Tax Appeal: One of the largest and longest property tax appeals in the state's
history has ended with ramifications for Bucksport and other towns
(from Maine Townsman, February 1996)
By Jo Josephson, Staff Writer
How do you get an intransigent taxpayer to provide you with the documents you believe you need to properly defend your property assessment?
That was the question the Town of Bucksport faced back in 1993, when its largest taxpayer-Champion International Corp.-balked at the town's request for information during a dispute over the town's 1992 assessment of the company's Bucksport paper mill.
The company said the assessor's 10-page request for information on the mill was "unreasonable, overbroad, and burdensome" and eventually challenged it in the courts.
The town admitted that in making its detailed request it had presented the mill with a "daunting task". But it argued that the information was needed in order to "level the playing field".
And besides, argued the town's attorneys, it was the mill's obligation under the law to provide that information.
For if there is anything the town says it had learned from the three year tax battle with the mill, says Bucksport Town Manager Roger Raymond, it is that municipalities should not rely on the existing law (36 MRSA Section 706) to get information from a reluctant taxpayer.
Not only does the law lack clarity, says Raymond, it also lacks teeth. And lacking clarity it leaves too much room open for interpretation. And lacking teeth, which is to say, lacking penalties, it is ineffectual.
Ultimately, the town got the information it requested. Ultimately the town got 3,000 pages of usable documents from Champion.
It got the information, circuitously through the courts. But not through any litigation initiated by the town. Rather, through litigation initiated by the company against the town.
For by challenging the town's request for information in the courts, the company unwittingly enabled the town to take advantage of the wide open discovery process of the court system, notes Lee Bragg, a municipal attorney who represented the town in this dispute.
And it was only through the power of that process that the town was able to gain access to the information it sought. As Bragg sees it, "The court action enabled us to do what Section 706 should have done."
It cost the town $250,000 to obtain that information, half of its total legal fees in the case, one-quarter of its total costs in the appeal. But it was cheap, considering the mill was after a tax abatement which exceeded $6 million for the years in question.
Ultimately, based on that information, the state Board of Property Tax Review voted 3-2 that the mill had not been able to prove that the town's assessment was "manifestly wrong" and in doing so voted to deny Champion's $1.45 million tax abatement request for 1992.
As noted above, the case has been settled. But in the eyes of town officials and the two attorneys-Lee Bragg and Jack Montgomery of Bernstein, Shur, Sawyer, and Nelson, who argued the town's case-and presumably others, including company officials, there are a number of unresolved issues remaining.
As such, this article attempts to look at what has been put to rest by the Board's decision and what, following it, is still unclear. In other words it attempts to look at the ramifications of the three-year battle.
But before doing so, the article looks briefly at the political dynamics that led to the appeal.
For some, the origins of the three-year tax battle between the mill and the town go back to 1989, when the town began to change the rules that were in place regarding its assessment of its largest taxpayer, Champion International.
In the course of conducting a revaluation of the town, the town's newly hired and first full-time local tax assessor, in the name of taxpayer equity, scrapped an agreement between the town and the mill that had been in effect since 1985, when Champion purchased the mill from the St. Regis Paper Co.
It was an agreement in which the mill was to be treated differently than other taxpayers in town. It was an agreement in which new construction at the mill over 5100,000 was only assessed at 50 percent of its value.
(Other taxpayers in town were assessed at 95 percent.) It was an agreement in which there was no cap on depreciation at the mill. (Other tax-payers were capped at 30 percent for equipment and 50 percent for buildings.)
Some would say that in scrapping that agreement, the town set off a chain reaction that was to take three years and close to $1 million to get under control.
For it didn't seem to matter that when the town's revaluation was completed in 1992 that the mill's taxes only went up $8,000. In December of 1992, the mill filed an appeal with the town to abate its taxes not by $8,000 but by $1.45 million.
It was worth, said the mill, not the $248 million it had been assessed prior to the revaluation, and definitely not the $310 million the town said it was now worth, but only $210 million!
(It should be noted here that the $210 million figure argued by the mill represents an average of the values arrived at through the cost, income and sales approaches to arriving at a fair market value).
For if the town was beginning to look at taxpayer equity, the mill, it appeared, was beginning to look at ways to cut costs, dramatically. And in doing so, the mill was looking at new ways to assess their properties, putting more weight on functional and economic obsolescence than had been the tradition in assessing such properties in the past.
It should be noted, however, that even after the mill filed its appeal with the state in 1993, the two parties did make an effort to resolve their differences "out of court" so to speak.
But the resolve did not occur. Each side stood its ground. In the name of taxpayer equity, the town refused the mill's request to negotiate any lower than $285 million. To do otherwise, said the town, would be unfair to the other taxpayers.
WHAT HAS BEEN PUT TO REST
As Bucksport officials see it, the 3-2 decision by the state Board of Property Tax Review to uphold the town's-$310 million assessment of the mill not only validated the town's methodology, it also validated the role of the local assessor to do industrial appraising.
Which is to say that the Board found that the mill was unable to prove that the assessment arrived at by the town's assessor William Mayo was "manifestly wrong." Which is to say that the mill's methodology lacked credibility and reliability.
As Bucksport's town manager sees it, on one level the battle with Champion was over a major difference in assessing methodologies. But what the battle really boiled down to in the end was who had the more credible and reliable numbers.
The Mill's Methodology. In arguing the cost approach before the state Board of Property Tax Review, the company's experts compared an "ideal" mill built today using modern materials, technology, current standards, design and layout, to the existing mill in Bucksport, which was built in 1930. It then penalized the existing mill for what it saw as the mill's deficiencies: antiquated technology, excessive machinery and employees, and a poor layout.
Setting $1 billion as the estimated cost to construct its "ideal" mill-a number the town challenged, saying no such mill existed and therefore the foundation of the mill's argument was indeed "very rotten", the company then argued that because the existing mill was in such terrible shape, it had to reduce the cost by 81 per-cent or $810 million in the name of economic and functional obsolescence and depreciation.
As Raymond sees it, there is nothing wrong with using functional and economic obsolescence and depreciation in arriving at the fair market value, it's just that in his opinion and in the opinion of three members of the state Board, the mill pushed their use of these factors too far.
As Montgomery would argue before the Board, not only had the mill been a bit too "creative" in their use of it, they had not been able to substantiate their figures.
Among other things, to arrive at the $190 million figure of its cost approach, the company had penalized the existing mill $112 million for excess employees and $23 million for its inability to process tree-length wood.
The town would argue that such deductions were "double dipping" or a doubling up of obsolescence penalties.
"They just pushed their method too far," says Raymond. Given the fact that the Bucksport mill had such great earnings during this period; given the fact that by their own admission they had recently spent $340 million in capital improvements on the Bucksport mill, the company's numbers were not credible," says Raymond.
"And not only were the company's cost approach numbers not credible, when it came to the income and sales approach, their numbers were not reliable," says Raymond.
As the town argued, based on projected income, the income approach was too subjective, too erratic, too cyclical, and consequently too volatile to be reflective of the fair market value of pulp and paper properties. As the town argued, the sales approach was lacking in comparable examples to be reliably used in establishing a fair market value of pulp and paper properties.
And for those reasons, says Raymond, the town's assessor had considered and then discarded those two methodologies (income and sales) in arriving at its $310 million value of the mill.
The Board agreed, by a 3-2 vote.
Luckily for Bucksport and other paper mill towns in the state. Last year, Raymond was quoted in this magazine saying that if the mill's methodology in determining fair market value had found acceptance with the Board, every mill in the state would see a decreased valuation and a major shift in the property tax.
Had the mill's numbers prevailed, it would have meant a shift of between $500,000 and $600,000 in taxes each year from the mill to the other taxpayers in Bucksport.
The Town's Methodology. It is not the intent of this article to go into the details of the numbers used to win the appeal, but suffice it to say that, unlike the mill the town's approach was based solely on cost.
And unlike the mill, its approach was based not on the cost of an "ideal" hypothetical contemporary mill minus deductions, but on the "actual" cost of all of the components that make up the existing mill. An actual cost that was grounded in historical numbers that were both trended up for inflation as well as depreciated for age.
It should be noted here that in challenging the town's methodology, Champion was also challenging the methodology used to arrive at state valuation by the Maine Bureau of Property Taxation. The two were essentially the same.
As such, it was not surprising then that the town's number-$310 million-came very close (within 10 per-cent) to the state's valuation of the mill, $290 million.
According to the record, that similarity appeared to be a strong argument in upholding the town's number, as indicated by the following comments of one member of the state Board of Property Tax Review:
" I think that the thing that . . . you basically look at is the state valuation. I think you have to look at that. They're unbiased. They have no reason to add, subtract or anything else. I think you have to look at that, and that was very close to what the assessor had on it. . ."
It could be said that in upholding the town's methodology, the Board upheld the State's.
The Local Assessor
If the Board's 3-2 decision affirmed the town's assessment, in Raymond's view, it also affirmed the role of the local assessor in being able to do a fair job in appraising industrial properties.
If challenging the mill's numbers was one tactic taken by the town and its attorneys, challenging the credibility of the so-called experts, who came up with the numbers was another tactic.
As such, attorney Jack Montgomery, a trial lawyer, reminded the state Board during its deliberations that one of the mill's experts had promised to help the mill get a tax reduction. He had as evidence a brochure promising such.
"I am not saying that is immoral (to promise tax reductions). I am just saying this Board needs to be aware of that in considering whether you are going to put any weight at all on his testimony," said Montgomery.
According to the record, at least one member of the state Board concurred with Montgomery, likening "experts" to "hired guns" and saying "I think you should be very careful on how much credence you give (their) testimony."
As Raymond sees it if Champion had prevailed, local assessors would have had to hire such "experts" in the future when it came to assessing the industrial properties in their town. But Champion did not prevail.
WHAT IS STILL UNCLEAR
"We closed the door on the mill's methodology. We validated our cost approach as a reliable approach to assessing pulp and paper properties. We closed the door on the income and sales approach on such properties.
"But we did not close the door on just how far a town can go with regard to accessing information to validate its numbers," says Bucksport's Raymond.
If anything, the town opened two cans of worms, says Raymond: the first in calling attention to the
706 process; the second in calling attention to the need for confidentiality in the 706 process.
36 MRSA, Section 706
Seven-O-Six, as in section 706 of 36 MRSA, that portion of the Maine law that requires assessors to request a so-called "true and perfect list" from all persons liable to taxation in the municipality of all their properties not exempt from taxation.
That portion of the law that says, if you do not provide such a list you forfeit your right to appeal your assessment, but if the town fails to request the list, you the taxpayer are not barred from making an appeal, and should the town not request the list but you make an appeal, you are then required to furnish the information requested by the town.
The town's request for information under 706, all 10 pages of it, said the mill, was "unreasonable, over-broad, and burdensome," in a complaint it took to the courts challenging the town's entitlement to the information under 706.
But not before the company dragged its feet, some would argue "stonewalled" the town, and only partially (read "selectively") responded to the request for information by the town, saying that either they did not have the information or that it was irrelevant.
Burdensome or no, attorney Bragg told the TOWNSMAN, " We could not have won without the information. For without it, it was Champion's word against our word, when it came to the numbers. Without the information, the playing field was not level."
As Bragg described it: "Champion got to hide the ball and bring in the experts to describe the deplorable state of the mill, the depressing prospects for future growth and the over-whelming competitive disadvantage it faced and the town had nothing to contradict it."
It's not that the company provided the town with no information, explains Bragg, it's just that the asset list it routinely provided to the town contained "major deficiencies". And when the town requested additional information, it was very slow and selective in responding
The asset list and its deficiencies aside, it should be noted here that the town did not request that true and perfect list of property from the mill in 1992, relying on the mill's asset list instead. Nor did it request such a list from any other taxpayer in town. Like other towns in Maine, it viewed the 706 process as a costly one, one that produced little information, and one that had little teeth.
However, if there is one piece of advice that Raymond would share with other towns as a result of the three-year, near million dollar battle it is: "Request the true and perfect list of all of your taxpayers, especially the industrial ones. Don't assume you will not be challenged. Because if you are going to be challenged you had better be doing things by the book." By the book, Raymond means requesting a true and perfect list of all your taxpayers.
For when the town sent Champion a request for information in 1994, it was not a request for a so-called true and perfect list, that was then followed up by a request for additional information, but rather a one-time, full-blown, no-holds-barred request that consisted of 10 pates of detail, the company took the offensive and challenged the request on three grounds:
That the town had not requested a true and perfect list from all taxpayers
That Champion had never received a demand for such a list (which it argued was a prerequisite for demanding additional information)
That the information demanded by the assessor was unreasonable, overbroad and burdensome.
The challenge ultimately made its way to the Maine Supreme Judicial Court, which chose to only address the complaint that Champion had never received a request for a true and perfect list as described in 706 and it should not be barred at some time in the future from appealing its 94 taxes. The Court agreed. But, by that time the town had acquired the information it needed using the Court's discovery rules.
In Raymond's mind, the broad challenge by Champion and the narrow ruling by the Court have raised a number of questions that have yet to be answered in his mind.
Does that mean that in the future towns will have to mail a true and perfect list request to all taxpayers? Does that mean that unless you request a true and perfect list first you cannot request additional information later? Does that mean there is a limit on what information an assessor can request?
These are the questions that Raymond feels have yet to be answered.
As noted above, in challenging Bucksport's entitlement to information under 706, Champion opened up the discovery process of the courts to the town and the town promptly took advantage of that process. Through numerous depositions, it was able to acquire the information it said it needed to challenge the mill's numbers and to verify its own numbers.
But the courts are not the solution, says Bragg. They are costly; they constitute a long and drawn out process. (The Maine Supreme Court ruling was not decided until Dec 5, 1995, one month after the state Board of Property Tax Review made its decision in favor of the town).
Strengthen Section 706
As Raymond and Bragg see it, 706 must be strengthened to ensure that assessors can request all of the information they think necessary for assessing purposes. Raymond likens the problem it had with Champion over the Bucksport mill to a situation in which a taxpayer says, "I have no sheet rock on my walls but I will not permit you access to my dwelling to confirm it."
As Raymond sees it, "all the information the appellant argues should be made available to the town." He further explains it, "there was a lot of argument on economic and functional obsolescence, but the company was not willing to provide information to verify it."
At the same time, both men also feel that 706 must be amended to create an exception to the Right-to-Know Law for documents which the taxpayer feels are confidential. Both
Raymond and Bragg agree that there is information that should be kept confidential.
The question is what kind of information should be kept confidential? It should be noted here that early on in the appeal process, the town and the mill had signed an so-called "confidential agreement", in which the town agreed not to release certain confidential documents it had obtained from the mill.
It should be noted that the Bangor Daily News challenged that agreement in the courts. And while it lost in Superior Court, the paper took its complaint to the Maine Supreme Judicial Court, where it is being considered.
It should also be noted that the courts upheld that agreement and allowed for much of the appeal process to be held behind closed doors.
Strengthen the State Board of Property Tax Review
Both Raymond and Bragg say that broadening the subpoena power of the state Board of Property Tax Review is another way to ensure municipalities and their assessors have access to all the information they need and request.
They note that under the Board's current rules the Board has that power; however they also note that when they did make a request of the chairman of the Board to subpoena the mill for certain information, the chair denied the request.
And while the Legislature is at it, Raymond would have it strengthen the Board's power so that not only could it lower the assessed value of a property, as it can now do, but that it would have the power to increase the valuation as well.
FOOTNOTE: It should be noted, the mill filed an appeal in the Kennebec County Superior Court, following the Board's 3-2 decision. Playing tit-for-tat, the town in return made it known that it was scheduling a public forum to apprise the rest of the taxpayers in Bucksport of the foot-dragging and stonewalling tactics the mill had engaged in during the appeals process.
As in most cases like this, both sides were playing their last cards and ultimately the appeal was withdrawn and the public forum never occurred. Ultimately, the two sides hammered out an acceptable formula for determining valuation that both sides say is "fair".
The town says it is not much different than the state's formula; nor is it much different than the formula Mayo had replaced the special agreement of 1985 with. The town notes that the difference in valuation comes to about 1.4 percent and as such the town has abated the mill's taxes by a total of $248,000 for the years 1993-95. There was no abatement for the year 1992.
The relationship between the mill and the town, though battered, continues, as it must. The town is currently issuing municipal bonds on be-half of the mill.
But it should be noted that the town is also currently actively pursing means to change its image as a "mill town". Which is to say it is actively seeking to expand and diversify its economic base, as all towns, mill or otherwise, should. It has hired an economic development director and developed a plan that includes among other things the creation of a business park and the development of a marina.
Ramifications of the Appeal
The ramifications of the Champion International's appeal of its 1992 tax assessment will be felt most directly in the Town of Bucksport. However, there appears to be some statewide significance to the appeal that other Maine municipalities should consider and reflect on.
If anything, the appeal has highlighted the need to:
Revisit 36 MRSA Section 706 to clarify and strengthen its powers to access and protect information.
Revisit the rules governing the powers to the state Board of Property Tax Review to strengthen the Board's powers to subpoena information and to expand its powers to enable it to increase the value of a property where warranted.
Request a true and perfect list of all taxpayers.
Clarify what is and is not confidential information and to protect that confidentiality.
If anything, the appeal has established:
The cost approach as a reliable approach when it comes to assessing pulp and paper properties. Which is to say that the sales and income approaches are not reliable in this industry.
The ability of a local assessor (non-expert) to assess industrial properties.
A process for obtaining information through litigation and the courts.
The ability of information to level the playing field.
ACKNOWLEDGMENT: The author wishes to acknowledge her thanks to the Bangor Daily News and the Ellsworth American for their extensive coverage of the appeal process, a coverage that provided much background for this article.