balances held by Petitioners were indicated in their respective annual reports to the Department. The value of cash as an intangible is thus identifiable and separable as required by RT Communications and Airtouch. Conclusions, ¶¶ 160, 161, 162.

172.    The question then for resolution becomes the manner in which the identifiable and separable intangible value of Petitioners’ cash is to be exempted. Petitioners assert the language of the Department’s Rules and the Wyoming statutes require the value of the cash as an intangible be deducted from the final fair market value determined by the Department.

173.    It would appear the exact method for exempting statutorily defined intangibles in a unitary valuation has not been directly addressed by the Wyoming Supreme Court. It is our conclusion, however, based on the language of the Department’s rules, and discussion by the Supreme Court of exempt property in unitary valuation litigation, that the identifiable and separable value of an intangible must be deducted from the Department’s final fair market value. Simply not including intangibles as an input in a given methodology is not sufficient.

174.    The Wyoming Supreme Court, in PacifiCorp, Inc. v. Department of Revenue, 2001 WY 84, 31 P.3d 64 (Wyo. 2001), was concerned with the proper allocation of exempt property, such as pollution control equipment, in the context of the same unitary valuation process as used to value Petitioners. Pacificorp had property in Wyoming as well as a number of other states. The precise issue facing the Court was the proper formula for allocating exempt property between Wyoming and the other states. PacifiCorp, Inc. v. Department of Revenue, 2001 WY 84, ¶ 3, 31 P. 3d at 65.

175.    The Court, in discussing the allocation issue, set out the sequence of the unitary valuation methodology used by the Department. The Department first established a fair market value for Pacificorp’s entire integrated, multiple state system. The Department then allocated, by formula, a portion of the total system market value to Wyoming. This allocation results in a fair market value “subject to tax assessment in Wyoming.” PacifiCorp, Inc. v. Department of Revenue, 2001 WY 84, ¶¶ 7, 8, 31 P. 3d at 66. The Court then states:

Before the tax is imposed, the Department must deduct the fair market value of any exempt property actually located in Wyoming, such as pollution control equipment. The problem arises when one attempts to determine the fair market value of the individual tax exempt property located in Wyoming which heretofore has only been valued as an integrated part of the entire system.

PacifiCorp, Inc. v. Department of Revenue, 2001 WY 84, ¶ 9, 31 P.3d at 66.

176.    This is the same sequence used by the Department in its unitary methodology to value the PacifiCorp system in a prior year:

The Board's findings are confirmed by the Brief of Appellant, in which, after alluding to the unitary valuation step, and stating the Department determined it to be $6,400,000,000, Pacificorp states, “[t]hat valuation is not in dispute here.” Subsequently, after describing the allocation step, Pacificorp states, “[t]he formula used by the Department with respect to electric utilities is also not in dispute in this case. That formula results in an allocation to Wyoming of 22.183% of the System Value, producing a Wyoming Value of $1,419,712,000.”

The third step in the Wyoming appraisal was to deduct the value of the tax-exempt property in order to determine the value of the property subject to the Wyoming ad valorem tax.

PacifiCorp, Inc. v. Department of Revenue, 13 P.3d 256, 258 (Wyo. 2000).

177.    Under this sequence as described by the Court, the fair market value of exempt property, which may have contributed to the system value, is deducted from the final fair market value determined by the Department using the unitary valuation methodology. The described sequence appears to support Petitioners’ arguments as to the manner in which the value of intangibles must be exempted.

178.    The Department’s own Rules appear as well to support Petitioners’ assertion the value of an intangible asset must be deducted from the Department’s final fair market value. The Department Rules, in the chapter “intended to describe the valuation methodology to be used to determine the taxable value of Division-assessed…properties” specifically defines fair market value as the value a well informed buyer would pay and a well informed seller would accept. Rules, Wyoming Department of Revenue, Chapter 7, §§ 2, 4(g.); Conclusions, ¶¶ 119, 122.

179.    The Department Rules further provide, in the same chapter, intangible assets “shall be removed from the Fair Market Value” provided a taxpayer can establish the contributory value to the unit. The language of these Department Rules clearly anticipate, similar to the Wyoming Supreme Court decisions, that a final fair market value will be determined by the Department, and then the value of the exempt assets deducted. Rules, Wyoming Department of Revenue, Chapter 7, § 8; Conclusions, ¶ 126.

180.    Petitioners’ cash asset as reported to the Department in their annual reports is a statutorily defined intangible the value of which must be deducted from the final fair market value as determined by the Department.

ORDER

           IT IS THEREFORE HEREBY ORDERED this matter shall be, and is remanded to the Department for valuation of Petitioners’ systems consistent with this decision using only the Department’s HLCD methodology which functions, in effect, as a discounted cash flow or income capitalization model.

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 day of June, 2009.

                                                                  STATE BOARD OF EQUALIZATION

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                                                                  Thomas R. Satterfield, Chairman

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                                                                  Thomas D. Roberts, Vice-Chairman

ATTEST:

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Wendy J. Soto, Executive Secretary