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Western Refining Yorktown, Inc. v. County of York

Supreme Court of Virginia

December 15, 2016





         Western Refining Yorktown, Inc. ("Western") appeals from a judgment upholding the valuation of a refinery's machinery and tools for purposes of levying the machinery and tools tax. It (1) challenges the assessment methodology employed by the County of York; (2) argues that the Commissioner of the Revenue improperly ignored the assessment provided by Western's expert; (3) asserts that the circuit court erred in allowing the County to take inconsistent positions relating to the highest and best use of the refinery in the course of successive litigations involving the same property; (4) contends that the Commissioner erred in failing to consider that the refinery was no longer in operation as of 2011, as well as evidence of the contemporaneous arm's length sale of the refinery equipment at issue; and (5) argues that the circuit court erred in upholding the assessment at issue merely upon a finding that the Commissioner had followed a uniform assessment methodology where such methodology was proven not to yield fair market value. For the reasons explained below, we affirm.


         We review the evidence in the light most favorable to the prevailing party, in this instance the County. County of Mecklenburg v. Carter, 248 Va. 522, 523, 449 S.E.2d 810, 811 (1994).

          I. The Yorktown Refinery

         The refinery was completed in 1956. Western acquired it in 2006. The refinery is a large site, occupying approximately 658 acres. Between 2006 and 2008, Western invested heavily to upgrade the refinery, making purchases of approximately $213.5 million in equipment. Although some of these investments were made to comply with environmental mandates, others added to the refinery's profitability.

         The refinery business is cyclical. While refining margins were generally low during the 1990s, they recovered in 2000 and 2001. Margins increased significantly from 2003 through part of 2007. One expert called this period the "golden years of refining." Beginning in late 2008, refining margins drastically declined, although they recovered slightly in 2010. The refinery at issue operated at a loss in 2010. Western idled the refinery in September 2010 and laid off the near totality of the workforce. In March 2011, Western filed a 10-K statement with the Securities & Exchange Commission indicating to investors that its refining assets were worth $472 million, and that it planned to let the facility sit idle to wait out the poor economy. Western indicated that it planned to restart activities no later than mid-2013.

         Ultimately, operations never resumed and on December 29, 2011, Western sold the refinery to Plains Marketing LP for $180 million in cash. Plains is not a refiner and had no plans to operate the site as a refinery. Under the agreement, if Plains sold all or part of the refinery equipment, Western could receive part of the proceeds. At the time of the sale, Western needed cash and had experienced a credit downgrade from S&P, a bond rating agency. The evidence also indicates that Western could receive a valuable tax advantage from writing off the value of assets.

          In January 2013, Plains contracted with Louisiana Chemical Equipment Company and Louisiana Chemical Dismantling Company ("Louisiana Chemical") to sell or scrap the refinery equipment. The agreement called for Louisiana Chemical to remove all of the equipment by the end of 2015. Louisiana Chemical sold some of the equipment, including columns, paraffin coolers, and heat exchangers, but it was not able to sell any of the major units. Had any of the major units sold, Plains would have received 65% of the sale, and Louisiana Chemical would have received 35%. Instead, most of the refinery equipment was sold as scrap.

         II. Taxing the refinery's machinery and tools

         The refinery is subject to the machinery and tools tax. For the tax year beginning January 1, 2010, the County assessed the value of the refinery's machinery and tools at $96, 144, 520 and on January 1, 2011, the County assessed the value at $99, 102, 285. Ann Thomas, the York County Commissioner of the Revenue, explained that the assessment increased for 2011 because Western purchased machinery and tools worth over $7.8 million in 2010 and disposed of only about $1.7 million worth.

         Thomas has been Commissioner of the Revenue for 23 years. She worked in the commissioner's office prior to her election, and has worked a total of 42 years there. Thomas earned a master certification issued by the Weldon Cooper Center at the University of Virginia. To maintain this designation, she must attend training and conferences every year. Thomas also acknowledged that she does not have training or experience as a private appraiser and she has not worked in the oil and gas industry.

         Thomas valued the refinery's machinery and tools using "a percentage . . . of original total capitalized cost excluding capitalized interest" as provided by Code § 58.1-3507(B). This method works as follows: She first obtains a long list of taxable machinery and tools from Western. This list shows property disposed of and property purchased and the capitalized cost of the property. The equipment is assessed at a 25% flat rate of original cost. Thomas then applies the tax rate to the assessed value. In 2010, for example, the original cost for Western's machinery and tools as reported by Western was $385, 620, 378. Multiplying this figure by 0.25 yields an assessed value of $96, 405, 405. This new figure is then multiplied by the tax rate to generate a 2010 tax bill of $3, 856, 203.80.

         The 25% of original cost figure remains static. It does not vary until the equipment is disposed of, that is, the assessment does not decline as the item ages. Thomas acknowledged that she did not commission any studies to support the 25% rate. She also does not physically evaluate the physical condition of the equipment assessed.

         Thomas concluded that over time this percentage equates to the fair market value of machinery and tools, although she acknowledged that new equipment is undervalued by this method. She noted that a manufacturer will add or remove parts and maintain the equipment to certain standards, both for safety reasons and to meet environmental law requirements. Thomas acknowledged that this legislatively approved method places more weight on uniformity than on fair market value, but she observed that a business has the option to challenge the assessment, and to provide evidence that the assessment overvalues its property. She testified that the method of assessment she uses is consistent with the practice in other jurisdictions in that region of the Commonwealth.

         Western filed tax returns for the refinery and its manufacturing machinery and tools for 2010 and 2011 and paid the assessed machinery and tools taxes in full. In February 2011, Western filed to have the refinery and its manufacturing machinery and tools treated as "idle" for tax purposes under Code § 58.1-3507(D). On February 25, 2011, Western informed the County of this intent in a letter stating: "It is our understanding that effective 1-1-2012 (2012 tax year) that the idled machinery and tools at the refinery will be exempt and no taxes will be due." "Idle status" exempts manufacturing property from taxation; in order to qualify, the property must be out of use for the entire 12 months before with no intention of being used in the subject tax year. Code § 58.1-3507(D). For the year 2012, the now-idle refinery was entirely exempted from the machinery and tools tax, as provided by Code § 58.1-3507(D).

         Also, Western appealed the 2010 and 2011 assessments on December 14, 2010 and May 19, 2011 respectively, as excessive, citing the September 2010 suspension of its operations and the struggling economy generally. Regarding the 2010 assessment, Western stated that "the 2010 value did not adequately account for the negative economic conditions, " and that "[d]ocumentations would be forthcoming" to support its claim that the 2010 value was $75 million instead of $426, 469, 005. The appeal for tax year 2011 alleged the "2011 assessed value exceeds [FMV]. See appraisal to be submitted by June 16, 2011, " because "Facility was shutdown 9-2010."

         On July 15, 2011, Western submitted an appraisal to Thomas prepared by Michael J. Remsha, an expert with extensive experience in the oil industry. Thomas met with Western officials and asked for documents to support Remsha's appraisal. Thomas reviewed what she characterized as Western's "very comprehensive appraisal." To determine the accuracy of this assessment, she conducted research by looking at tax rulings, Attorney General opinions, land records, and opinions from this Court. Thomas reviewed the tax returns Western provided. Thomas verbally asked for documents that supported Western's appraisal, notably the separate appraisal of the real estate and the tanks. She found that the site was subject to credit line deeds of trust in the amounts of $800 million and $1.7 billion and asked for information to identify what type of machinery and tools Western had put up as collateral. Thomas stated that this additional documentation was never provided.

         Thereafter, in a written response, Thomas explained her reasons for adhering to the County's original assessments after consideration of Western's independent appraisal. First, Western had agreed after a protracted appeal process for the 2009 assessment that the assessment for 2009 was correct both as to the value and the method of assessment. Thomas concluded that she "could give no consideration to an adjustment in value" in part because Western "had just agreed to the assessed value as of 2009, " which she arrived at using the same methodology as used for the 2010 and 2011 assessments. She also noted that as of January 1, 2010, the operative date for the 2010 assessment, the refinery was fully operational. She asserted that after reading statements Western made to its stockholders, she concluded that Western had no plans before spring 2011 to permanently shut down the refinery.

         Additionally, Thomas disagreed with the methodology that Western's expert had employed and reached the conclusion that it was not a "bona fide appraisal." In a letter dated February 24, 2012, she described at length why she rejected Remsha's appraisal, writing that

[a]t the beginning of this current appeal process, I plainly stated that I would not accept an appraisal that "backed into" the value of machinery and tools. That is, an appraisal which derived the values of the machinery and tools and the certified pollution control equipment by deducting assumed values of all other assets from an assumed total value of the Refinery. Nonetheless, that was the methodology employed by the referenced appraisal submitted in support of the Refinery's appeal.

         III. Competing expert appraisals

         Western proceeded to challenge the Commissioner's 2010 and 2011 assessments in the circuit court by filing a complaint for correction of erroneous assessments, pursuant to Code § 58.1-3984, in the circuit court. It again relied on Remsha's assessment. In that assessment, Remsha employed three approaches: sales comparison, income, and cost. He then "correlated" each approach to reach a conclusion as to the worth of the machinery and tools. The sales comparison approach calls for an analysis and comparison of recent sales of comparable property. The income approach "measures market value as the present worth of monetary benefits anticipated to be derived in the future from ownership of the asset." Finally, the cost approach estimates the value of property based on the current cost of the asset, minus depreciation or reduced value "from physical deterioration, functional obsolescence, and economic obsolescence."

         Remsha discounted the income approach as a "non[-]meaningful indicator of value" because the refinery was losing money. In the concluding portion of his report, Remsha assessed the total value of the site and then deducted the value of component parts, such as real estate and its improvements, tankage, pollution control assets, and what remained, he concluded, was the value of the machinery and tools. He assessed the value of the machinery and tools at approximately $16 million for January 1, 2011, and $25 million for January 1, 2010, which he later revised to $24 million and $32 million, respectively.

         The County obtained and presented to the circuit court its own expert evaluation by Paul Hornsby, an experienced appraiser and consultant. He likewise employed the cost, income, and sales comparison approaches. He estimated that the machinery and tools at issue were worth about $215.4 million for January 1, 2010, and $198 million for January 1, 2011.

         Hornsby opined that the sale of the refinery to Plains was not relevant for purposes of assessing the worth of the machinery and tools tax. He noted that Western needed cash and it sold the site to Plains for cash. Western's need for cash, Hornsby supposed, could have had a dampening effect on price. Furthermore, he testified that there can be tax advantages to writing off the value of assets. Hornsby based his valuation, in part, on what Western stated in its state tax filings and in its 10-K statements filed with the Securities and Exchange Commission. In these filings, Western assessed the refinery at almost double Hornsby's valuation. Hornsby noted that in a 10-K report Western filed with the Securities and Exchange Commission at the end of 2009, and therefore germane to the January 1, 2010 appraisal date, Western told its shareholders that its assets at Yorktown had a carrying value of about $725 million. Western noted that these assets were "recoverable, " that is, that they "could and would" continue operating the refinery. By March 2011, Western reported $472 million in refining assets. Hornsby testified that the values listed on the 10-Ks would be reasonably approximate to market value under these conditions, namely, when the owner finds that the value of the assets has been impaired and orders an analysis concerning their value. He also reasoned that these statements were consistent with what Western was claiming in its corporate tax returns in Virginia in 2009, 2010, and 2011. At that time, Western anticipated restarting refining activity no later than the middle of 2013.

         Hornsby laid out the basis of his disagreement with Remsha's estimate. Hornsby agreed significantly with Remsha's estimated replacement cost of a new refinery and assessment of physical depreciation. He parted company, however, on Remsha's estimates of and deductions for obsolescence. According to Hornsby, Remsha calculated an 83% reduction from the machinery and tools' value when new based on obsolescence, which was "well above what the sales data indicates . . . is the proper deduction for obsolescence." He noted that an adjustment in depreciation of only 5% would yield a value of $146 million. Changing Remsha's deductions by a mere 2%, Hornsby further noted, would yield a value close to the County's assessment. Hornsby also disagreed with Remsha's "top down" method of beginning with valuation of the entire refinery and deducting all other assets, leaving a net value for the machinery and tools that remained.

         In earlier litigation concerning the value of the land, Hornsby issued an assessment report for the purpose of "estimat[ing] the fair market value of the fee simple interest" in the refinery. Consistent with settled law, Hornsby valued the real estate according to its highest and best use. Shoosmith Bros. v. Cnty. of Chesterfield, 268 Va. 241, 246, 601 S.E.2d 641, 644 (2004). Hornsby valued the fee simple interest at $163.9 million as of January 1, 2010 and $173.2 million as of January 1, 2011. In this report, Hornsby noted that "[t]he highest and best use as improved was to shut down the refinery and modify the existing facilities for use as a stand-alone terminal." He also stated that "[g]iven our conclusion that the highest and best use of the real property is operation as a stand-alone terminal, we have not appraised and have no opinions of any separate fair market value of the Refinery Process Units."

         Later in the report, Hornsby wrote that in light of his conclusion that the highest and best use for the facility was as a stand-alone terminal, his analysis of the "improvements . . . focuses solely on the assets that were contributory to the highest and best use as a terminal on the effective date." Hornsby cited to the Plains sale, but chiefly to explain why he reached a valuation of the real estate he believed should be used for a stand-alone terminal that was lower than the $180 million that Plains paid to use the site for that very purpose. In this report, Hornsby expressed no view concerning what should be done with the refinery, whether it should be idled or sold. The real estate litigation was settled by agreement of the parties.

         After hearing testimony from the expert assessors and other witnesses, the trial court found that Commissioner Thomas had conducted her initial assessment thoroughly and in accord with Code § 58.1-3503. The court found her assessments to be prima facie correct. The court rejected the testimony of Western's expert, faulting his methodology. Thus, Western did not carry its burden of proof to show that the ...

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