BEFORE THE STATE BOARD OF EQUALIZATION
FOR THE STATE OF WYOMING
IN THE MATTER OF THE APPEALS OF )
WYOMING RSA # 1 (PARK LIMITED ) Docket No. 99-81
WYOMING RSA # 2 (SHERIDAN LIMITED ) Docket No. 99-82
WYOMING RSA # 3 (CELLULAR INC., ) Docket No. 99-83
NETWORK CORP.) )
FROM STATE ASSESSED VALUATION )
DECISIONS OF THE DEPARTMENT OF )
IN THE MATTER OF THE APPEALS OF )
AIRTOUCH COMMUNICATIONS, INC ) Docket No. 2000-120
COMMNET PAGING, INC., ) Docket No. 2000-121
WYOMING RSA # 3 (CELLULAR INC., ) Docket No. 2000-122
NETWORK CORP.) )
WYOMING RSA # 2 (SHERIDAN LIMITED ) Docket No. 2000-123
WYOMING RSA # 1 (PARK LIMITED ) Docket No. 2000-124
FROM STATE ASSESSED VALUATION )
DECISIONS OF THE DEPARTMENT OF )
FINDINGS OF FACT
CONCLUSIONS OF LAW
DECISION AND ORDER
Richard G. Smith of Hawley, Troxell, Ennis, & Hawley, for Petitioners, Airtouch Communications, Inc., Wyoming RSA #3, Wyoming RSA #2, and Wyoming RSA #1.
Cathleen D. Parker, Assistant Attorney General, for Respondent, Wyoming Department of Revenue.
Pursuant to notice duly given to all parties in interest, this matter came before the State Board of Equalization (Board) for hearing on the 8th day of October 2001, at 1:00 p.m. in the State Board of Equalization Hearing Room, Herschler Building, 122 West 25th Street, Cheyenne, Wyoming and was heard by Chairman Edmund J. Schmidt, Vice-Chairman Roberta A. Coates and Member Sylvia Lee Hackl. This appeal arises from the decision of the Department of Revenue for the State of Wyoming (Department) treating Petitioners as telephone companies located in the State of Wyoming, and assessing such property as State assessed property.
Upon application of any person adversely affected, the Board is mandated to review final decisions of the Department of Revenue on state-assessed property and hold hearings after due notice pursuant to the Wyoming Administrative Procedure Act and prescribed rules and regulations pursuant to Wyo. Stat. 39-11-102.1(c)(viii).
The Board is required to "[d]ecide all questions that may arise with reference to the construction of any statute affecting the assessment, levy and collection of taxes, in accordance with the rules, regulations, orders and instructions proscribed by the Board." Wyo. Stat. 39-11-102.1(c)(iv). The rules of practice and procedure for appeals before the Board involving tax matters contemplate appeals from final administrative decisions of the Department. Rules, Wyoming State Board of Equalization, Chapter 2, 3. The rules require appeals to be filed with the Board within thirty (30) days of any administrative decision. Rules, Wyoming State Board of Equalization, Chapter 2, 5. Petitioners timely filed their appeals. The Board is required to decide all issues relating to this appeal and give a written decision, citing findings of fact and conclusions of law following a hearing before the Board. Rules, Wyoming State Board of Equalization, Chapter 2, 34.
Petitioners filed appeals on July 8, 1999, for their 1999 annual assessment and on July 14, 2000, for their 2000 annual assessment. On February 28, 2001, the Board issued a decision in Wyoming Interstate Gas Company, Docket No. 99-75. Approximately six months later, on September 13, 2001, the Department issued "revised" notices of valuation to Petitioners based on the Wyoming Interstate Gas Company decision which required the Department to adjust capitalization rates by taking into consideration flotation costs. The revised assessments did not address any of the issues raised by Petitioners in their Notices of Appeal, thus the newly issued assessments did not render moot any issues in Petitioners' appeals nor raise new issues. The revised assessments were not a result of any settlement or compromise between the Department and Petitioners pursuant to Wyoming Statute Section 39-11-103, nor of an examination request filed with the Board pursuant to Wyoming Statute Section 39-11-102.1(c)(x). Approximately 15 months after the original assessments were issued by the Department and certified to the counties, and only twenty-four days before the hearing, the Department filed a Motion to Dismiss Petitioners' original appeals for lack of jurisdiction. Petitioners filed a motion in opposition. The Board denied the Department's motion, which was based on the unilateral action of the Department, because none of the issues of the original appeals were changed as a result of the revised assessments and because all parties had ample opportunity to prepare for the hearing based on the issues in the original appeals.
CommNet Cellular, Inc., the managing company and agent of Petitioners, filed Notices of Appeal of the 1999 valuation determinations of the Department, on July 8, 1999, for Wyoming #1- Park Limited Partnership, Wyoming #2-CINC, and Wyoming #3-CINC. The Notices of Appeal alleged the Department did not value the companies in accordance with Wyoming law because the Department did not deduct a value for intangible property, and the Department inflated values by using an adjustment for economic enhancement. On July 14, 2000, CommNet Cellular, Inc., filed similar Notices of Appeal for the 2000 tax year for the three companies and Airtouch Communications, Inc., alleging intangible property was being overvalued and taxed incorrectly, the economic adjustment was improper, and there was no adjustment for economic and functional obsolescence.
The Board finds that all of the companies were telephone companies because the service they provide is indistinguishable from the service of land-line telephone companies. Only the technology is different. We also find the unitary method of valuation is appropriate because all companies are going-concern businesses with integral parts for which a willing buyer would pay more. We also find the economic enhancement adjustment to be correct, and the adjustment for functional obsolescence to be adequate.
OUTLINE OF FINDINGS OF FACT AND CONCLUSIONS OF LAW
This is a complex case, with multiple issues, a lengthy record and detailed analyses of facts and law. This outline is presented to assist in identifying the individual issues and in locating the facts, law and conclusions relevant to each. The subsections are presented in parallel fashion: for example, the second section in the Findings of Fact, dealing with the valuation of the companies as telephone companies under state law, is also the second section in the Conclusions of Law. The numbers in parentheses following each subsection heading refer to the numbered paragraphs within the opinion which reference that issue.
FINDINGS OF FACT
I. General Information (1-13)
II. Are Petitioners "telephone companies" subject to state assessment and valuation under Wyoming Statute 39-13-102(m)(vi)? (14-17)
III. Was it appropriate for the Department to make an economic enhancement adjustment in valuing the property using the cost approach? (18-29)
IV. Did the Department allow a sufficient adjustment for functional obsolescence? (30-39)
V. Do Petitioners have intangible property that must be deducted from value and if so how should the Department have accounted for that value? (40-60)
CONCLUSIONS OF LAW
I. General Information: Jurisdiction, Burden of Proof (61-66)
II. Petitioners are "telephone companies" subject to state assessment and valuation under Wyoming Statute 39-13-102(m)(vi). (67-74)
III. The economic adjustment factor used by the Department was appropriate. (75-80)
IV. The Department's adjustment for functional and technological obsolescence is sufficient. (80-84)
V. The intangible property identified by Petitioners does not have to be deducted from the value of the unit. (85-94)
FINDINGS OF FACT
I. General Information
1. This matter relates to the valuation and assessment of Petitioners' properties in Wyoming by the Ad Valorem Division of the Department of Revenue for the State of Wyoming for tax years 1999 and 2000. Airtouch Communications, Inc., appealed its assessment only for the tax year 2000. [Transcript Vol. I, p. 4]. We will refer to all of the companies collectively as Petitioners.
2. Petitioners, Wyoming RSA #1, Park Limited Partnership (RSA #1), Wyoming RSA #2, Sheridan Limited Partnership (RSA#2), Wyoming RSA #3, Cellular Inc. (RSA#3), and Airtouch Communications, Inc. (Airtouch) provide cellular telephone service in the State of Wyoming. Each operates under an FCC license granting it the right of coverage in certain parts of the state. The license for each Petitioner covers multiple taxing districts and multiple counties. [Exhibits 505-507, 518, 520-522].
3. In approximately 1986, CommNet Cellular, Inc. (CommNet), convinced local telephone exchanges to form partnerships to provide wireless services. CommNet provided the ability to build, manage, and market the systems for the partnerships. [Transcript Vol. II, p. 145]. Those partnerships are the Petitioners, RSA#3, RSA #2 and RSA #1. CommNet does not provide cellular services but is a management company. [Transcript Vol. II, p. 144].
4. Originally there were two types of licenses issued by the FCC for cellular service in each service area. The "A" licenses were allocated on a lottery process pursuant to which there were rules imposing requirements on the owner to "build out" the service area within a certain period of time. [Transcript Vol. I, p. 87]. The "B" licenses were reserved for local exchange telephone companies who already provided service in the area. [Transcript Vol. I, p. 86; Vol. II, p. 145]. Both licenses cover a fixed geographical area. Petitioners acquired several "B"licenses through partnership agreements with local exchanges and one "A" license through the lottery. The FCC issued licenses for the rural service territories or "Rural Service Area" known as "RSAs." There are five RSAs in Wyoming. RSA #1 and RSA #2 operate in northern Wyoming, RSA #3 in southwestern Wyoming, and RSA #4 and RSA #5 in central and southeastern Wyoming. [Transcript Vol. I, pp. 87, 88, 98].
5. Airtouch acquired the U.S. West New Vector Group in 1998, and the CommNet entities on January 6, 2000. Thereafter, on April 3, 2000, Airtouch became part of Verizon Wireless, a partnership between Verizon Communication (formed from the combination of Bell Atlantic and GTE) and the Vodafone Company. [Transcript Vol. II, pp. 145-146].
6. The Department is required to determine the fair market value of the business enterprise in the state. [Transcript Vol. II, p. 242].
7. The procedure used by Department to value a company is as follows:
a) In January Annual Report forms are mailed to taxpayers soliciting information;
b) In February the Department develops capitalization rates for various types of taxpayers;
c) In March taxpayers are given the opportunity to comment on the Department's capitalization rates;
d) Taxpayers must submit their information to the Department by April 1;
e) From April to May the companies are valued by the Department and all appraisals go through a two-step review;
f) The preliminary values as set by the Department are mailed to taxpayers;
g) The taxpayer may request an informal meeting with the Department to discuss the preliminary values;
h) The final value is set by the Department and provided to the taxpayer and the counties.
[Transcript Vol. III, pp. 521-522].
8. In June of each tax year the Department certifies the value of 60 telephone companies to the counties. [Transcript Vol. III, p. 516]. Wyoming is a self-reporting state which means the Department collects the information from the taxpayer and calculates value based on this reported information. [Transcript Vol. IV, p. 577].
9. The Department valued the various properties of the Petitioners using a unitary approach to valuation. [Stipulated Updated Summary of Uncontroverted Facts]. The Department uses a unitary approach in appraising all telephone companies. It looks at the value of all the assets of a going-concern business, and values that entity. [Transcript Vol. III, p. 516]. The unitary method values the company as a whole in contrast with the summation method, which values individual assets then sums the total.
10. The Department uses three methods to value a company. The first method is the "historical cost of the property less depreciation," which is a cost approach. The second method is "yield capitalization," which is an anticipated income valuation approach. The third method, used by an appraiser in the Department who reviews the initial valuation, is the "direct capitalization value," which is also an income approach. [Transcript Vol. III, p. 524].
11. The capitalization rate used by the Department in the income valuation method is a rate developed by the Department after consulting various documents concerning industry financial information. This capitalization rate did not consider the cost of capital or flotation costs. The Department held a public hearing concerning that rate. The Department subsequently used the capitalization rate uniformly for all cellular companies. [Transcript Vol. IV, p. 555].
12. Exhibit 509 is the appraisal of RSA # 1. Exhibit 510 is the appraisal of RSA #2 and Exhibit 511 is the appraisal of RSA #3. [Transcript Vol. III, pp. 524-525].
13. In the 1999 tax year Petitioners requested an informal conference with the Department to discuss the preliminary valuations of the three entities. Petitioners requested a reduction
for the value of intangibles from the amount the Department had calculated as enhancement under the cost approach. [Transcript Vol. IV, p. 606; Exhibit 110]. In their request for the informal conference the Petitioners did not identify what they considered exempt intangibles. [Transcript Vol. IV, p. 658; Exhibit 110]. After the meeting, Petitioners provided additional information showing income and customers by company, and invoices showing that price of a particular item of equipment had dropped considerably. However, the information did not specifically address the value of the intangibles. [Transcript Vol. III, p. 529; Vol. IV p. 652]. After the conference the Department reduced the income by ten percent in both models. [Transcript Vol. III, p. 529; Vol. IV p. 652]. Petitioners did not request an informal conference in 2000, because they considered it a waste of time. [Transcript Vol. IV, pp. 572, 667]. In May of 2001, Petitioners provided to the Department an independent appraisal performed by the Dallas office of the accounting firm of Ernest and Young. This occurred well over a year after the Department had certified the value of the companies to the counties, and after the counties had prepared their budgets, set mill levies, and issued tax notices. [Rejected Exhibits 100 and 101].
II. Are Petitioners "telephone companies" subject to state assessment and valuation under Wyoming Statute 39-13-102(m)(vi)?
14. Petitioners argue that because they are not regulated by a governmental entity and do not own any land-line facilities, they are not a "telephone company" within the tax statutes. [Transcript Vol. II, p. 162]. Petitioners do not own any facilities for the operation of land-line services. In other words, they do not own "telephone wires." In fact, they are not even permitted to own such property under the terms of their FCC licenses. [Transcript Vol. II, p. 162-163]. Wireless communication companies are not rate or tariff regulated by a governmental entity. [Transcript Vol. II, pp. 146, 164, 276]. All companies must hold a wireless license with the Federal Communications Commission (FCC) and must file a certificate that they can provide and are providing wireless service to the licensed area. The cellular companies are regulated to some extent by the FCC, as are telephone companies. [Transcript Vol. II, p. 146].
15. The FCC license is for multiple counties and each Petitioner provides service across multiple county lines. [Exhibit 120]. Petitioners are long-distance telecommunications carriers whose sole service depends upon the network of microwave and fiberoptic cable that connect across county and even state lines to carry messages for its customers. Each Petitioner owns property in multiple counties. [Exhibits 505, 506, 507]. However, wireless cellular companies do not have the right to eminent domain or condemnation, unlike regulated telephone companies. [Transcript Vol II, p. 225].
16. The FCC cellular licenses are competitive because more than one license may be awarded for a certain territory. [Transcript Vol. II, pp. 149, 164]. However, in the Wyoming markets in 1999 no other companies were competing with the Class "A" or "B" licenses.
17. Land telephones and cellular telephones use fiberoptic cable to transmit signals. Both land telephones and cellular telephones use cordless handsets, commonly called "phones." The primary purpose of both land telephones and cellular telephones is to make and receive two way, interactive, real time, verbal communications at a distance. [Transcript Vol. II, pp. 217, 218]. Both provide voice mail services, caller ID services and call waiting services. [Transcript Vol. II, p. 219]. The telephone numbers of both land telephone companies and cellular companies are similar with identical area codes assigned to telephones for that area, and are specific to a handset. [Transcript Vol. I, pp. 88, 109-110; Vol. II, p. 219]. Most calls made on cellular phone calls are mobile-to-land calls thus using wire line technology. [Transcript Vol. I, p. 103].
III. Was it appropriate for the Department to make an economic enhancement adjustment in valuing the property using the cost approach?
18. The Department of Revenue Rules, Chapter 7, Section 7(a) require the Department to annually calculate capitalization rates based upon the band of investment method for all state-assessed industries.
19. The Department of Revenue Rules, Chapter 7, Section 7(b) require that a public meeting be held for presentation of the capitalization rate to be used for the current year and to allow oral and written comments. Petitioners presented studies of capitalization rates, but did not make any presentations at the meetings held to consider the development of the capitalization rate. [Transcript Vol. I, pp. 554-555; Exhibits 504, 517].
20. The Department determined the proper Wyoming Capitalization Rate of Return for the wireless telephone industry for the 1999 tax year to be 13%, and 14.3% for the 2000 tax year. [Exhibits 502, 515].
21. The Department then analyzed each wireless telephone company in Wyoming and made adjustments if the "Return on Average Operating Property and Equipment" was different from the Wyoming Capitalization Rate. If there was a difference, the Department adjusted the net book value of the company either up or down depending on the difference. The formula to determine the adjustment is described as follows:
The Average Telephone Plant Subject to Economic Obsolescence is determined by taking the previous years total plant and adding it to the current years total plant and dividing that figure by two.
The Working Net Operating Income is divided by the Average Total Telephone Plant Telephone plant subject to economic obsolescence to arrive at a Return on Average Operating Property and Equipment .
The Return on Average Operating Property and Equipment is divided by the Wyoming Capitalization Rate of Return for the current year and subtracted 1.00 to arrive at a negative or positive adjustment (Adjusted Percentage).
If the Adjustment Percentage is negative when 1.00 is deducted, economic obsolescence is deducted from the Average Total Telephone Plant subject to Economic Obsolescence. If the Adjustment Percentage is positive when 1.00 is deducted, economic enhancement is added to the Average Total Telephone Plant subject to Economic Obsolescence.
[Transcript Vol. IV, pp. 553-557; Exhibits 509-511, 535].
22. The Department applied this formula to all cellular phone companies. For both tax years, each Petitioner received a rate of return on its assets higher than the anticipated rate for that industry thus resulting in an Adjustment Percentage that was positive. The Department refers to this as "economic enhancement." It is the Department's judgment that such adjustment is necessary to measure the true value of the property. Otherwise, the property would only be valued at net book value. The Department noted that Petitioners' income is increasing while the book value of the assets is declining through depreciation, and therefore there is a greater return on the assets, resulting in a positive adjustment to properly measure the true value of the assets. The Department also argues that if Petitioners had earned a lower rate of return than the industry-wide capitalization rate, Petitioners would have received a deduction for economic obsolescence using the same formula. [Transcript Vol. IV, pp. 556-557].
23. Petitioners agree that an economic obsolescence adjustment may be appropriate but they dispute the use of the economic enhancement adjustment. [Transcript Vol. II, p. 239].
24. Appraisal theory recognizes the income capitalization approach is related to the other appraisal approaches. Appraisal Institute, The Appraisal of Real Estate (10th Ed. 1992). [Exhibit 536].
25. If no economic enhancement adjustment is made, and the historical cost approach method is used, the value can never be more than the net book value of the company. [Transcript Vol. II, p. 240].
26. If no adjustment is made, the value of a company using the historical cost less depreciation model would be the reported book value of the company and no appraiser judgment would be required. [Transcript Vol. IV, p. 565]. The Department considers the
economic enhancement adjustment to reflect appreciation in the value of property. [Transcript Vol. IV, p. 649].
27. The Department does not use the same net operating income to calculate value in the cost method and the income method as a result of the recommendation of a special study as commissioned by the Board. This study is discussed in PacifiCorp v. Department of Revenue, 31 P.3d 64, 67 (Wyo., 2001).
28. Petitioners argue because of the economic enhancement adjustment in the cost approach used by the Department, the cost approach is inappropriate because it is dependent on the income approach. [Transcript Vol. II, p. 178]. Petitioners also argue
the net book value of the equipment of the company should serve as an upper limit on valuation because of the rapid change in technology, resulting in functional obsolescence. [Transcript Vol. II, p. 181].
29. Carl Hoemke, an accountant hired by Petitioners, criticized the economic enhancement calculated by the Department because in his opinion it included intangible enhancement of property and income information. [Transcript Vol. III, pp. 414, 415]. However, Mr. Hoemke agreed that net book value is not appropriate to value a company. [Transcript Vol. III, p. 375]. He also admitted that the Department's enterprise value arrived at fair market value, as required by statute. "The numbers that they [the Department] utilized to arrive at value were within a reasonable range, and it is my opinion that they are in a reasonable range of fair market value." [Transcript Vol. III, p. 373].
IV. Did the Department allow a sufficient adjustment for functional obsolescence?
30. The Department used a three or five year average to project future income. [Transcript Vol. II, p. 244]. Using a three-year or five-year average to calculate income is appraiser judgment. [Transcript Vol. III, pp. 371, 461]. The consistent use of a five-year average could be supported due to the decrease in roaming income because of improved technology, increasing competition, and higher capital expenditures. However, the income projections used by the Department were reasonable. Petitioners' own expert witness, Carl Hoemke, testified the income numbers used by the Department were within the reasonable range for value and fair market value. [Transcript Vol. III, p. 373].
31. Petitioners attempted to criticize the appraisal of the Department through the testimony of Ms. Stacey Sprinkle, who is the Director of Federal and State Tax Policy for Verizon Wireless. While Ms. Sprinkle certainly has vast experience in tax matters and accounting, Petitioners never established her credentials as an expert witness in appraisal sufficient to overcome the presumption of correctness of the Department's appraisal. [Transcript Vol. II, p. 257; Exhibit 112].
32. In the late 1990s, between 40% and 50% of Petitioners' revenue was from roaming charges, and a large part of this was because of a favorable arrangement with AT&T. Toward the end of the 1990s, those favorable roaming arrangements were less common. As a consequence, there was a decline in the overall value of roaming revenues. Petitioners' income decreased because of lower roaming income. [Transcript Vol. II, pp. 145-146, 153-155, 158].
33. During the same time period, usage of wireless communication devices was steadily increasing, but the pricing structure was decreasing dramatically. [Transcript Vol. II, p. 158].
34. We find that by using multiple years to compute the companies' income the Department reasonably adjusted the value for the roaming differential.
35. Although Petitioners failed to present documentation of obsolescence to the Department when they had the opportunity to do so, they now argue before the Board that due to the need to retrofit their equipment for digital service they should have received a larger adjustment for functional obsolescence. [Transcript Vol. II, p. 228]. When filing information with the Department, Petitioner disclosed no information about obsolescence because of digital technology, lower anticipated income because of loss of roaming income, or the acquisition by AirTouch. [Transcript Vol. II, pp. 230-232].
36. Cellular phone companies are retrofitting their analog equipment to encompass digital technology. Digital technology is an advantage to cellular phone companies because digital cell sites can handle more capacity, more features may be offered to the customer and a digital call is more private. [Transcript Vol. I, p. 90]. Furthermore, digital technology allows an emergency call to be located, and when enhanced 911 emergency call regulations are enacted, digital service will be increasingly important. [Transcript Vol. I, p. 93]. At the same time, analog equipment is increasingly hard to replace, and it is anticipated it will no longer be sold in the future. [Transcript Vol. I, p. 94].
However, the FCC demands that an analog signal remain available. [Transcript Vol. IV, pp. 700, 705]. Digital service does not cover as large an area as analog service; thus, there are gaps in the digital service area in Wyoming. Approximately 27 more cell sites are being added to accommodate digital technology with a goal of being all digital in Wyoming in the future as FCC regulations allow. [Transcript Vol. I, pp. 92, 101].
37. Due to FCC regulation, cellular companies must keep analog technology in place and cannot totally convert to digital technology. Dual-mode cellular technology will be maintained by Petitioners including the modem handsets. All handsets work on analog equipment as there are no "digital only" handsets. [Transcript Vol. I, p. 123]. Analog is the default mode if digital service is not available and is deemed the "fail-safe" mode. [Transcript Vol. I, pp. 109, 125, 132].
38. The Department determined that the depreciation information provided by Petitioners to decrease the net book value of the plant adequately accounted for all technological and functional obsolescence. [Transcript Vol. IV, p. 564].
39. The analog equipment is necessary to the provision of wireless service. In fact, the FCC requires that analog equipment be maintained in Wyoming. More importantly, the digital equipment conversion was not required for the tax years at issue in this case. Therefore the Department did not need to further adjust the value for obsolescence. [Transcript Vol. I, p. 109].
V. Do Petitioners have intangible property that must be deducted from value, and if so, how should the Department have deducted the intangible value?
40. Petitioners claim the FCC licenses and customer base of the companies are intangible assets, and thus their value should be deducted from the assessed value of the companies. [Transcript Vol. III, pp. 389-394; Exhibits 124, 125].
41. The Department contends the intangibles in fact were not assessed. The Department used a unitary approach which valued each company as a "going concern." This approach captures the enhancement of the tangibles operating as a working unit in combination with the intangibles. [Transcript Vol. IV, pp. 574-575]. Petitioners' expert witness, Carl Hoemke, agreed a synergy is created by this combination of assets, so that the whole is greater than the sum of the parts. Mr. Hoemke agreed the effect of this synergy is not allocatable or identifiable specifically. [Transcript Vol. III, pp. 386-387].
42. Petitioners did not list on their accounting books the value of the FCC cellular licenses because Petitioners were the original recipients and thus did not have to purchase licenses. [Transcript Vol. II, p. 190].
43. During preparation of Petitioners' annual assessments, the Department of Revenue requested information about the FCC licenses but Petitioners did not provide any information. [Transcript Vol. IV, pp. 579, 610, 611].
44. The Internal Revenue Service and purchase price accounting standards mandate that an intangible be identified on the books of a company and amortized for fifteen years. [Transcript Vol. II, p. 196]. Although Petitioners were aware of these standards, they neither listed the FCC licenses and the customer base on their books, nor was there any evidence they amortized these claimed intangibles. [Transcript Vol. II, p. 196]. From this it is logical to assume Petitioners themselves did not consider the FCC licenses and the customer base to be intangibles.
45. Petitioners claim they reported all information required by the Department. However, the evidence is clear that Petitioners did not report the value of the FCC cellular license. [Transcript Vol. III, p. 516]. Petitioners did not attempt to report any value for any intangible property until May 2001 - more than a year past the deadline for submission of information to the Department, and well past the time the Department had certified the values to the counties; more than a year from the time the counties set their budgets and mill levies were certified; and over one year from the time the taxes were to be paid. [Transcript Vol. II, pp. 197, 280; Vol. IV, pp. 547-548]. The Department was unable to ascertain the value of the intangibles at issue based on the information provided by Petitioners. The Department cannot identify and value intangible assets without additional information being provided by Petitioners. [Transcript Vol. IV, pp. 547-548].
46. Although the Department's instruction to taxpayers on how to file an Annual Report, General Instruction 5, directs the taxpayer to file with the Department of Revenue a copy of the annual 10-K report submitted to the Securities and Exchange Commission, Petitioners in fact did not provide these reports. Petitioners did provide the 10-K reports to a private appraiser to prepare an appraisal for this litigation well over a year from the time the reports should have been provided to the Department. [Transcript Vol. III, p. 533]. The Department's Annual Report form also requires a taxpayer to report a value for goodwill; Petitioners failed to report any value for goodwill. The Petitioners did not report a value for the FCC licenses or the customer base even though the forms requested information about intangibles. The Petitioner reported additional cell sites, but no other information concerning digital technology change. [Transcript Vol. III, pp. 535-547; Exhibit 509, pp. 82-85]. The financial information requested by the Department on the Annual Report is the same financial information reported by Petitioners to the SEC, to the shareholders and on the companies' financial statements. [Transcript Vol. IV, pp. 613, 620; Exhibit 505]. Thus, the information was available to the Petitioners; however, they failed to provide the information to the Department.
47. The Annual Report form, General Instruction 7, also provides taxpayers with an opportunity to supply additional information "regarding valuation, interstate allocation, intrastate distribution to counties and tax districts which could result in a more equitable assessment . . ." (Emphasis added.) [Exhibits 505-507, 518, 520-522]. Petitioners failed to avail themselves of this opportunity to provide additional information on matters about which they now complain.
48. The Financial Accounting Standard Board issued Statements 141 and 142, in June, 2000. Statements 141 and 142 define intangibles as identifiable, separable or contractual. Petitioners contend the customer base is intangible because it consists of customer contracts, and that the FCC licenses are intangible because they are separable. [Transcript Vol. II, pp. 302, 304].
49. The Wyoming Supreme Court, however, has held that an intangible asset must be both identifiable and separable. RT Communications, Inc. v. State Board of Equalization, 11 P.3d 915, 928 (Wyo. 2000). The Board finds the customer base is not an intangible because it is neither identifiable nor separable.
50. Similarly, the Board finds the FCC licenses are not intangibles because they are neither identifiable nor separable. They are not identifiable because there is no market for this type of FCC license. An FCC cellular license can be purchased from the FCC, but there is no evidence in the record that there is a secondary market for such FCC licenses. [Transcript Vol. I, p. 74]. Furthermore, the licenses are saleable only after approval by the FCC. Transcript Vol. II, pp. 149, 188, 247].
The licenses are not separable because to provide wireless communication, Petitioners were required to have an FCC license; in fact, the CommNet partnerships were formed in a manner to obtain the licenses. [Transcript Vol. II, p. 144]. If the license were severed from each company, the remaining assets of the company would have only salvage value, since Petitioners could no longer provide cellular phone service. Salvage value is not fair market value. The enhancement effect of the FCC cellular license is critical to establishing fair market value for the company. [Transcript Vol. I, p. 75].
51. Beginning in 1994, the FCC issued a new kind of license, a PCS license, for digital cell phone service. These licenses are not for analog equipment but only for digital equipment. Petitioners' licenses are for analog and digital service. [Transcript Vol. I, p. 95]. In January 2001, PCS licenses sold in an auction for $25 to $100 per population served in the area. [Transcript Vol. II, p. 259]. In 1995 and 1996 the original PCS license auctions averaged from $12 to $35 per population. [Transcript Vol. II, p. 260].
52. There was no competition for cellular services in 1999 in Wyoming. There are resellers of phone service but each phone has to operate under some form of FCC license. In 1999, Petitioners were the only providers of cell phone service in Wyoming. [Transcript Vol. I, p. 122]. In 2000, only Qwest had started to compete in limited Wyoming markets. [Transcript Vol. II, p. 225].
53. The Internal Revenue Code, Section 197, allows intangibles to be amortized over their useful life. Petitioners admit neither the FCC licenses nor the customer base are being amortized. [Transcript Vol. II, p. 302].
54. The Department could not perform the same appraisal as the Ernest and Young appraisal proffered by Petitioners because the Department needed information from the Petitioners' engineers to do a replacement cost analysis. Furthermore, Ernest and Young had financial statements from the companies, statements of subscriber growth, network and marketing cost information, which was not made available to the Department. [Transcript Vol. II, pp. 329, 337].
55. Department of Revenue rules allow a taxpayer to file an affidavit to claim an exemption. Rules, Wyoming Department of Revenue, Chapter 14, 3 (a). Petitioners did not file an affidavit claiming any intangibles to be exempt for the tax years in question. [Transcript Vol. I, p. 57].
56. Carl Hoemke, Petitioner's expert witness from Ernest and Young, used the following formula to value the companies:
1) Total Value (income projection model)
- Value of tangible property (net book cost model)
= Net intangible value (intangibles and goodwill)
2) Net intangible value
- Value of select intangibles
3) % intangible property
x value of the goodwill
= Value of goodwill of intangibles.
4) Total value of the company
- Value of certain intangibles
- Intangible portion of goodwill
= Fair market value of the company.
[Transcript Vol. III, pp. 377, 407].
Neither Mr. Hoemke nor any other witness testified that this formula was in accordance with any recognized appraisal or financial accounting method, nor that this formula was in accordance with generally accepted appraisal practice.
57. Mr. Hoemke attempted to value the FCC license by multiplying the population of the area served by the weighted average sale price taken from the 1996 auctions, taking into account transactions that involved fewer than a million customers. [Transcript Vol. III, pp. 389, 404; Exhibits 124, 125]. We disagree with the use of the 1996 auction prices because those licenses were only for digital operations, which were not in use in Wyoming during the tax years in question. Furthermore, there was no testimony that there had been a purchase of an FCC license separately from a "going concern" company. In fact, the reason Mr. Hoemke developed this formula is because there was no such market information publicly available. [Transcript Vol. III, p. 480].
58. Mr. Hoemke valued the customer base by using acquisition costs, advertising costs and contract reduction costs, as reported to the SEC in Petitioners' 10-K. Petitioners did not report either the customer acquisition costs or the 10-K information to the Department at the time of filing their annual reports or in subsequent meetings. [Transcript Vol. III, p. 397; Exhibits 124, 125].
59. Customer acquisition costs are an expense. They decrease net income and therefore reduce the income stream that is capitalized. Customer acquisition costs were accounted for in both methods the Department used to value these companies. Therefore, there is no need to deduct customer acquisition costs again. [Transcript Vol. III, p. 461; Vol. IV, pp. 576, 646].
60. Any Discussion above or Conclusion of Law below which includes a finding of fact may also be considered a Finding of Fact and, therefore, is incorporated herein by this reference.
CONCLUSIONS OF LAW
I. General Information: Jurisdiction, Burden of Proof
61. Petitioners' Notices of Appeal were timely filed and the Board has jurisdiction to determine this matter. The Board's jurisdiction was not defeated by the revised assessment because the issues on appeal have not become moot.
62. Petitioners have the burden of going forward and the ultimate burden of persuasion. Rules, Wyoming State Board of Equalization, Chapter 2, 20. The Department's appraisal is presumed valid if determined in accordance with applicable statutes, rules, regulations and other directives developed under public scrutiny. RT Communications, Inc., 11 P.3d at 922; Amoco Production Co. v. Wyoming State Bd. of Equalization, 899 P.2d 855 (Wyo. 1995); Gray v. Wyoming State Bd. of Equalization, 896 P.2d 1347, 1350 (Wyo. 1995), citing Teton Valley Ranch v. State Bd. of Equalization, 735 P.2d 107 (Wyo. 1987).
63. The applicable constitutional provisions provide, in relevant part:
Wyoming Constitution Article 15 Section 11: Uniformity of assessment required.
(a) All property, except as in this constitution otherwise provided, shall be uniformly valued at its full value as defined by the legislature, in three classes as follows:
* * *
(ii) Property used for industrial purposes as defined by the legislature; and
* * *
(f) All taxation shall be equal and uniform within each class of property. The legislature shall prescribe such regulations as shall secure a just valuation for taxation of all property, real and personal.
64. The Department's valuation established for state assessed property is presumed valid, accurate, and correct, a presumption which survives until overturned by credible evidence. Without evidence to the contrary, it is presumed that the official charged with establishing value, be he a county assessor or a Department appraiser, exercises honest judgment in accordance with the applicable statutes, rules, regulations, and other directives, which presumption survives until overturned by credible evidence. Chicago Burlington & Quincy Railroad Co. v. Burch, 400 P.2d 494, 498-499 (Wyo. 1965).
65. Petitioners have the initial burden to present credible evidence to overcome the presumption. A mere difference of opinion as to value is not sufficient. Teton Valley Ranch v. State Bd. of Equalization, 735 P.2d 107 (Wyo. 1987); Hillary v. Big Horn Coal Company, 549 P. 293 (Wyo. 1976); Weaver v. State Bd. of Equalization, 511 P.2d 97 (Wyo. 1973); CF&I Steel Corporation v. State Bd. of Equalization, 492 P.2d 529 (Wyo. 1972); Chicago Burlington & Quincy Railroad v. Burch, 400 P.2d 494 (Wyo. 1965); J. Ray McDermott & Co. v. Hudson, 370 P.2d 363 (Wyo. 1962) and Certain-Teed Products Corporation v. Comily, 87 P.2d 21 (Wyo. 1939).
66. All taxable property is to be annually valued at its fair market value. Wyo. Stat. 39-2-102. "Fair market value" is defined in Wyoming Statute Section 39-11-101(a)(vi) as follows:
The amount in cash, or terms reasonable equivalent to cash, a well-informed buyer is justified in paying for a property and a well-informed seller is justified in accepting, assuming neither party to the transaction is acting under undue compulsion, and assuming the property has been offered in the open market for a reasonable time.
II. Petitioners are "telephone companies" subject to state assessment and valuation under Wyoming Statute Section 39-13-102(m)(vi).
67. Telephone companies are assessed by the Department in accordance with Wyoming Statute Section 39-13-102(m)(vi) which states:
(m) The department shall annually value and assess the following property at its fair market value for taxation:
* * *
(vi) Property of telephone and telegraph companies which have more than two thousand dollars ($2,000) in assessed value;
68. The term "telephone company" is not defined in Title 39 of the Wyoming Statutes. In order to determine if Petitioners are telephone companies subject to state assessment, we must decide whether the statutory reference to "telephone companies" is clear and unambiguous. If it is, there is no need to resort to rules of statutory construction. "Construction of legislative enactments is only appropriate where the enactment has first been found, as a matter of law, to be ambiguous." Snake River Brewing Company, Inc., v. Town of Jackson, 2002 WY 11, ___ P.3d ___, 29.
A statute is unambiguous if its wording is such that reasonable persons are able to agree as to its meaning with consistency and predictability. General Chemical Corp. v. Wyoming State Bd. of Equalization, 819 P.2d 418, 420 (1991). If a statute is determined to be unambiguous, the words used are to be given their plain and ordinary meaning. Wyoming Game and Fish Comm'n v. Thornock, 851 P.2d 1300 (Wyo. 1993); U.S. West Communications, Inc. v. Wyoming Public Service Commission, 989 P.2d 616 (Wyo. 1999). The dictionary defines "tele" as, "distant, at a distance; over a distance," and "phon" or "phono" as "sound, voice; speech." Webster's New Collegiate Dictionary (1977). "Telephone" is defined as "an instrument for reproducing sounds at a distance."
The words of the statute are unambiguous: the Department shall assess telephone companies. Thus, the words "telephone companies" must be given their plain and ordinary meaning. To most reasonable people, Petitioners' business is indistinguishable from that of a telephone company. In fact, in today's society, many people use telephone services and cellular services interchangeably. Sometimes, cellular services are utilized in areas where traditional telephone service is not even available. Thus, since the statute is clear and unambiguous, there is no need to resort to statutory construction. Johnson v. Safeway Stores, Inc., 568 P.2d 908, 911(Wyo. 1977).
69. This Board has previously determined that a pager service is not a "telephone company." Rule Radiophone Service, Inc.,1999 WL 124396 (Wyo. St. Bd. Eq. 97-215). We can understand the confusion created by that decision, because some of the factors used to determine that the pager service was not a "telephone company" are applicable to Petitioners. One common factor is that the pager system was no longer regulated as a public utility; Petitioners are not regulated public utilities. Another factor is that the pager service used radio transmission frequencies under a license of the FCC. Petitioners also operate pursuant to FCC licenses.
However, there is an important distinction between the Petitioners and the pager company. Petitioners provide two-way communication between significant numbers of unrelated persons or businesses, whereas the pager service provided one-way communication. "Telephone companies" and Petitioners provide their service primarily as two-way communication.
Another important distinction is that state law defines an "Essential Telecommunications Service" as "Services necessary to connect 911 emergency services to the local network." Wyo. Stat. 37-15-103(a)(iv)(D). Petitioners provide 911 emergency services and are installing digital equipment in part to interface with enhanced 911 emergency services. See paragraph 36.
70. This Board agrees with those courts which have concluded that cellular phone companies are "telephone companies" for taxation purposes. In holding that cellular telephone companies should be centrally assessed, the court in Cellular Telephone Co. v. Commonwealth of Kentucky, 897 S.W. 2d 601, 603 (Ky. App. 1995) said:
The only thing that significantly sets cellular telephone companies apart from traditional telephone companies may be the technology involved. The means to the end may have changed, but the end remains the same, that is, cellular phone companies are designed and operated to provide telephone service.
Although Section 39-13-102(m)(vi) was enacted long before cellular technology was invented, we agree that, while "[t]he means to the end may have changed, . . . the end remains the same, that is, cellular phone companies are designed and operated to provide telephone service." Cellular service is telephone service. Only the technology has changed. Cellular telephone companies are similar to public companies because they use public airwaves and they are regulated for the public benefit by the FCC. We also find convincing the argument that most cellular communication utilizes land-based wire lines. See paragraph 17.
It is true that Wyoming law does not rate-regulate cellular service. However, that does not mean that the legislature cannot, or has not, decided to assess cellular companies at the state level. The legislature may assess differently than it determines to regulate, with the result that a cellular phone company, while not rate-regulated, is nevertheless centrally assessed. This is the same logic applied in Southwestern Bell Mobile Systems, Inc., et. al. v. Arkansas Public Service Commission, 40 S.W. 3d 838 (Ark. App. 2001), and U.S. Transmission Systems v. Board of Assessment, 715 P.2d 1249 (Colo. 1986).
We also find persuasive the reasoning that if a company is in the business of transmitting two-way communication between a significant number of unrelated persons or businesses, it is a telephone company. U.S. Transmission Systems v. Board of Assessment, 715 P.2d 1249 (Colo. 1986).
Finally, the telephonic service provided by Petitioners is an essential service, not merely a convenience like a paging service. Due to the isolation and sparsely populated nature of the areas served by Petitioners in the State of Wyoming, cellular telephone service is essential for emergency purposes. In some areas, it is the only telephone service available.
71. It is clear Petitioners fall within the meaning of "telephone companies." Petitioners sell handsets that have telephone numbers, and that are used for local and long-distance two- way communication. The service provided by Petitioners crosses taxing districts, county and state lines. See paragraph 15.
72. We acknowledge other states have decided cellular phone companies should not be centrally assessed as "telephone companies." In the cases of In re Topeka SMSA Ltd., 917 P.2d 827 (Kansas, 1996), and MCI Telecommunications Corp. v. Limbach, 625 N.E. 2d 597 (Ohio 1994), the courts compared cellular phone companies to pager services or resellers of services, and concluded that since those services were not centrally assessed, the cellular services should not be either.
The evidence before us, however, does not support this comparison. In Wyoming, Petitioners' competitors are wire-line telephone companies, not pager services or resellers. When a customer decides to make a telephone call, he must chose between a wire-based handset or a cellular handset. It would violate constitutional principles of equal taxation to tax wire-line telephone companies centrally, but tax cellular services locally.
73. One of the fundamental reasons our legislature requires large industries such as railroads, pipelines, airlines and telephone companies to be state-assessed is because these industries provide services that cross taxing districts, county and even state lines. It simply is more practical for the Department, with its staff of professionally-trained appraisers, to appraise these industries utilizing a unitary approach to value. If these businesses were appraised at the local level, piece-meal valuation would result, with twenty three county assessors arriving at different opinions as to the value of the property. The very nature of the services provided by these businesses supports central assessment using the unitary approach.
74. During the 2001 legislative session, the legislature amended the language of Section 39-13-102(m)(vi). In its original form (applicable during the assessments at issue in these cases), the statute provided for state assessment of "[p]roperty of telephone and telegraph companies." Effective January 1, 2002, the statute requires state assessment of "[p]roperty of telecommunications companies." Session Laws 2001, Ch. 206, 1. The legislature for the first time also defined "telecommunications companies," as "any person engaged in the furnishing of telecommunications service." Session Laws 2001, Ch. 206, 1, now codified as Wyo. Stat. 39-13-101(a)(vi). The legislature then defined "telecommunications service" as:
[T]he offering of transmission for hire of telecommunications between or among points specified by the user, of information of the user's choosing without change in the content of the information as sent and received by means of telecommunications facilities, including switching facilities, using wire, cable, microwave, radio wave, light wave or a combination of those or similar media. The term shall include all types of telecommunications transmission, such as telephone service, telegraph service, cellular, wireless or satellite. The term shall not include assets used for television or radio programming broadcast over airwaves for public consumption, cable or satellite television offered for public consumption or telephone answering service and one-way paging or beeper service.
Session Laws 2001, Ch. 206, 1, now codified as Wyo. Stat. 39-13-101()(vii).
This Board acknowledges the rule of statutory construction that "when the legislature amends a statute, it must be presumed that some change in the existing law was intended." State ex rel. Albany County Weed and Pest District v. Board of County Commissioners of Albany County, 592 P.2d 1154, 1157 (Wyo. 1979). However, as noted above, see paragraph 68, the rules of statutory construction are not be used to read an unambiguous statute. The current form of Section 39-13-102(m)(vi) is unambiguous, just as was its predecessor. The legislature merely updated the language to reflect the reality of technological changes in the industry. Petitioners are telecommunications companies, within the meaning and scope of the statute. Thus, they were, and are, subject to state assessment.
IV. The economic adjustment factor used by the Department was appropriate.
75. The unitary method is considered the most rational means of central assessment to determine the value of an enterprise whose functions rely on cross-boundary connections. RT Communications, Inc., 11 P.3d at 924. As the Utah Supreme Court observed in Beaver County, et. al. v. Wilted, Inc., 995 P.2d 602 (Utah, 2000):
From a purely practical perspective, central assessment is the most rational way to determine the value of an enterprise whose function relies upon cross-boundary connections. In fact, the sum of assessments of local property made by a collection of counties each employing different valuation systems and competing for tax dollars could conceivably overestimate the value of unitary enterprise's state-wide property.
In this case, each Petitioner owns property in multiple counties. [Exhibits 505, 506, 507]. Furthermore, the services provided by Petitioners frequently cross county and even state boundaries because calls can cover many miles. Unitary valuation is appropriate.
76. The Department of Revenue Rules define unitary valuation as:
[T]he process of determining the value of a company as a whole without reference to the 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(k).
77. The goal of the appraisal process is to determine fair market value. Petitioners' property is most appropriately valued as a whole using the unitary approach. The full value is not reflected merely by a summation of the parts of each unit, because there is value to the entire combined unit (the "operating unit" or "going concern") that a simple summation does not capture. Even Petitioners' witness acknowledged that the simple summation of the cost of the parts - reflected as the net book value of the company - did not reflect fair market value. See paragraph 29.
78. In valuing Petitioners, the Department used the "historical cost approach," which is the sum of the cost of the parts, adjusted by the historical performance income. [Transcript Vol. IV, pp. 563-564]. Petitioners' expert witness agreed that a downward adjustment is appropriate to account for economic obsolescence. It is logical to the Board that if an adjustment for economic obsolesence is appropriate to adjust a value downward, it is equally logical to adjust value upward through economic enhancement. However, Petitioners argue an upward adjustment is inappropriate because such enhancement is due solely to the value of the intangibles. [Transcript Vol. III, pp. 414-415].
79. Petitioners argue the economic enhancement adjustments were not appropriate because they included income information, and therefore were not an independent value. We do not find the values derived from different approaches have to use completely different information, because indicators of value may be related. It is well recognized that the indicators of value are "integrated, interrelated, and inseparable." In these cases, because the appraiser used different incomes in attempting to measure historical income versus future performance income, the enhancement adjustment was proper. [Transcript Vol. IV, pp. 563-564; Appraisal Institute, The Appraisal of Real Estate, (10th Ed. 1992) p. 409]. See also the study by David Shank of Ad Valorem Services, Inc., commissioned by the Board and discussion PacifiCorp v. Department of Revenue, 2001 WY 84, 31 P. 3d 64, 67 (WY 2001. See paragraph 27. [Transcript Vol. IV, pp. 563-564].
80. Furthermore, such adjustment is supported by the Department of Revenues Rules which, having been properly promulgated pursuant to statutory authority, have the force and effect of law. Department of Revenue v. Buggy Bath Unlimited, Inc., 2001 WY 27, 18 P.3d 1182 (Wyo. 2001). The Department of Revenue Rules, Chapter 7, Section 6, require that cost models consider all forms of depreciation and appreciation. Appreciation is defined as:
[A]n increase in cost to reproduce, value over the cost, or value at some specified earlier point caused by greater demand, improved economic conditions, increasing price levels, reversal of depreciating environmental trends or other factors as defined in the market.
Rules, Wyoming Department of Revenue, Chapter 7, 4 (f).
We find the use of the economic enhancement adjustment was appropriate. Petitioners' argument is nothing more than a mere disagreement regarding value. Hillard v. Big Horn Coal Company, 549 P.2d 293 (Wyo. 1976).
V. The Department's adjustment for functional and technological obsolescence was sufficient.
81. The "flip side" of economic enhancement is obsolescence. Just as Petitioners argue that the Department's valuations included too great an increase for economic enhancement, they contend that the Department did not take into account a sufficient decrease for functional and technological obsolescence. Petitioners argue for a consistent five-year income average to be used to calculate income under the income approach, rather than the three-or-five year average used by the Department. Petitioners contend the five-year average would decrease income and better adjust for functional and technological obsolescence. The obsolescence identified by Petitioners was the eventual change from analog equipment to digital equipment, and the resulting additional cell sites and a decrease in roaming income.
As noted above, see paragraph 30, whether to use a three-year average or a five-year average is a matter of appraisal judgment. Petitioner's own expert witness admitted this, and further testified the depreciation and net book value of the equipment was reasonable. [Transcript Vol. III, p. 461]. Thus the argument about using a five-year average constitutes nothing more than a difference of opinion as to value, and as such is not sufficient to meet Petitioners' burden. Teton Valley Ranch v. State Board of Equalization, 735 P.2d 107 (Wyo. 1987); J. Ray McDermott & Co. v. Hudson, 370 P.2d 364 (Wyo. 1962); Chicago Burlington & Quincy Railroad Co. v. Bruce, 400 P.2d 494 (Wyo. 1965).
82. Petitioners argue for a larger obsolescence adjustment because of the change from analog to digital equipment. However, the evidence does not support a larger adjustment in these tax years because analog was the only technology offered at the time, analog compatibility was required by the FCC, and there was little competition for wireless services. Furthermore, Petitioners' income has actually increased over the life of the companies.
83. The Department determined the depreciation accounted for by Petitioners, and used to decrease net book value, adequately accounted for all technological and functional obsolescence. [Transcript Vol. IV, p. 564]. Petitioners did not present sufficient evidence to rebut the presumption in favor of the Department's valuation. The functional and technological obsolescence has been accounted for in a reasonable manner.
84. Petitioners did not raise the issue of the capitalization rate in their Notices of Appeal, their Preliminary Statements or in their Summaries of Updated Contentions for either 1999 or 2000. The Notices of Appeal, Preliminary Statements and Updated Summaries of Contention were never amended to raise any issue regarding the Department's capitalization rate for either tax year, and therefore any issue challenging the capitalization rate is not properly before this Board. [Transcript Vol. II, pp. 209-213]. Pleadings and notice of hearing are meaningless unless they are limited to considering only the issues presented in the notice and pleadings. Dan's Supermarket & State of Wyoming Workers Safety and Compensation Division v. Pate, 2001 WY 136, 33 P.3d 1121, 1125 (2001).
V. The intangible property identified by Petitioners does not have to be deducted from the value of the unit.
85. Petitioners are asking to deduct unidentified intangible property from the total value of the unit. Their position is that the fair market value may never exceed the net book value of the property. This contention is a cutting-edge issue being presented to many courts throughout the country. Assessment Journal, May/June 1996, Vol. 3, Number 3, p. 33. Nevertheless, it is irrational. If the value of property is limited to net book value, in essence the company sets its own value by choosing both what to list as an asset and the rate of depreciation. If intangibles need not be identified, but their alleged value nevertheless may be deducted, then the value is completely subjective. If this view were accepted, then a residential homeowner could argue that electrical service, telephone service, sewer and water service, road value, site value and other intangibles have to be deducted from the assessed value, which in turn could reduce the value to less than the cost of the materials needed to build a home. While this might seem to have beneficial tax consequences, there would be no reason to invest in property if the fair market value is less than the cost of the sum of the parts.
86. The statute exempting property from taxation includes an exemption for "intangible property." Wyo. Stat. 39-11-101(a)(vii). Wyoming Statute Section 39-11-105(a)(xxix) provides that intangibles include:
(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.
This statute does not, however, define what intangible property is. The Board and the Wyoming Supreme Court have determined the list to not be exclusive. RT Communications, Inc., 11 P.3d 915; Union Telephone Company, et. al., 1999 WL 370035 (Wyo. St. Bd. Eq. 95-69); Tri-County Telephone Association, et. al., 1999 WL 1268428 (Wyo. St. Bd. Eq. 95-70).
87. In RT Communications, Inc.,11 P.3d at 922-923, the Wyoming Supreme Court provided guidance as to what is intangible property, and how to exempt it from taxation within a unit:
The one common characteristic of each of the items listed within 39-1-101(a)(vii) was that they had no inherent value in and of themselves but instead represented value. In the ordinary sense of usage, this is what "intangible property" means: "As used chiefly in the law of taxation, this term means such property as has no intrinsic and marketable value, but is merely the representative or evidence of value, such as certificates of stocks, bonds, promissory notes, copyrights, and franchises. " Blacks Law Dictionary 809 (6th ed. 1990). This definition is clearly what was intended by the legislature as evidenced by the fact that 39-1-101(a)(vii) specifically listed some of the examples cited therein such as stocks, bonds, and promissory notes.
The court further noted that "intangibles" include goodwill, a certificate of convenience and franchise rights. The court explained that the value of property is not just the sum of the parts of the property, but is the value of the unit as a "going concern," just as a house is not just the cost of lumber and nails, but includes intangible values such as site, accessibility and ownership rights. RT Communications, Inc., 11 P.3d at 924.
"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 value of a company's property is considered." RT Communications, Inc., 11 P.3d at 924.
88. Going-concern value includes an intangible enhancement of value that assimilates the effect of all operating property interacting together. The unit valuation method requires the appraiser to determine a "going concern" value which may include contributions due to intangible property, but only to the extent such intangible property is necessary to the operation of the property being assessed. RT Communications, Inc.,11 P.3d at 924.
The Wyoming Supreme court recognized that the use of intangible property to assess the value of tangible property is justified on two grounds: 1) intangible property can affect the value of tangible property; and 2) the difficulty of separating intangible property from tangible property. RT Communications, Inc., 11 P.3d at 923-924.
89. In order to be exempt from taxation, an intangible must be both separable and identifiable. RT Communications, Inc.,11 P.3d at 928. Petitioners' witness contended that for an asset to be intangible it must be only one of three things: identifiable, separable or contractual. [Transcript Vol. III, p. 378]. We disagree; the Supreme Court has stated that for an asset to be an intangible it must be identifiable and separable. RT Communications, Inc., 11 P.3d at 928.
In these cases, neither the FCC licenses nor the customer base are separable. Neither are identifiable. Petitioners had to rely on inside information to try to identify the value of those assets. They used customer numbers, the "churn" (turnover rate of customers), and the yearly advertising cost to value customer base. We do not accept the cost of advertising as the value of the customer base. Furthermore, the cost of advertising is deducted from income. If it is again deducted from value it would be a double deduction.
Petitioners attempted to value the FCC licenses by using FCC auction prices. This approach was invalid because the auction was for a different type of license. Further, there was no showing that the price was what a buyer of the business itself would pay the holder of the current license.
90. Even if we were to conclude the customer base and FCC license are intangibles, it does not necessarily lead to the conclusion that they must be deducted from the taxable value of the unit. As the court observed in RT Communications, Inc.11 P.3d at 924:
None of the tangible property such as telephone poles, lines, and switching equipment had any value unless it could be used, and it could not be used without a certificate of convenience and necessity and these other intangible items that the Telephone Companies argued were accounted for in the acquisition adjustments. If the Telephone 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.
Petitioners argue the equipment could be used without the FCC license because the license of another party could be leased but that begs the question. The equipment has to be associated with an FCC license to provide the cellular service. Therefore, the license is necessary for the service. Further, the service could not be provided unless there were customers for the business. The FCC license and customer base are integral to each business and therefore are not exempt from taxation. RT Communications, Inc., 11 P.3d at 925.
91. A fatal flaw with Petitioners' requested exemptions is Petitioners' failure to either give the Department the information necessary to value the claimed intangibles, or to even claim the exemption. See Paragraphs 13, 46, 54, 55, and 58. As the court noted in RT Communications, Inc., 11 P.3d at 924, the Department could not have exempted something Petitioners failed to identify or claim. Petitioners attempt to excuse their inaction in several ways: (1) the Department did not request the information; (2) the information would have been available if Department had requested it; (3) some information was available in the public domain; and (4) it would have been fruitless to provide the information because the Department had historically considered the statutory list of intangibles to be exclusive. None of these reasons shifts the burden to the Department. It was Petitioners' responsibility to properly complete the annual report form, and to request and prove the claimed exemptions. RT Communications, Inc.,11 P.3d at 922; Amoco Production Company v. Wyoming State Board of Equalization, 899 P.2d 855 (Wyo. 1995), Gray v. Wyoming State Board of Equalization, 896 P.2d 1347, 1350 (Wyo. 1995); citing Teton Valley Ranch v. State Board of Equalization, 735 P.2d 107 (Wyo. 1987).
92. Petitioners' approach to deduct the intangibles from value presumes the values are actually captured in the Department's valuations. In fact, neither asset was captured in the cost method because neither was included with a book value. Neither was included in the income approach because expenses associated with the assets were deducted from the income stream.
93. By removing the intangible value first, Petitioners fail to recognize that the assets of each company operating as a working unit create synergy or enhancement, as testified to by Petitioners' own witness, Mr. Hoemke. Petitioners' method recognized enhancement for RSA #3 and Airtouch, but does not recognize enhancement for RSA #1 and RSA #2. Because all of the companies are the same type of enterprise utilizing similar property, tangible and intangible, it is illogical to assume that there is enhancement for one company and not the others.
94. Because the FCC license and customer base cannot be removed from Petitioners' business operating as a "going concern" without substantially affecting the value of the Petitioners' physical assets, the assets identified by the Petitioners are not separable and therefore are not intangible property to be excluded from value.
THIS SPACE INTENTIONALLY LEFT BLANK
IT IS THEREFORE HEREBY ORDERED: The Department of Revenue's valuation
PURSUANT TO Wyo. Stat. 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 of review within thirty (30) days of the date of this decision.
DATED this 15th day of February, 2002.
STATE BOARD OF EQUALIZATION
Edmund J. Schmidt, Chairman
Roberta A. Coates, Vice-Chairman
Sylvia Lee Hackl, Member
Wendy Soto, Executive Secretary