93-1055 and 94-1127

Cent. Assessed

Signed 3/23/95

BEFORE THE UTAH STATE TAX COMMISSION

____________________________________

XXXXX, )

Petitioner, : ORDER

v. : Appeal No. 93-1055 and 94-1127

PROPERTY TAX DIVISION OF THE :

UTAH STATE TAX COMMISSION, :

Respondent. : Tax Type: Cent. Assessed

_____________________________________

STATEMENT OF CASE

This matter came before the Utah State Tax Commission for a Settlement Conference pursuant to the provisions of Utah Code Ann. §59-1-502.5, on XXXXX. G. Blaine Davis, Administrative Law Judge, heard the matter for and on behalf of the Commission. Present and representing Petitioner on the telephone were Mr. XXXXX, XXXXX, and XXXXX. Present and representing Respondent were Mr. XXXXX, Assistant Attorney General, together with Mr. XXXXX, Mr. XXXXX, and Mr. XXXXX of the Property Tax Division. Present and representing the affected Counties was Mr. XXXXX of the law firm XXXXX.

The issue in these proceedings is the fair market value of the subject property as of XXXXX, and the fair market value of the subject property as of XXXXX.

The subject property is a mining property located in XXXXX County, State of Utah. The property was originally owned by XXXXX. On XXXXX, the stock of XXXXX was purchase by XXXXX, in an arms length transaction, for $$$$$. XXXXX paid cash of $$$$$, and assumed reclamation liabilities of approximately $$$$$. The acquisition was an arms length transaction.

The position of Petitioner is that the respondent has been using the historical cost basis to determine the assessed values of the property, whereas they believe that it should be valued in accordance with the net proceeds method. In support of that proposal, Petitioners submitted a schedule which calculated a proposed value based upon a discounted cash flow of the business. Petitioners represent that the mine will be a very short lived mine, and the assumption is that it will last for only four years, and that after the four year period there will be no further ore left to mine. The discounted cash flow presented by Petitioner shows an actual loss for XXXXX, an actual profit for XXXXX, and estimates a profit for XXXXX and a loss for XXXXX. The petitioner then used a discount rate of 25% and determined a net present value for XXXXX of $$$$$, and a net present value for XXXXX of $$$$$.

The respondent concurs that the property should be valued according to the net present value of the anticipated cash flows of the business, and Respondent has also made an estimate of the projected cash flow of the business. Respondent also utilized an actual loss for XXXXX, an actual net income for XXXXX, and a projected net income for XXXXX and a projected net loss for XXXXX. The figures used and projected by Respondent are identical to the income and loss figures used by Petitioner except for the deduction which Petitioner made for royalties. The position of Respondent with respect to those royalties is that they are not deductible expenses, but are instead distributions of the net income of the business, and therefore they should not be deducted as an expense at arriving at the net income or net cash flows to be capitalized in determining the value of the property. The petitioner also took the position that the value that is required to be determined for property tax purposes is the full fee interest in the property, and that if royalties are deducted in determining the cash flows to be capitalized, then the Commission will only have determined the value of the property owned by the company, and will not be valuing the ownership interest in the property which is owned by those who are entitled to the royalty income.

The Commission finds that the position of Respondent relating to royalties is correct. The Commission is required to value the full fee interest in the property. Part of the property is owned by the petitioner, but part of the property is owned by those entitled to the royalty income. Accordingly, to determine the full value of the property, the royalty payments should not be deducted as an expense in arriving at the net income to be capitalized in determining the value.

The respondent also presented testimony and evidence that the appropriate capitalization rate to be used in determining the value of this property was 17.88% for XXXXX, and 17.57% for XXXXX. The petitioner's determination of a discount rate of 25% was not based upon a study, but just based upon "their general knowledge of the industry." The Commission finds that the capitalization rates of 17.88% for XXXXX, and 17.57% for XXXXX are the appropriate capitalization rates to use in determining the net income.

DECISION AND ORDER

Based upon the foregoing, the Tax Commission finds that the market value of the subject property as of XXXXX, is $$$$$, and as of XXXXX is $$$$$. The XXXXX County auditor is hereby ordered to adjust its records in accordance with this decision. It is so ordered.

This decision does not limit a party's right to a formal hearing. However, this Decision and Order will become the Final Decision and Order of the Commission unless any party to this case files a written request within thirty (30) days of the date of this decision to proceed to a Formal Hearing. Such a request shall be mailed to the address listed below and must include the Petitioner's name, address, and appeal number:

Utah State Tax Commission

Appeals Division

210 North 1950 West

Salt Lake City, Utah 84134

Failure to request a Formal Hearing will preclude any further administrative action or appeal rights in this matter.

DATED this 23rd day of March, 1995.

BY ORDER OF THE UTAH STATE TAX COMMISSION.

W. Val Oveson Roger O. Tew

Chairman Commissioner

Joe B. Pacheco Alice Shearer

Commissioner Commissioner