C265966•In Re Verizon New England, Inc. Consolidated Central Valuation Appeals: Boston and Newton (October 1, 2009)
In Re Verizon New England, Inc. Consolidated Central Valuation Appeals: Boston and Newton (October 1, 2009)
C265966Masstaxbd
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COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD
In Re VERIZON NEW ENGLAND, INC.
CONSOLIDATED CENTRAL VALUATION
APPEALS: BOSTON AND NEWTON
Docket No. C265966, Promulgated:
October 1, 2009
These are consolidated appeals under the formal procedure, under G.L. c. 58A, §§ 6 and 7 and G.L. c. 59, § 39, challenging the central valuations for fiscal years 2003 through 2009 determined and certified by the Commissioner of Revenue ("Commissioner"), pursuant to G.L. c. 59, § 39, for the "machinery, poles, wires and underground conduits, wires and pipes" ("§ 39 property") of Verizon New England Inc. ("Verizon"), located in the cities of Newton and Boston.
Commissioner Scharaffa heard these appeals. He was joined by Chairman Hammond and Commissioners Egan, Rose, and Mulhern in the decisions for the appellant Board of Assessors of the City of Newton ("Newton Assessors") in the fiscal year 2003 through 2008 appeals brought by the Newton Assessors; in the decisions for the appellant Board of Assessors for the City of Boston ("Boston Assessors") in the fiscal year 2005 through 2008 appeals brought by the Boston Assessors; in the decisions for the appellees Verizon and Commissioner in the fiscal year 2009 appeals brought by the Newton Assessors and the Boston Assessors; and in the decisions for the appellees Commissioner and either the Newton Assessors or the Boston Assessors in the fiscal year 2005 through 2009 appeals brought by Verizon against the Commissioner and either the Newton Assessors or the Boston Assessors.
These findings of fact and report are made pursuant to the Appellate Tax Board ("Board")'s own motion and later requests by the Commissioner, Verizon, and the Newton Assessors under G.L. c. 58A, § 13 and 831 CMR 1.32.
William A. Hazel, Esq. and James F. Ring, Esq. for the appellant and appellee Verizon.
Anthony M. Ambriano, Esq. for the appellant and appellee Boston Assessors.
Richard G. Chmielinski, Esq. for the appellant and appellee Newton Assessors.
Daniel A. Shapiro, Esq. for the appellee Commissioner of Revenue.
FINDINGS OF FACT AND REPORT
Introduction
The Boston Assessors, the Newton Assessors (collectively, "Assessors"), the boards of assessors of various other municipalities, and Verizon each appealed from certain central valuations of § 39 property certified by the Commissioner for fiscal years 2003 through 2009, pursuant to G.L. c. 59, § 39. Verizon and the Boston Assessors appealed the Commissioner's certified central valuations for fiscal years 2005 through 2009. The Newton Assessors appealed the Commissioner's certified central valuations for fiscal years 2003 through 2009. The Framingham Board of Assessors appealed the Commissioner's certified central valuation for fiscal year 2003, and the board of assessors of various other municipalities appealed the Commissioner's certified central valuations for fiscal years 2005 through 2009.
On May 30, 2007, the Board issued two orders, which consolidated and bifurcated for trial and decision all of the § 39 appeals filed by Verizon, the Boston Assessors, the Newton Assessors, and the boards of assessors of various other municipalities, for fiscal years 2003 through 2007 ("May 30th Orders") into: (1) an "Initial Phase," to deal with all issues other than valuation, including but not limited to whether poles and wires laid over public ways are subject to central valuation and tax under G.L. c. 59, §§ 18 and 39; and (2) a "Valuation Phase." On July 10, 2007, the Board amended the May 30th Orders to include the fiscal year 2008 § 39 appeals of Verizon, the Newton Assessors, the Boston Assessors, and the boards of assessors of various other municipalities. On September 7, 2007, the May 30th Orders were further amended to denote that the Initial Phase was to include all issues other than valuation, while reserving the following specific issues for the Valuation Phase (as numbered in the Board's September 7th Order): Issue 2 - whether Verizon's late return filings following the Commissioner's grants of extensions defeat the Board's jurisdiction for fiscal years 2006 and 2007; Issue 3 - whether construction work in progress ("CWIP") is subject to tax; Issue 4 - whether embedded warranties are to be included in original costs; and Issue 5 - whether so-called "dark fiber" is subject to
tax.
As for Issue 2, the Board previously found and ruled in another consolidated § 39 telephone company central valuation appeal for fiscal years 2004, 2005, and 2006 entitled In Re: MCI Consolidated Central Valuation Appeals: Boston and Newton, Mass. ATB Findings of Fact and Reports 2008-255 ("MCI"), affirmed in part and reversed in part, sub nom In the Matter of the Valuation of MCI Worldcom Network Services, Inc., 454 Mass. 635 (2009), that under certain circumstances the Commissioner may grant extensions of time for telephone companies to file their returns under G.L. c. 59, § 41. The Board examines infra whether similar such circumstances exist in these consolidated appeals. As for Issue 3, the Board previously found and ruled in MCI that CWIP is subject to tax. Id. at 2008-373-74. As for Issue 4, Verizon no longer contests the inclusion of embedded warranties in original costs. And lastly regarding Issue 5, the Board also found and ruled in MCI that dark fiber is subject to tax. Id. at 314-15, 332, 373. The Board reaffirms and adopts here its rulings in MCI as they relate to Issues 2, 3, and 5 in these consolidated appeals. With respect to Issue 3, however, Verizon has raised several new arguments distinct from those proffered in MCI contending that CWIP is not subject to tax as § 39 property. Accordingly, the Board examined the new arguments raised by Verizon in these consolidated appeals with respect to Issue 3, but does not further directly address Issues 3, 4, and 5 in this Findings of Fact and Report.
The Initial Phase, in which the Boston Assessors and the Newton Assessors were the only boards of assessors that actively participated, was submitted to the Board on a Statement of Agreed Facts and attached exhibits. On March 3, 2008, the Board issued an Order in which it found and ruled that:
"1. Verizon is taxable on all of its poles and the wires thereon erected upon public ways under G.L. c. 59, § 2 and G.L. c. 59, § 18, First; 2. Only those cities and towns that filed petitions under § 39 may seek to establish that the value of Verizon's properties in their city or town was substantially higher than the value
certified by the Commissioner; and 3. The Board's rulings and decisions in these appeals apply to all years at issue in these appeals, fiscal years 2003 through 2008, and cannot, as Verizon argues, be applied prospectively only."
On April 1, 2008, the Board ordered the fiscal year 2009 § 39 appeals of Verizon, the Assessors, and the boards of assessors of various other municipalities included in the Valuation Phase of the proceedings. The Boston Assessors and the Newton Assessors were the only boards of assessors that actively participated in the Valuation Phase. As a result, the Board issued final decisions in these consolidated appeals pertaining to Verizon's § 39 property located in Newton and Boston only. Accordingly, this Findings of Fact and Report likewise pertains to Verizon's § 39 property located in Newton and Boston only.
At the start of the hearing for the Valuation Phase, the Newton Assessors, along with Verizon and the Commissioner, entered into and filed with the Board a "Stipulation of Agreed Values" concerning Verizon's § 39 property situated in Newton for fiscal years 2003 and 2004, which the Board adopts. The agreed values are $48,017,000, a $13,134,800 increase over the $34,882,200 certified value for fiscal year 2003 and $47,151,100, a $13,761,200 increase over the $33,389,900 certified value for fiscal year 2004. Verizon reserved its right to appeal the legal issue of whether poles and wires over public ways are taxable. The Board finds that the agreed values are substantially higher than the Commissioner's corresponding certified values. A summary of the Board's valuation findings regarding the § 39 property located in Newton for fiscal years 2003 and 2004 are summarized in the following table.
Fiscal Year Certified Value ($) Agreed Value ($) Difference ($) Difference (%)
2003 34,882,200 48,017,000 13,134,800 37.7
2004 33,389,900 47,151,100 13,761,200 41.2
Accordingly, this Findings of Fact and Report will address: (1) the Board's jurisdiction over these consolidated appeals; (2) the Initial Phase associated with these consolidated appeals filed with the Board for fiscal years 2003 through 2009 by Verizon against the Commissioner, the Assessors and the boards of assessors of various other municipalities, and by the Assessors and the boards of assessors of various other municipalities against Verizon and the Commissioner; and (3) the Valuation Phase associated with these consolidated appeals with respect to Verizon's § 39 property in Newton and Boston for fiscal years 2005 through 2009.
The fiscal years 2003 through 2008 jurisdictional information and the Initial Phase of these consolidated appeals were presented to the Board through Statements of Agreed Facts with numerous exhibits attached, as well as post-trial and reply briefs. The jurisdictional information was later augmented with a Supplemental Statement of Agreed Facts with exhibits attached for fiscal year 2009. The Valuation Phase of these consolidated appeals was presented to the Board through the above-described evidence along with the submission of additional Statements and Supplemental Statements of Agreed Facts with in excess of two hundred exhibits attached; the testimony of lay and expert witnesses and the introduction of additional exhibits, including expert valuation reports, at the hearing of these consolidated appeals; as well as post-trial and reply briefs. At the hearing for the Valuation Phase of these consolidated appeals, for procedural purposes, the Assessors and Verizon were designated as appellants with the Commissioner as appellee.
The Parties
Verizon was formed as a New York corporation in 1883 under the name of New England Telephone & Telegraph Company and registered to do business in Massachusetts in 1884. It is the original provider of telephone service in the Commonwealth. In August, 2000, the company changed its name to Verizon New England, Inc. Under the Telecommunications Act of 1996, Verizon is the incumbent local exchange carrier ("ILEC") for the Commonwealth while more recent providers of telephone service in Massachusetts are generally referred to as competitive local exchange carriers ("CLECs").
The Commissioner is responsible for the administration of delineated tax matters as provided for in the General Laws. The Bureau of Local Assessment ("BLA") is the Bureau within the Department of Revenue ("DOR"), Division of Local Services, responsible for reviewing and making recommendations to the Commissioner regarding her obligations under G.L. c. 59, § 39.
Newton is a municipal corporation situated within the Commonwealth. The Newton Assessors are charged with, among other things, assessing § 39 property within Newton once the Commissioner has centrally valued that property and certified those values to the Newton Assessors. Similarly, Boston is a municipal corporation situated within the Commonwealth. The Boston Assessors also are charged with, among other things, assessing § 39 property within Boston once the Commissioner has centrally valued that property and certified those values to the Boston Assessors. The various other municipalities in these consolidated appeals are likewise situated within the Commonwealth. Their boards of assessors are charged with, among other things, assessing § 39 property within their municipalities once the Commissioner has centrally valued that property and certified those values to their boards of assessors.
Central Valuation of Verizon's § 39 Property
Pursuant to G.L. c. 59, § 39, the Commissioner is mandated to perform an annual valuation of telephone and telegraph companies' "machinery, poles, wires and underground conduits, wires and pipes." Corporate telephone utilities, such as Verizon, are exempt from tax on all property, except "real estate, poles, underground conduits, wires and pipes, and machinery used in manufacture or in supplying or distributing water." G.L. c. 59, § 5, cl. 16(1). Accordingly, Verizon's real estate, poles, underground conduits, wires, and pipes, as well as its generators and power equipment, used in the manufacture of electricity, remain taxable and subject to central valuation by the Commissioner. The Commissioner must complete this valuation and certify values to each owner and board of assessors of each municipality where this property is located by May 15th of each year. The local board of assessors then assesses personal property taxes in accordance with the central valuation determined by the Commissioner, subject to appeal of the values under G.L. c. 59, § 39.
Verizon's § 39 property, the certified central values of which are at issue in these consolidated appeals, is composed of Verizon's outside plant and its electronic machinery and generators. Verizon's outside plant consists of an underground component, which is composed of conduits and wires and an aerial component, which is composed of poles and wires. For both the underground and the aerial components, the wires include metallic copper lines and fiber optics. The metallic copper network now includes the electronically enhanced digital subscriber lines ("DSL") that allow for analog and digital or telephone and Internet connections over the same line by utilizing different frequencies or band widths. Verizon's fiber optics include so-called business-as-usual ("BAU") fiber and the more recently developed FTTP network, which delivers the proprietary FIOS product. The metallic copper network serves both Newton and Boston and the rest of the Commonwealth. The FTTP network, on the other hand, is in place and operational in Newton, but not in Boston, with the exception of a limited deployment in the Dorchester section of the City.
For the fiscal years at issue, the Commissioner issued prescribed tax forms under G.L. c. 59, § 41 for use in the central valuations. The form is denoted as State Tax Form 5941, "FISCAL YEAR [year] - Telephone or Telegraph Company: Return of personal property subject to valuation by the Commissioner of Revenue." Forms 5941 as used for fiscal years 2003 through 2009 were revised and/or amended every year. The Forms 5941 and the related instructions required § 39 "telephone and telegraph companies," including Verizon, to provide the original cost of their personal property indicated by the Commissioner to be subject to central valuation and reportable. In accordance with G.L. c. 59, § 41, these telephone and telegraph companies were required to make their returns on or before the March first preceding the fiscal year for which the § 39 property is being valued. By May 15th, the Commissioner then valued the personal property as reported by the telephone and telegraph companies in their Forms 5941 according to valuation methodologies established each year and certified those values to the affected telephone and telegraph companies and the municipalities where the § 39 property was located.
The Valuation Hearing
The Newton Assessors, who presented their case first, offered Elizabeth Dromey as their sole witness, while the Boston Assessors, appearing second, did not present any witnesses. Through Ms. Dromey, who has been the Director of Assessment Administration for Newton since 1995, the Newton Assessors, and then the Boston Assessors during their examination of her, introduced exhibits which added the Commissioner's values for Verizon's CWIP and its poles and wires over public ways in Newton and Boston to the Commissioner's certified values for Newton and Boston for fiscal years 2005 through 2008. A summary of these values for Newton and Boston are contained in the following two tables, respectively.
Newton
Fiscal Year
DOR's Certified Values*
($)
CWIP**
($) Poles & Wires Over Public Ways**
($)
Total Value
($)
2005 20,798,600 317,900 7,941,400 29,057,900
2006 19,203,900 17,558,900 8,532,700 45,295,500
2007 22,874,000 130,300 31,772,100 54,776,400
2008 23,676,700 630,100 26,526,100 50,832,900
2009 57,738,100 234,300*** 33,398,900*** 57,738,100
Grand Total $237,700,800
Boston
Fiscal Year
DOR's Certified Values*
($)
CWIP**
($) Poles & Wires Over Public Ways**
($)
Total Value
($)
2005 174,141,000 909,300 39,114,300 214,164,600
2006 157,810,600 1,419,100 42,051,800 201,281,500
2007 157,177,700 1,268,300 42,427,100 200,873,100
2008 178,164,300 4,948,600 51,500,000 234,612,900
2009 230,655,200 1,414,600*** 50,906,800*** 230,655,200
Grand Total $1,081,587,300
*These figures reflect the Commissioner's certified values based upon Verizon's original property reports set forth in its Forms 5941.
**These figures reflect the parties' valuation for these categories based on Verizon's July 23, 2008 revised data listings.
***For fiscal year 2009 only, the Commissioner included the values for these categories in her certified values.
The values in the above Newton and Boston tables' "Total Value" column for each fiscal year represent the values that the Newton Assessors and the Boston Assessors ascribe to Verizon's § 39 property situated in Newton and Boston, respectively.
Verizon presented four witnesses at the hearing of these appeals: Jeffrey Beavin; Gary Williams; Chris Parker; and Jerome Weinert. Mr. Beavin, as Verizon's Manager of Financial Controls & Analysis, explained how Verizon accounts for its investment in Massachusetts property, plant, and equipment. In accordance with FCC regulations and standard accounting practices in the telecommunications industry, Verizon used mass-asset accounting and retirement unit costs ("RUCs"), under which groups of homogeneous assets are accounted for based on the average costs of placing those assets in service in a given year. This approach is consistent with the Commissioner's central valuation methodology. With respect to poles, Mr. Beavin explained how Verizon capitalizes the cost of poles in accordance with its ownership or reimbursement share.
Mr. Beavin also discussed some of the issues created when Verizon changed its accounting software to the People Soft accounting program. These issues included some assets not being assigned to a particular municipality and others not having their "highway [or public] versus private" indicator carried over. In the former situation, Verizon allocated the assets to municipalities in a proportional way, and in the latter situation, Verizon "erred" on the side of designating the affected property private and taxable. In addition, as part of the accounting software conversion process, Verizon received FCC approval to restate all pre-1981 vintage year assets to the 1981 vintage year. Mr. Beavin also defined CWIP as an incomplete project, which is not generating revenue. Accordingly, Verizon did not consider the costs associated with CWIP to be part of the RUC process and did not report that property until the project was completed. Consequently, Mr. Beavin explained, Verizon did not include CWIP on its Forms 5941 filed with the Commissioner and did not consider it to be reportable § 39 property until actually placed in service. The Board found that Mr. Beavin's testimony was credible, but disagreed with the conclusion regarding CWIP.
As a manager in Verizon's property tax group, Gary Williams has been responsible for the preparation and filing of Forms 5941 since fiscal year 2003. According to Mr. Williams, Verizon did not include its aerial plant over public ways or its CWIP in its fiscal year 2003 through 2008 Forms 5941 because neither the Commissioner nor Verizon considered that property to be taxable. On or about July 23, 2008, following the Board's decision in MCI and its March 3, 2008 Order resolving the issues raised in the Initial Phase of these consolidated appeals, and to assist the parties and this Board in the Valuation Phase, Verizon submitted the revised asset listings to the Commissioner reporting its aerial plant over public ways and its CWIP for fiscal years 2003 through 2009.
While testifying that previous Forms 5941 had been filed containing the best available information at that time, Mr. Williams also explained that resolving the designation issues raised by Verizon's conversion to the People Soft accounting system had resulted in some different values in the § 39 property listings (other than machinery) for fiscal years 2005 and 2006. The changed values were discovered when, during discovery in these consolidated appeals, the Commissioner and the Assessors requested that Verizon produce FCC original cost information for the aerial plant over public ways and for the CWIP that was not reported to the Commissioner on the Forms 5941 for fiscal years 2003 through 2008. This information was requested so that the Commissioner could calculate the values that she would have certified had Verizon's aerial plant over public ways and CWIP been included on the Form 5941 for each of those fiscal years. In complying with the request, the newly generated July 23, 2008 asset lists for fiscal years 2005 and 2006 revealed that the resolution of the issues raised by the conversion to the new accounting system had resulted in different property listings and values beyond the addition of aerial plant over public ways and CWIP. The differences between the originally certified values and the July 23, 2008 revised-asset-list-based values (without regard to machinery and not including aerial plant over public ways and CWIP) for fiscal years 2005 and 2006 are summarized for Newton and Boston in the following two tables, respectively.
Newton
Certified Value July 28, 2008 Value Difference
Fiscal Year 2005
$20,375,400
$18,235,000
-$2,140,400
Fiscal Year 2006 $18,652,200 $18,734,500 +$82,300
Boston
Certified Value July 28, 2008 Value Difference
Fiscal Year 2005
$165,721,700
$149,920,400
-$15,801,300
Fiscal Year 2006 $152,453,100 $153,136,300 +$683,200
The Board found that while Mr. Williams' testimony was credible, the July 28, 2008 asset lists for fiscal years 2005 and 2006 did not provide better evidence of Verizon's § 39 property than the corresponding Forms 5941 filed years earlier.
Chris Parker was Verizon's third witness. As the Outside Plant Manager for Boston and the South Shore area, he provided extensive testimony regarding Verizon's network, particularly the outside plant in Newton and Boston, Verizon's engineering records, and Verizon's telecommunications network. Mr. Parker described Verizon's network as being composed of wire centers. The wire centers are organized like a bicycle wheel on its side with the central office or exchange ("CO"), containing the electronic equipment and generators, in the center or hub and the wiring or cables extending out like spokes from the CO. Verizon deploys metallic copper wires, and more recently added fiber optic cables that are used for its BAU fiber, and its FTTP fiber that offers its proprietary FIOS service. It was not until the late 1980s and 1990s that Verizon first integrated and later, as data service requirements increased, expanded its use of fiber optics in its network by installing BAU fiber, primarily for business applications. By 2004, Verizon began marketing its latest generation of fiber optics for telephone, Internet and video services under the proprietary name of FIOS, which, as of the hearing date, existed in approximately 63 Massachusetts municipalities, including Newton but not Boston (with the exception of a small area in Dorchester). These wires and cables emanate from the CO building in underground conduits that are serviced through manholes and eventually emerge as aerial plant along utility poles. The underground conduit structures vary in the number of internal ducts and are encased in concrete. The wires run through and are protected by the ducts in the conduit. Typically 1,200 pairs of copper wires, which conceivably could service 1,200 customers, may run through one duct. There may also be intra-ducts within a duct to separate, organize and protect fiber-optic cable.
Mr. Parker testified that the utility poles may be owned solely by Verizon or jointly with the electric company that provides service in the municipality where the pole is located. The jointly owned poles typically carry the electric service at the top of the pole followed by the neutral space, then below that any attachments by cable television or other communications providers and, finally, the lowest cable attached is the metallic copper and fiber optic cable owned and operated by Verizon. The electric company and Verizon receive modest annual per pole attachment fees from CLECs and the cable companies for their use of the jointly owned poles. Pole records indicate that there are many poles in use in Massachusetts that pre-date 1981 and even some that were originally placed in service in the 1930s and 1940s.
Mr. Parker also described the paper, vellum, and electronic engineering records maintained and constantly updated and reconciled by Verizon. He explained the conversion process that the company has been undertaking to transition all of the records to a digital format called intelligent computer graphic system ("ICGS"). Similarly, the paper pole records have been converted to a "mechanized" spreadsheet database called pole records system or "PRS." The records contained in the ICGS and PRS enable the engineers to accurately determine the location, characteristics and components of the outside plant. The Board found that Mr. Parker's testimony was generally credible.
Lastly, in its case-in-chief, Verizon called Jerome Weinert from AUS Consultants to testify as its valuation witness. The Board previously qualified him as an expert in MCI in the areas of depreciation and functional obsolescence and in valuing telephone companies. For these consolidated appeals, the parties stipulated to his qualifications and expertise. On these bases, the Board qualified him as an expert in these consolidated appeals. In his testimony, Mr. Weinert explained his replacement cost new less depreciation methodology ("CORLD") in which he first determined a "preliminary cost indicator" and then tested for and applied an economic obsolescence percentage. In general, Mr. Weinert obtained his preliminary cost indicator by trending the historic original cost of the § 39 property to current reproduction cost new and then adjusting for lack of utilization of metallic cable and associated conduit, and for depreciation, and then accounting for plant removal costs. He tested for and calculated economic obsolescence by comparing the value of all of Verizon's Massachusetts property determined using his CORLD approach to that same property's value determined using a discounted cash flow ("DCF") analysis. Mr. Weinert also critiqued the Commissioner's methodology and offered some rebuttal testimony. A summary of the values that he derived for Verizon's § 39 property in Newton and Boston for fiscal years 2005 through 2009 is contained in the following table.
Fiscal Year
Newton Value Boston Value
2005 18,327,026 117,882,848
2006 32,354,568 106,454,004
2007 39,446,557 100,845,536
2008 35,654,909 98,897,256
2009 35,019,843 80,295,254
More specifically, Mr. Weinert based his original costs, the starting point for his methodology, on Verizon's July 23, 2008 revised asset lists, not the property reported to the Commissioner by Verizon on the Forms 5941. Mr. Williams explained that Verizon's July 23, 2008 revised asset lists contained not only CWIP and aerial plant over public way, which had not been reported on the Forms 5941 for fiscal years 2005 through 2008, but also adjustments from Verizon's accounting software conversion. For fiscal year 2005, without considering CWIP or aerial plant over public ways, Mr. Weinert's reliance on the July 23, 2008 revised asset lists resulted in lower starting values than those reported on the Forms 5941 for Newton and Boston by $2,969,406 and $24,837,415, respectively. For fiscal year 2006, the July 23, 2008 revised asset lists, again without considering CWIP or aerial plant over public ways, resulted in starting values that were slightly higher than the values reported on the Forms 5941 for Newton and Boston by $146,437 and $1,161,639, respectively. Mr. Weinert considered the information contained in the asset lists to be the best available data at the time he performed his valuations. Summaries of the original costs that Mr. Weinert used in his methodology for Newton and Boston for fiscal years 2005 through 2009 are contained in the following table.
FY 2005
$
FY 2006
$ FY 2007
$ FY 2008
$ FY 2009
$
Newton 49,662,478 67,069,425 76,940,620 77,534,473 84,635,056
Boston 341,908,249 338,959,466 340,258,246 352,304,681 352,082,724
Mr. Weinert next determined the cost to reproduce new the property contained in the assets lists using the tables in the Turner Plant Index ("TPI") and the assumption that the property was placed in service near the middle of the year. Summaries of the reproduction costs new ("RCN") that Mr. Weinert calculated for Newton and Boston for fiscal years 2005 through 2009 are contained in the following table.
FY 2005
$
FY 2006
$ FY 2007
$ FY 2008
$ FY 2009
$
Newton 70,212,955 91,685,266 109,294,644 117,742,985 127,615,131
Boston 500,508,905 494,453,068 541,480,570 602,919,706 617,624,114
Mr. Weinert then changed this RCN to a reproduction cost new adjusted for utilization ("CORU"), which he considered equivalent to a replacement cost new, to reflect the price that a buyer would pay for Verizon's property that was likely to be used. Mr. Weinert explained that a buyer would not pay for excess capacity, which would remain unused.
In making this modification from RCN to CORU, Mr. Weinert determined that a utilization adjustment was necessary to account for the reduced use of metallic wires and cables and associated conduits in Verizon's Newton and Boston systems. Mr. Weinert attributed this reduction to increased competition in the telecommunications market from CLECs and wireless and cable providers, as well as Voice Over Internet Protocol ("VOIP") and also to changes in technology. Mr. Weinert employed the "cost-of-capacity method" to quantify his utilization adjustment.
This method entails finding the utilization rate of the metallic wires and cables and associated conduits and the scale factor. Mr. Weinert relied on the methodology described in American Society of Appraisers, Valuing Machinery and Equipment: The Fundamentals of Appraising Machinery and Technical Assets (2nd ed. 2005) 61-65 ("Valuing Equipment and Machinery"). To determine the utilization rate, Mr. Weinert compared the number of "assigned" pairs of metallic copper wires to the total number of pairs in the Massachusetts, Newton, and Boston networks. He obtained this data from Verizon's Loop Engineering Information System ("LEIS"). Mr. Weinert stated that the number of "assigned" pairs took future service and maintenance demands into account. Summaries of the utilization percentages that Mr. Weinert developed for the Massachusetts, Newton and Boston networks for fiscal years 2005 through 2009 are contained in the following table.
FY 2005
%
FY 2006
% FY 2007
% FY 2008
% FY 2009
%
Massachusetts 51.8 50.3 49.0 47.8 46.2
Newton 46.0 44.1 42.3 40.6 38.3
Boston 36.4 35.0 33.8 33.1 31.7
In determining the scale factors, Mr. Weinert also used data from Verizon's LEIS to obtain historical cost information for the various sizes and types of Verizon facilities to study how the cost of various sizes and types of Verizon facilities vary with capacity. From these analyses, he determined his cost-to-capacity scale factor for the various metallic wire and cable and associated conduit accounts specific to Verizon's Massachusetts plant. As Mr. Weinert explained, a scale factor, applied to the utilization percentage as an exponent, is necessary when using the cost-to-capacity method because the methodology assumes that not all costs vary with size on a linear basis. Valuing Machinery and Equipment at 62. A summary of the scale factors that Mr. Weinert developed for use in his methodology for fiscal years 2005 through 2009 is contained in the following table.
Account
Scale Factor
Aerial Metallic Wire 0.64
Underground Metallic Wire 0.68
Buried Metallic Wire 0.51
Submarine Metallic Wire 0.70
Intrabuilding Metallic Wire 0.93
Conduit 0.53
In keeping with the method illustrated in Valuing Equipment and Machinery at 61-65, Mr. Weinert then applied each account's scale factor as an exponent to the Massachusetts, Newton, and Boston systems' utilization percentages for fiscal years 2005 through 2009 to determine the utilization factor adjustment for his methodology. Summaries of his development of his utilization factor adjustments for Newton and Boston for fiscal years 2005 through 2009 are contained in the following two tables, respectively.
Newton
FY 2005 FY 2006 FY 2007 FY 2008 FY 2009
Utilization % 0.460 0.441 0.423 0.406 0.383
Account
Scale Factor
Utilization
Factor
Aerial 0.64 0.608 0.592 0.577 0.562 0.541
Underground 0.68 0.590 0.573 0.557 0.542 0.521
Buried 0.51 0.673 0.659 0.645 0.631 0.613
Submarine 0.70 0.581 0.564 0.548 0.532 0.511
Intrabuilding 0.93 0.486 0.467 0.449 0.432 0.410
Conduit 0.53 0.663 0.648 0.634 0.620 0.601
Boston
FY 2005 FY 2006 FY 2007 FY 2008 FY 2009
Utilization % 0.364 0.350 0.338 0.331 0.317
Account
Scale Factor
Utilization
Factor
Aerial 0.64 0.524 0.511 0.499 0.493 0.479
Underground 0.68 0.503 0.490 0.478 0.472 0.458
Buried 0.51 0.597 0.585 0.575 0.569 0.557
Submarine 0.70 0.493 0.480 0.468 0.461 0.447
Intrabuilding 0.93 0.391 0.377 0.365 0.358 0.344
Conduit 0.53 0.585 0.573 0.563 0.557 0.544
Mr. Weinert then applied the appropriate utilization factor adjustment to the RCN of each metallic wire and cable and related conduit account for fiscal years 2005 through 2009, but not to fiber optic cable or other accounts. These adjustments resulted in the development of his CORU. Summaries of the original cost, RCN and now CORU for fiscal years 2005 through 2009 for Newton and Boston are contained in the following two tables, respectively.
Newton
FY 2005
$ FY 2006
$ FY 2007
$ FY 2008
$ FY 2009
$
Original Cost 49,662,478 67,069,425 76,940,620 77,534,473 84,635,056
RCN 70,212,955 91,685,266 109,294,644 117,742,985 127,615,131
CORU 50,255,393 69,626,682 83,441,000 88,036,487 95,722,718
Boston
FY 2005
$ FY 2006
$ FY 2007
$ FY 2008
$ FY 2009
$
Original Cost 341,908,249 338,959,466 340,258,246 352,304,681 352,082,724
RCN 500,508,905 494,453,068 541,480,570 602,919,706 617,624,114
CORU 326,580,490 303,014,874 319,667,676 654,257,326 354,941,252
Mr. Weinert next calculated depreciation, using a method, which included what he termed "normal," or mostly physical, depreciation and functional obsolescence, to reflect the fact that the property being valued is not new. His normal depreciation was determined based on the age of the property and its normal service life; his functional obsolescence was based on what he believed was the impact on the property's normal life caused by factors such as changing technology, service requirements, and competition over time. To quantify his normal depreciation, Mr. Weinert used a "condition formula" in which the remaining life of property was divided by the sum of its age and remaining life. Mr. Weinert stated that the "condition formula" takes into account the age, service life, and survival characteristics or expectations for each category of § 39 property. The service lives changed within asset categories depending upon the "service drivers" in effect when the asset was placed in service in order to reflect the "life expectancy" of the asset. Mr. Weinert addressed functional obsolescence by varying the normal life to reflect the overall effect on service life of the various obsolescence factors. He depreciated the § 39 property to a "floor" of five percent, meaning that when the value diminished to this predetermined level, it is not further depreciated in value until the property is taken out of service. A summary of his resultant replacement cost new less normal and functional depreciation ("CORULD") for Newton and Boston for fiscal years 2005 through 2009 is contained in the following table.
FY 2005
$ FY 2006
$ FY 2007
$ FY 2008
$ FY 2009
$
Newton 21,839,715 37,508,897 46,302,425 44,417,214 47,955,746
Boston 138,447,247 127,561,447 124,780,139 129,638,470 117,347,310
The final step in Mr. Weinert's methodology for reaching his preliminary cost conclusion was to determine the liability that Verizon may have to remove property that is at the end of its useful life or at least make it safe for abandonment and then to subtract that amount from the CORULD figures. Mr. Weinert assessed this potential liability by determining salvage, net of removal costs, for each property account. He relied, at least in part, on the FCC's estimated range for removal costs. Overall, Mr. Weinert determined that an 11% provision for abandonment/removal costs for Verizon's § 39 property in Newton and Boston was appropriate. He then discounted these costs to their present value as of the relevant assessment dates to account for the future incurrence of these costs. Summaries of his preliminary cost conclusions derived by deducting abandonment/removal costs from his CORULD figures for Newton and Boston for fiscal years 2005 through 2009 are contained in the following two tables, respectively.
Newton
FY 2005
$ FY 2006
$ FY 2007
$ FY 2008
$ FY 2009
$
CORULD 21,839,715 37,508,897 46,302,425 44,417,214 47,955,746
Aban./Removal 1,663,583 2,092,476 2,495,634 2,644,371 2,667,074
Prelim. Cost 20,176,132 35,416,421 43,806,791 41,772,843 45,288,672
Boston
FY 2005
$ FY 2006
$ FY 2007
$ FY 2008
$ FY 2009
$
CORULD 138,447,247 127,561,447 124,780,139 129,638,470 117,347,310
Aban./Removal 8,670,603 11,033,240 12,787,618 13,771,688 13,507,169
Prelim. Cost 129,776,644 116,528,207 111,992,521 115,866,782 103,840,141
Lastly, in his CORLD methodology, Mr. Weinert checked for economic or external obsolescence. He defined economic obsolescence as obsolescence outside the property that is most often indicated by insufficient earnings. Specifically, he reviewed Verizon's earnings to determine if the earnings warranted an investment in the § 39 property at his preliminary cost indicator level. If earnings are considered insufficient, economic obsolescence is determined by discounting the earnings shortfall. He evaluated economic obsolescence at the Massachusetts state-wide level by comparing the value of Verizon's Massachusetts § 39 property derived using his preliminary cost approach conclusion to the values derived using a DCF method.
More specifically, Mr. Weinert stated that he reviewed and analyzed Verizon's income statements and balance sheets, and by relying on that historic information, developed his assumptions or "drivers" regarding various DCF factors such as future revenue, future expenses, and future capital cost. For each fiscal year, his DCF analysis started with a base revenue to which he applied his drivers to project future revenue and expenses. The difference between these amounts were subsequently reduced to present value taking into account such matters as taxes, depreciation, and capital expenditures. In this way, he derived his present value of anticipated future cash flows for each fiscal year. A summary of the values derived from his CORULD and DCF techniques, the difference between which enabled him to develop his economic obsolescence percentage, is contained in the following table.
FY 2005 FY 2006 FY 2007 FY 2008 FY 2009
CORLD $ 4,373,763,532 4,231,715,734 4,053,294,604 4,106,506,507 3,976,002,061
DCF $ 3,973,824,327 3,865,871,583 3,649,856,819 3,505,079,015 3,074,476,714
Eco. Obs. % -9.16 -8.65 -9.95 -14.65 -22.67
Mr. Weinert calculated his final cost indicators of Verizon's § 39 property in Newton and Boston for fiscal years 2005 through 2009 by applying the economic obsolescence percentages that he developed to his related preliminary costs conclusions. Summaries of his calculations for Newton and Boston are contained in the following two tables, respectively.
Newton
FY 2005 FY 2006 FY 2007 FY 2008 FY 2009
Prelim. Cost $ 20,176,132 35,416,421 43,806,791 41,772,843 45,288,672
Eco. Obs. % -9.16 -8.65 -9.95 -14.65 -22.67
Final Cost Indicators $
18,327,026
32,354,568
39,446,557
35,654,909
35,019,843
Boston
FY 2005 FY 2006 FY 2007 FY 2008 FY 2009
Prelim. Cost $ 129,776,644 116,528,207 111,992,521 115,866,782 103,840,141
Eco. Obs. % -9.16 -8.65 -9.95 -14.65 -22.67
Final Cost Indicators $
117,882,848
106,454,004
100,845,536
98,897,256
80,295,254
Mr. Weinert also used his DCF approach as a stand-alone valuation. In addition, he performed a capitalized income analysis and a historic cost less depreciation rate-base approach to value. Mr. Weinert did not rely on any of these methods for his final estimates of Verizon's § 39 property's value, except to the extent that he used his DCF approach to develop economic obsolescence for his CORLD methodology. He also considered and discussed, but ultimately did not rely on, a market approach.
The Commissioner called two witnesses, Marilyn Browne, Chief of the Commissioner's Bureau of Local Assessment ("BLA") and George Sansoucy, whose company, George Sansoucy P.E. LLC, was retained by the BLA to devise a mass appraisal system for central valuation of telephone company § 39 property. As it has done in previous telecommunications appeals, the Board qualified Mr. Sansoucy as an expert in valuing utility and telephone company property and as an engineer. Ms. Browne explained the BLA's responsibilities, including its annual role in centrally valuing the § 39 property of telephone and telegraph companies and then certifying those values to the boards of assessors of the municipalities where the § 39 property is located. She related that prior to fiscal year 2004, the BLA had valued telephone companies' "poles, wires and underground conduits, wires and pipes" that were not over public ways by depreciating their original cost by 10% per year down to a floor of 30% of original cost. The "machinery," which then consisted of telephone companies' generators, was valued at 90% of their original cost. After the Board's August 2002 Order in RCN Beco-Com, LLC v. Commissioner of Revenue and City of Newton, Mass. ATB Findings of Fact and Reports 2003-410, aff'd 443 Mass. 198 (2005) ("RCN Beco-Com Order"), which resulted in the BLA valuing significantly more machinery property under § 39 because limited liability companies ("LLCs") no longer qualified for the corporate utility exemption under G.L. c. 59, § 5, cl. 16(1)(d) for their non-manufacturing machinery, the BLA recognized the need to modify its existing valuation methodology and implement a new mass appraisal system for the upcoming fiscal year 2004 valuations.
Because of his engineering and appraisal experience, Mr. Sansoucy was selected by a DOR procurement team to evaluate the existing valuation system and implement an automated mass appraisal methodology that could be readily updated and would produce defensible values. Ms. Browne's and Mr. Sansoucy's testimony and other evidence reveal that after extensive analysis, Mr. Sansoucy concluded that the BLA's existing methodology was deficient in many respects, and he recommended a method of valuation that used a "composite multiplier" based upon a reproduction cost new less depreciation approach to value ("RCNLD").
As an overview, his methodology trended the original cost of 23 categories of property as set forth in companies' Forms 5941 using the TPI. For generators, he used the Handy-Whitman Index. His methodology then adjusted the property for physical, functional and economic forms of depreciation using Federal Communications Commission ("FCC") depreciation schedules that used the same 23 property categories. The depreciation was straight-line based on the FCC range of useful lives, which was periodically reviewed and incorporated physical and functional depreciation and economic obsolescence based on actual experience. Mr. Sansoucy adopted a 30% floor for all of the § 39 property except generators, for which he used a 60% floor, recognizing the continuing vitality and incumbency of the property. The composite multiplier combined the trending and depreciation steps, and Mr. Sansoucy annually updated the composite multiplier and reviewed the efficacy of his methodology and any assumptions.
Beginning with fiscal year 2005 and on Mr. Sansoucy's recommendation, the BLA adopted an additional economic depreciation deduction of 25%. Ms. Browne and Mr. Sansoucy related that this deduction resulted from meetings with and memoranda and studies submitted by a great many telephone companies as well as Mr. Sansoucy's analyses. For fiscal year 2006 and thereafter, and again on Mr. Sansoucy's recommendation, the BLA determined that the additional economic depreciation deduction should not be applied to new property, that is, property which had been in service for less than one year. Beginning in fiscal year 2008, the 25% economic depreciation deduction was no longer applied to generators. For fiscal year 2009, in response to the Board's March 3, 2008 Order in these consolidated appeals and its Decision in MCI, the Commissioner included telephone property over public ways in her values and a new category for reporting CWIP.
More specifically, and as reviewed in MCI at 2008-288-295 and recounted by the evidence here, Mr. Sansoucy's methodology begins with the reported original cost of the categorized § 39 property and its vintage year or year of purchase as reported by Verizon on the relevant Forms 5941. That original cost is then trended to a "cost new," which is the cost to currently reproduce the § 39 property as of the valuation date, by using trending indices. For telephone companies' personal property, such as wires, conduits and electronic machinery, Mr. Sansoucy recommended the TPI Index, which is a commercially available publication that is updated semi-annually and is based on the FCC uniform code of accounts for telephone plant property. For valuing generator equipment, Mr. Sansoucy recommended the Handy-Whitman Index of Public Utility Construction Costs ("Handy-Whitman Index").
The indices are composed of digits representing the relative numeric positions of current cost and are provided for historical years to the present. To use an index, the digit for a vintage year is divided by the current year digit to arrive at a factor that is applied to the original cost to determine cost new.
The depreciation component that Mr. Sansoucy recommended includes the loss of physical, functional, and economic service over time, and utilizes FCC service lives for each FCC property category account in accordance with FCC Docket No. 98-137 (December 17, 1999). The 23 categories of property that are contained in the FCC service life tables are also listed as FCC Account references in the TPI. Mr. Sansoucy recommended the FCC service lives because they are based on objective data from the telephone industry, are verifiable and allow for an orderly decrease in value over time accounting for all, or almost all, aspects of depreciation.
The depreciation calculation that Mr. Sansoucy recommended and that was adopted by the Commissioner was "straight-line" depreciation. Straight-line depreciation takes the expected service life of property and divides it into even yearly amounts. These amounts are the annual depreciation deductions. The depreciation method that Mr. Sansoucy recommended also utilizes a floor. For telephone company personal property, other than generators, Mr. Sansoucy used a floor of 30%. He based this amount on the property's continuing vitality, incumbency, income production and maintenance, as well as its salvage value. Included in incumbency is the considerable original investment in associated direct and indirect costs, as well as the notion of exclusivity. Mr. Sansoucy noted that other jurisdictions, such as New York State, also use floors.
Mr. Sansoucy combined the two component steps, the cost new factor and the depreciation percentage, into his "composite multiplier" to allow for a single calculation. He created the composite multiplier by taking the trended cost new mathematical factor and multiplying it by the depreciation percentage (adjusted by the appropriate floor, if applicable). The resulting "composite" number is then multiplied by the reported original cost. The composite multipliers are calculated for each category of property for each vintage year. By combining the steps into one multiplier, Mr. Sansoucy provided the Commissioner with a single mathematical input for each line item on the Commissioner's fiscal year 2005 through 2009 Internet spreadsheet.
For the valuation of generators, the composite multiplier reflected the reproduction cost new determined from the Handy-Whitman Index and a market-based depreciation study confirmed by Mr. Sansoucy from comparisons of available used equipment and the anticipated cost of new generators. The resulting expected service life for electrical generators used in the telephone industry was 12 years or 8.33% depreciation per year. Mr. Sansoucy viewed the generation equipment as generally retaining value because it provides emergency power only, is subject to a high degree of maintenance to insure reliability, and suffers from only limited actual wear and tear. A depreciation floor of 60% to the good, as opposed to the BLA's prior floor of 90% to the good, was recommended and applied based on Mr. Sansoucy's opinion that no matter the age of the generator it retains at least 60% of its value. Mr. Sansoucy's market-based evaluation demonstrated that a viable sales market exists for used generators of the type needed in the telecommunications industry.
For fiscal years 2005 through 2008, as well as in prior fiscal years, and as discussed in MCI at 2008-292, the BLA valued only property "in service." Form 5941 implicitly reflected this position in the definition of original cost by requiring the inclusion of the "costs of construction to place said property in operation." The definition also referenced FCC regulations contained in 47 CFR Section 32.2000. Consequently, the BLA did not consider CWIP to be § 39 property and taxable. Beginning in fiscal year 2009, as a result of the Board's March 3, 2008 Order in these consolidated appeals and its Decision in MCI, the Commissioner included telephone property over public ways in her values and a new category for reporting CWIP.
The Form 5941 was modified for fiscal year 2005 to allow full implementation of Mr. Sansoucy's valuation methodology. In addition, Mr. Sansoucy's firm updated the composite multiplier tables, annually, based on the most recent TPI Index published. For fiscal years 2005 through 2009, the filing format required companies to enter installation and cost information on an interactive DOR Internet spreadsheet that included pull down menus with community lists, 23 property categories, FCC account codes and vintage years.
For fiscal years 2005 through 2009, an additional 25% economic obsolescence deduction was applied to the preliminary value determinations from the composite multiplier system. The additional obsolescence deduction was in response to claims, particularly from wireless companies, that proposed BLA values were overstated because of technological advances. As discussed in MCI at 2008-294, the 25% estimate was determined at least partly on calculations from a sample property listing that applied a sliding scale of additional depreciation from 5% to 70% depending on the age of the property. A weighted depreciation average was then calculated by applying the sliding percentage to the amount of total property from that vintage year. Mr. Sansoucy also considered information and data submitted by various telecommunications companies and his own analyses. For fiscal year 2005, the additional 25% economic obsolescence deduction was applied to all property; for fiscal year 2006 and thereafter, the additional deduction was not applied to property in service less than one year. Mr. Sansoucy also testified that, although the deduction was initially applied to generators, it was stopped beginning in fiscal year 2008 because Mr. Sansoucy believed that generators maintain their value in the marketplace. Summaries of Mr. Sansoucy and the BLA's certified valuations of Verizon's § 39 property for fiscal years 2005 through 2009 for Newton and Boston are contained in the following tables, respectively.
Certified Values for Newton
FY Private Poles & Wires Underground Conduits Wires & Pipes
$
Machinery
$
CWIP
$
Poles & Wires Over Public Ways
$
Total
$
05 20,375,400 423,200 0 0 20,798,600
06 18,652,200 551,700 0 0 19,203,900
07 22,591,300 282,700 0 0 22,874,000
08 23,276,000 400,700 0 0 23,676,700
09 23,636,000 468,900 234,300 33,398,900 57,738,100
Certified Values for Boston
FY Private Poles & Wires Underground Conduits Wires & Pipes
$
Machinery
$
CWIP
$
Poles & Wires Over Public Ways
$
Total
$
05 165,721,700 8,419,300 0 0 174,141,000
06 152,453,100 5,357,500 0 0 157,810,600
07 153,127,600 4,050,100 0 0 157,177,700
08 171,518,800 6,645,500 0 0 178,164,300
09 170,411,700 7,922,100 1,414,600 50,906,800 230,655,200
Mr. Sansoucy testified that, in his opinion, the Commissioner's certified values for fiscal years 2005 through 2009 were an accurate reflection of Verizon's § 39 property's fair cash values. He also critiqued Mr. Weinert's valuation methodologies and values.
On the basis of the foregoing testimony, agreed statements of facts, and exhibits, as well as the Board's subsidiary findings, supra, and reasonable inferences drawn therefrom, the Board makes the following additional findings of fact.
Telecommunications Marketplace and
Verizon's Business Operations
The Telecommunications Act of 1996 ("1996 Act") introduced the deregulation of the local exchange industry and dramatically changed the competitive arena of the telecommunications industry. The historic monopolistic practices were discarded for ones that foster competition. Pursuant to the 1996 Act, the FCC required ILECs, like Verizon, to lease their network facilities to competitors on a non-discriminatory unbundled basis or to sell services to competitors at predetermined wholesale rates for rebranding and resale under their own names. Consequently, CLECs began competing in local exchange markets and, along with established carriers, expanded networks anticipating increased demand because of, among other things, the growing demand for access to the Internet. At the same time, wireless telecommunication services continued to grow while technological advances increased land-line capacity.
The Massachusetts Department of Telecommunications and Energy, now The Massachusetts Department of Telecommunications and Cable ("DTC"), oversees Verizon's activities in Massachusetts to ensure the company's conformance with FCC rules governing the relationships between Verizon and competitive carriers. In response to requests from Verizon or its competitors, or as a result of its own investigation, the DTC regulates the compensation that Verizon receives from competitors for their use of Verizon's facilities. In 2007, as a result of a petition submitted by Verizon, the DTC reduced the amount that the wholesale rate was discounted for competitive carriers using Verizon's facilities, effectively increasing the fees paid to Verizon.
The competitive system has affected Verizon. Operating revenues have declined from 1998 to 2007 by a total of approximately 21%. During this time, total telephone calls rose steadily from 1998 through 2001 but since then experienced a decline. The competitive landline environment and wireless industry have stressed Verizon's voice business and caused Verizon to expand its services. In addition to Verizon's voice communications business, it operates and generates revenues through its data and video services. Data and Internet services include DSL on existing copper lines, BAU, and FIOS. The video cable services follow from Verizon's franchising efforts and its FIOS product. The Verizon fiber-based FIOS product is not a system to which Verizon is obligated to provide competitive access. By the close of 2007, Verizon had obtained 63 Massachusetts cable TV franchises and was pursuing franchises in 25 additional communities. In Newton, Verizon's gross revenues from its FIOS product increased from $312,640 in the 2nd Quarter of 2007 to $1,087,439 in the 2nd Quarter of 2008. In its 2007 10-K filing, Verizon disclosed its intention to continue to deploy FTTP to provide fiber optic services while upgrading electronic technology to lower the cost and maintain the reliability of its existing wire-line based systems in order to "be the premier broadband and entertainment service provider in the mass market, while maintaining the level of network reliability currently provided by our telephony network."
Reporting and Jurisdiction
General Laws, c. 59, § 41 provides that telephone companies shall annually make a return to the Commissioner regarding their § 39 property "in the form and detail prescribed by the Commissioner" by the March first deadline contained in § 41. This statutory section does not specifically provide the Commissioner with the authority to grant extensions. As the Board noted in MCI at 2008-335, however, § 41 contains a savings provision for telephone companies "unable to comply . . . for reasons beyond [their] control." Thus, a telephone company's inability to make a return for reasons beyond its control will excuse that company's failure to meet the "make a return" requirements contained in § 41. The Board further notes here that § 41, read as a harmonious whole, does not expressly prohibit authorized filings submitted after the March 1st deadline.
For fiscal year 2003, Verizon filed its Form 5941 by letter and return dated March 14, 2002, which the Commissioner received on computer disc and by hardcopy on March 19, 2002, in accordance with an extension granted by the Commissioner. For fiscal year 2004, Verizon filed its Form 5941 via e-mail transmission to the Commissioner on Monday, March 3, 2003 and by letter and return dated Monday, March 3, 2003, which the Commissioner received on computer disc and by hardcopy on March 4, 2003. For fiscal year 2005, Verizon filed its Form 5941 by letter and return dated February 27, 2004, which the Commissioner received on computer disc and by hard copy on March 1, 2004.
For fiscal year 2006, Verizon filed its Form 5941 by letter and return dated March 10, 2005, which the Commissioner received on computer disc and by hard copy on March 11, 2005 in accordance with an extension granted by the Commissioner. For fiscal year 2007, Verizon filed its Form 5941 by letter and return dated March 7, 2006, which the Commissioner received on computer disc and by hard copy on March 8, 2007 in accordance with an extension granted by the Commissioner. For fiscal year 2008, Verizon filed its Form 5941 by letter and return dated February 27, 2007, which the Commissioner received on computer disc and by hard copy on March 1, 2007. For fiscal year 2009, Verizon filed its Form 5941 dated February 29, 2008 together with a filing letter dated February 28, 2008. The filing was electronically submitted on February 29, 2008. The Commissioner received the hard copy filing on Monday, March 3, 2008.
According to these facts, Verizon submitted its fiscal year 2003, 2006, and 2007 Forms 5941 beyond the statutory due date of March 1st. Verizon, however, did not appeal the fiscal year 2003 central valuation of its § 39 property so the timeliness of its Forms 5941 filing for that fiscal year is not a jurisdictional issue here. As for fiscal years 2006 and 2007, Verizon's Form 5941 filings were timely pursuant to extensions granted by the Commissioner. Moreover, the Board finds that the circumstances described in MCI relating to the filing of MCI's fiscal year 2006 Forms 5941 after March 1st are also present here. More specifically, the Commissioner did not put Forms 5941 or its instructions into a finalized version until after March 1st, and the Commissioner did not issue final corrective instructions on filing Form 5941 until a mailing dated April 4, 2005. See MCI at 2008-269-70.
Furthermore, for fiscal years 2006 and 2007, the Commissioner maintained a continuing practice of granting, periodically, extensions to telephone companies, including Verizon, to make or file their returns on their Forms 5941 after March 1st. MCI at 2008-271. This course of conduct between Verizon and the Commissioner is of probative value on the issue of Verizon's inability "to comply . . . for reasons beyond [its] control" in making its returns to the Commissioner on its Forms 5941. The Commissioner's granting of extensions under these circumstances at least implied reasons beyond Verizon's control in making its returns to the Commissioner on Forms 5941. Post March 1st changes and corrections in the Form 5941 and its instructions, the Commissioner's failure to promulgate any formal guidance, the shifting state of the law regarding what legal entity should report what property, and the concomitant confusion engendered were all beyond the control of Verizon and justified Verizon making its fiscal year 2006 and 2007 returns to the Commissioner beyond the March 1st date and the Commissioner's authorizing extensions under her power to audit and insure compliance. See MCI at 2008-271-72.
Verizon, the Newton Assessors, and the Boston Assessors timely filed their petitions challenging the central valuations made by the Commissioner. Summaries of the dates on which these appellants filed their related Petitions Under Formal Procedure with the Board for the designated fiscal years are contained in the following table.
Verizon, Newton Assessors, and Boston Assessors
Fiscal Year
Verizon
Petitions Filed* Newton Assessors
Petitions Filed Boston Assessors Petitions Filed
2003 None 06/12/02 None
2004 None 06/13/03 None
2005 06/14/04 06/15/04 06/14/04
2006 06/14/05 06/15/05 06/14/05
2007 06/14/06 06/15/06 06/15/06
2008 06/07/07 06/15/07 06/15/07
2009 06/04/08 06/16/08** 06/16/08**
*In Fiscal Year 2005, Verizon filed 67 petitions challenging values certified for 67 municipalities including Newton and Boston. In Fiscal Year 2006, Verizon filed 114 petitions challenging values certified for 114 municipalities including Newton and Boston. In Fiscal Year 2007, Verizon filed 116 petitions challenging values certified for 116 municipalities including Newton and Boston. In Fiscal Year 2008, Verizon filed 288 petitions challenging values certified for 288 municipalities including Newton and Boston. In Fiscal Year 2009, Verizon filed 351 petitions challenging values certified for 351 municipalities including Newton and Boston.
**June 15, 2008 fell on a Sunday.
On this basis, the Board found and ruled that it had jurisdiction over Verizon's, the Newton Assessors' and the Boston Assessors' appeals relating to Verizon's § 39 property located in Newton and Boston.
Initial Phase
In the Initial Phase of these consolidated appeals, the Board examined: (1) whether poles and the wires thereon erected upon public ways are subject to central valuation and taxation under G.L. c. 59, §§ 2, 18 and 39; (2) whether municipalities that did not file petitions under § 39 may nonetheless seek to establish substantially higher values for Verizon's § 39 property than the corresponding values certified by the Commissioner where Verizon has challenged those values; and (3) whether the Board's rulings and decisions in this phase of these consolidated appeals may only, as Verizon argues, be applied prospectively. Based on all of the evidence and its analyses of the relevant law, the Board answers these question yes, no, and no, respectively.
Poles and the Wires Thereon on Public Ways
As the Board related supra, the Commissioner promulgates State Tax Form 5941 to be utilized by telephone and telegraph companies in the reporting of their taxable personal property under § 39. Under her statutory obligation, the Commissioner values the reported § 39 property, which she considers to be subject to central valuation, and on or before May 15th of each year, certifies values to the owner and the boards of assessors of each municipality where the property is located.
Before fiscal year 2009, the Commissioner's instructions to State Tax Form 5941 specified that poles and wires located over public ways owned by corporate telephone and telegraph companies were not taxable and thus were not to be reported to the Commissioner. Accordingly, before fiscal year 2009, the Commissioner did not require Verizon to report its poles and wires erected upon public ways. In addition, the Commissioner's instructions did not specify how the taxpayer was to determine whether its poles and wires were erected on public or private property. The Commissioner intentionally did not include Verizon's poles and wires over public ways in her certified values for fiscal years 2005 through 2008. With the exception of fiscal year 2005, for which Verizon may have mistakenly reported some poles and wires over public ways, for fiscal years 2005 through 2008, Verizon did not report any of its poles and wires over public ways to the Commissioner. Newton and Boston issued personal property tax bills to Verizon based upon the Commissioner's certified values. These tax bills did not include an assessment based on Verizon's poles and wires erected upon or over public ways.
The Board finds that at all relevant times Verizon owned metallic copper wires and fiber optic cables that were located both over and under private property and public property, including public ways. Verizon owned telephone poles (often jointly with electric companies) together with the above-ground wires thereon, with the poles being affixed to real property that was either private property or public property, including public ways.
The telephone poles support not only wires owned by Verizon, but also wires and other equipment owned by others, including telecommunications providers and electric companies. In some instances, Verizon was compensated for such use by others. Some poles also support street lights owned by electric companies.
Verizon maintains procedures to account for all of its poles and wires, both reported and unreported to the Commissioner, under a June 30, 1986 Accounting Practice. The June 30, 1986 Accounting Practice was the operative Verizon internal procedure governing aerial plant (which included poles and wires) for Massachusetts personal property tax purposes. Verizon utilized the Accounting Practice in the reporting of its Form 5941 property to the Commissioner. At all relevant times, Verizon owned poles and wires in Massachusetts that are encompassed by the Accounting Practice.
Both Verizon and the Commissioner contended that poles and the wires thereon on public ways were not subject to personal property taxation and central valuation. They argued that decisional law and the relevant statutes, as well as the Commissioner's past practice of not valuing, assessing or taxing this property, require the Board to adopt their contention that poles and the wires thereon on public ways were not taxable. The Board disagrees with this premise. To the extent that it is a findings of fact, and, as more fully explained its Opinion below, the Board finds here that, poles and the wires thereon on public ways were taxable as § 39 property, and were, therefore, subject to central valuation by the Commissioner under G.L. c. 59, § 39 for all the fiscal years at issue in these consolidated appeals. The Board further finds that the values assigned to poles and wires over public ways by the parties for fiscal years 2005 through 2008, which were based on Verizon's July 23, 2008 revised asset listing for poles and wires over public ways, and the values for poles and wires over public ways included in the Commissioner's certified values for fiscal year 2009 were based on the best available information and are correct. The values for poles and wires over public ways for fiscal years 2005 through 2009 are summarized in the following table.
Values for Poles and Wires Over Public Ways
Fiscal Year 2005 2006 2007 2008 2009
Newton ($) 7,951,400 8,532,700 31,772,100 26,526,100 33,398,900
Boston ($) 39,114,300 42,051,800 42,427,100 51,500,000 50,906,800
Valuation Higher Than That Certified By Commissioner
Verizon has filed approximately 900 petitions in their appeals challenging the Commissioner's certified values for its § 39 property located in various municipalities, other than Newton and Boston, for fiscal years 2005 through 2009. The vast majority of those various other municipalities did not file similar appeals challenging the Commissioner's certified values. The Boston Assessors did not file appeals for fiscal years 2003 and 2004. Insofar as it may be finding of fact, and as more fully explained in its Opinion below, the Board finds that under § 39, "the appellant" bears the burden of proving that the certified value of the § 39 property "is substantially higher or substantially lower, as the case may be, than the valuation certified by the Commissioner," and consequently, if a municipality has failed to file a timely appeal with this Board, it is not an "appellant" and therefore has no standing to establish a value substantially higher than the value certified by the Commissioner. The Boston Assessors, therefore, had no standing to challenge the certified values for Verizon's § 39 property located in Boston for fiscal years 2003 and 2004.
Prospective Application of the Board's Rulings and Decisions in This Phase
Based on all of the evidence and the Board's analysis of the applicable law, which is explained in its Opinion below, and insofar as it may be a finding of fact, the Board finds that its rulings and decisions in these consolidated appeals apply to all years at issue in the Initial Phase of these consolidated appeals, fiscal years 2005 through 2008, as well as fiscal year 2009, and cannot, as Verizon, argues, be applied prospectively only.
Valuation Phase
In the Valuation Phase of these consolidated appeals, the Board examined: (1) whether the new arguments presented by Verizon necessitate a ruling that, contrary to its ruling in MCI regarding MCI's CWIP, Verizon's CWIP is not taxable as § 39 property; and (2) whether the fair cash values of Verizon's § 39 property in Newton for fiscal years 2003 through 2009 or Boston for fiscal years 2005 through 2009 are substantially higher or substantially lower than the Commissioner's corresponding certified values. Based on all of the evidence and after analyzing the relevant law, and insofar as they may be findings of fact, the Board answers these questions no and yes, respectively. Because the jurisdictional question, which had been reserved for the Valuation Phase, has already been discussed in detail, supra, what follows are the Board's findings regarding whether Verizon's CWIP is taxable and whether the fair cash value of Verizon's § 39 property is substantially higher or substantially lower than the Commissioner's corresponding certified values.
Construction Work in Progress
Verizon posits several arguments in support of its theory that its CWIP, which it readily admits exists in Massachusetts, Newton, and Boston and is susceptible of being valued, is not taxable for ad valorum property tax purposes. First, Verizon argues that CWIP owned by corporations is not taxable. Second, Verizon contends that its CWIP is exempt from taxation as intangible personal property. Third, Verizon suggests that CWIP relating to poles, wires and underground conduit is not taxable because G.L. c. 59, § 18, Fifth does not impose a tax on poles, wires and underground conduit unless and until they are "erected upon" private ways or "laid-in" private or public ways. Finally, Verizon maintains that any ruling that CWIP is taxable may be applied prospectively only.
To the extent that it is a finding of fact, and, as more fully explained its Opinion below, the Board finds here that, whether it was owned by a corporation or not, CWIP was personal property, was taxable, and, as § 39 property, was subject to central valuation by the Commissioner under G.L. c. 59, § 39 for all the fiscal years at issue in these consolidated appeals and the Board's findings in this regard will not be applied prospectively only. The Board also finds that Verizon did not demonstrate that it incurred costs in a fiscal year at issue that related to tangible property which it did not yet own. The Board further finds that the values assigned to CWIP by the parties for fiscal years 2005 through 2008, which were based on Verizon's July 23, 2008 revised asset listing for CWIP, and the values for CWIP included in the Commissioner's certified values for fiscal year 2009 were
based on the best available information and are correct. The values for CWIP for fiscal years 2005 through 2009 are summarized in the following table.
CWIP
Fiscal Year 2005 2006 2007 2008 2009
Newton ($) 317,900 17,558,900 130,300 630,100 234,300
Boston ($) 909,300 1,419,100 1,268,300 4,948,600 1,414,600
The Board's Findings Regarding Verizon's Expert Valuation Witness, Mr. Weinert's, Valuation Methodology
After reviewing and analyzing Mr. Weinert's CORLD methodology, which is his primary valuation tool, the Board finds that it contains numerous flaws that compromise the efficacy of the values derived from it. The more serious flaws include: (1) the use of Verizon's July 23, 2008 revised asset listings as the starting point for fiscal year 2005 and 2006 valuations, instead of the costs and vintage years of the assets reported on Verizon's Forms 5941; (2) the use of a utilization deduction in conjunction with other forms of functional and economic obsolescence; (3) the use of a net salvage deduction; (4) the use of certain techniques and calculations for depreciation; and (5) the approach and assumptions for determining economic obsolescence.
With respect to the July 23, 2008 revised asset listings for fiscal years 2005 and 2006, the Board finds that Verizon failed to prove that they were more accurate than the list of assets reported on Verizon's corresponding Forms 5941. When Verizon first submitted the relevant Forms 5941 on or about March 1, 2004 and March 1, 2005, its authorized signatory affirmed that "this return and all accompanying lists . . . are true, correct and complete to the best of my knowledge and belief." Not until Verizon prepared the July 23, 2008 revised asset lists during discovery in these consolidated appeals did Verizon raise the specter of its § 39 property having been reported for the wrong municipality or over-reported. Verizon never filed or sought to file amended or supplemental Forms 5941 to address purported discrepancies between its original filings and these later lists.
Moreover, the July 23, 2008 revised asset lists did not provide vintage years for property that, in conjunction with Verizon's accounting-system change, had been rolled-up into the 1981 vintage year. The evidence indicates that up to 16% of the § 39 property in Newton and Boston had vintage years prior to 1981. Verizon never demonstrated that its July 23, 2008 revised asset lists, which rolled-up all 1981 and pre-1981 property into a single 1981 vintage year resulted in a more accurate reflection of Verizon's § 39 property for fiscal years 2005 and 2006 than the listing submitted on its Forms 5941. To the contrary, Mr. Sansoucy testified that "[t]he effect is that the values produced . . . with the '81 roll-up in all categories will consistently understate the final value if the correct vintages were provided." Several examples discussed by the Assessors in their brief and submitted into evidence by the Commissioner demonstrated this deflating phenomenon for certain categories of § 39 property, including underground metallic cable and utility poles. The Board concludes that by not using pre-1981 vintage years, the value of older property is often understated in the cost methodology because the length of the trending period to bring original cost to cost new is truncated and the time cost of money and inflation are not offset by depreciation. Accordingly, the Board finds that Verizon failed to prove that the July 23, 2008 revised asset lists were more accurate than the asset listings on the corresponding Forms 5941, and Mr. Weinert's use of the July 23, 2008 revised asset lists as the starting point for his valuation methodology for fiscal years 2005 and 2006 was improper.
With respect to Mr. Weinert's use of a utilization deduction in his CORLD methodology, the Board finds, among other flaws, that it is unnecessary and duplicative of aspects of functional and economic obsolescence. Mr. Weinert applies his utilization adjustment to his replacement cost, which, in his analysis, is the same as his reproduction cost new. His rationale for using this deduction is his belief that the Verizon system contains excess capacity because with:
The advent of competition and alternate providers of local exchange service, i.e., competitive carriers (CLECs), cable broadband and telephone, wireless carriers, and Voice Over Internet Protocol (VOIP) providers, Verizon Massachusetts has lost substantial access lines to these providers resulting in significant under-utilization of Verizon Massachusetts's outside plant facilities.
The Board observes that Mr. Weinert's reference to reduced demand and increased competition as justifications for his utility deduction to compensate for excess capacity is more appropriately classified as and addressed in the form of economic obsolescence. As stated in Valuing Machinery and Equipment, the text upon which Mr. Weinert relied for developing this deduction, "[e]conomic obsolescence . . . has been previously defined as the loss in value or usefulness of a property caused by factors external to the asset. These factors include increased cost of raw materials, labor, or utilities . . .; reduced demand for the product; increased competition; environmental or other regulations; or similar factors." Ibid. at 96-97. Furthermore, in referencing FCC Order 03-36 as the impetus for Verizon's FIOS product, Mr. Weinert also considers regulatory change as a basis for his utilization deduction and for metallic cable obsolescence. In the Board's view, Mr. Weinert's utilization deductions attempt to account for the same or similar factors underpinning his functional and economic obsolescence deductions thereby rendering them duplicative, excessive, and improper.
Interestingly, Mr. Weinert's cost-of-capacity method for computing his utilization deduction is found in the economic obsolescence section of Valuing Machinery and Equipment where the text states that: "[w]herever the operating level of a plant or an asset is significantly less than its rated or design capability, and the condition is expected to exist for some time, the asset is less valuable than it would otherwise be. Such a penalty for inutility can be a measure of the loss in value from this form of economic obsolescence." Ibid. at 97. The factors that Mr. Weinert considered in developing his utilization deduction are some of the same factors that Valuing Machinery and Equipment recommends for consideration for analyzing economic obsolescence.
In addition, the Board finds that Mr. Weinert takes an overly restrictive view of the utility of copper wires and related conduit in Verizon's incumbent telecommunications system. The record is replete with evidence supporting the propositions that copper wires and conduit are essential and dynamic parts of Verizon's existing system and will remain so for the foreseeable future. At all relevant times, Verizon's copper wires and related conduits continued to provide service to its and CLECs' customers for which Verizon receives an increasing amount of revenue. In Boston, there is virtually no fiber optic service, leaving telecommunications service almost entirely dependent on copper wires, related conduits, and poles. In addition, the advent of DSL Internet service has allowed Verizon to add service to existing copper lines by using frequencies not previously utilized for voice communication. Technological advances, such as DSL, have enabled Verizon to extend the life of and provide new uses for existing copper wires. Furthermore, in Newton, for example, existing copper wires are often used to support aerial fiber optic cable strung along poles obviating the need for the installation of other structural support. The Board further finds that excess capacity is intentionally incorporated into Verizon's copper wire network for other legitimate business purposes connected to the savvy operation of its telecommunications system such as maintenance, overcapacity, peak capacity, customer churn, and prospective growth. Witnesses for Verizon readily acknowledged that copper wires are also utilized in conjunction with fiber optics in hybrid systems.
Even Verizon's own panel testimony at the Total Element Long Range Incremental Cost ("TELRIC") proceeding in Massachusetts, identified as DTE Docket No. 01-20, recognized that "network elements and systems cannot be engineered to operate at 100% utilization" and "copper cable continues to be the economically efficient design choice for many feeder loops nearer to the servicing center." The testimony further reveals that the utilization rate for distribution cable is 40%, thus supporting Mr. Sansoucy's premise that Verizon intentionally designed its telecommunications system with significant over-capacity to account for a host of factors.
Mr. Sansoucy also was critical of Mr. Weinert's use of a utilization deduction because it assumes Verizon's copper wires and related conduit have no use other than for voice transmission. The Board finds that his criticism is well-founded and supported by the weight of the evidence. Under the circumstances present in these consolidated appeals, the Board finds that Mr. Weinert's utilization deduction overlaps with functional and economic obsolescence and does not reflect the reality of copper wire and related conduit usage by Verizon or what a prospective purchaser of the telecommunications system would foresee for the immediate future.
In addition, the Board finds that Mr. Weinert's deductions for the potential future costs relating to the abandonment or removal of retired property, which he terms net salvage, are not appropriate. These deductions are not only speculative but they run counter to Verizon's own accounting practices dealing with negative net salvage values. Mr. Sansoucy credibly testified that these deductions are not appropriate in an ad valorum valuation unless the expenses are required to be incurred as with the decommissioning of a nuclear plant. There is no such regulatory requirement here, and, moreover, Verizon's accounting practices require negative net salvage deductions to be taken as an expense when incurred.
In addition, copper wires, even if not in service, may provide structural support for fiber cable or assistance in the installation of new cable. Similarly, conduits may provide placement and protection for other components and future uses. The likelihood of their removal and the incursion of any costs associated with their removal are highly speculative. Accordingly, the Board finds that this deduction was inappropriate.
Mr. Weinert's depreciation calculations employed a staggered life system, in which he reduced the service life of each category of § 39 property, based upon technological innovations, which he termed "service life drivers," within certain intervals of time. He then applied each service life to an Iowa curve to calculate depreciation. His depreciation was intended to include what he termed "normal," or mostly physical, depreciation and functional obsolescence. According to Mr. Weinert's appraisal report, "normal depreciation was determined based on the age of the property and its normal service life; while, functional obsolescence was based on the impact on the property's normal life caused by factors such as changing technology, service requirements, and competition over time." Mr. Weinert observed that functional obsolescence results "in decreased utility of existing equipment, and therefore decrease in value to its owner." Mr. Weinert addressed functional obsolescence by shortening the normal service life of property using his service life drivers, which he claimed reflect appropriate obsolescence factors.
Once again, however, the Board finds that Mr. Weinert is double counting his deductions by applying depreciation to account for factors that he purportedly already removed in his utilization deduction step. As the Board stated in MCI while quoting from page 357 of The Appraisal of Real Estate: "If reproduction cost or replacement cost is used inconsistently, double counting of items of depreciation and other errors can be introduced." MCI at 2008-357. Here, in the Board's view, Mr. Weinert has used these techniques inconsistently by employing a utilization deduction to convert reproduction cost new values to replacement cost values and then taking further deductions in the name of depreciation for functional obsolescence, which his utilization deduction was intended to cure. The Board also notes that Mr. Weinert's service life drivers were highly subjective and were not founded on what the Board considers to be verifiable data.
The Board further finds that the 5% floor that Mr. Weinert uses in his depreciation approach is too low. In Mr. Sansoucy's words "the property is still in existence, used, useful and operating, it does not depreciate any further by virtue of its continued age." Moreover, it is an integral part of Verizon's incumbent operating system, and "the cost of permits, location, surveys, franchises, approvals, construction, the one-time interest cost necessary for creating the entire property, and the engineering to create the entire property are all sunk in value in the existing property." The Board finds that Mr. Weinert's 5% floor did not adequately consider and incorporate the retained value associated with these factors and, accordingly, finds that his methodology was further flawed by his use of only a 5% floor.
With respect to his economic obsolescence deductions, the range of Mr. Weinert's percentage deductions, from 8.65% to 22.67%, was lower than the Commissioner's 25% and, at first blush, and without regard to other depreciation and obsolescence amounts, seemingly reasonable; however, this observation belies the flaws in Mr. Weinert's methodology. Perhaps the most troubling aspect of Mr. Weinert's economic obsolescence deductions was how they were calculated to transform the values that Mr. Weinert derived for his preliminary cost conclusions using his CORLD approach into the final values that he derived using his DCF method. By using the difference between his preliminary cost conclusions and his final DCF value conclusions for his measure of economic obsolescence, Mr. Weinert transformed the value conclusions developed using his CORLD approach into the value conclusions derived using his DCF method.
This transformation is perhaps best illustrated using an example. For fiscal year 2009, Mr. Weinert derived a value of $3,074,476,714 for Verizon Massachusetts using his DCF approach. He developed a preliminary cost value of $3,976,002,061 for Verizon Massachusetts using his CORLD approach. Mr. Weinert considered the $901,525,347 difference between these two values to be the applicable measure of economic obsolescence for use in his CORLD approach. Mr. Weinert converted that difference to a percentage by dividing the difference by the preliminary cost value. The mathematics related to this example is summarized in the table below.
a) Preliminary Cost Conclusion $ 3,976,002,061
b) DCF Value Conclusion $ 3,074,476,714
c) External (economic) Obsolescence (a-b) $ 901,525,347
d) External (economic) Obsolescence (c÷a) 22.67%
Using Newton to further this example, Mr. Weinert then applied his economic obsolescence adjustment of 22.67% to his preliminary cost conclusions for Newton as summarized in the tables below.
a) Preliminary Cost Conclusion $ 45,288,672
b) Economic Obsolescence ($ 10,268,829)
c) Percent Economic Obsolescence 22.67%
d) Final Cost Approach Value Indicator $ 35,019,843
Not surprisingly, given Mr. Weinert's technique for developing his measure of economic obsolescence, the $35,019,843 value that he derived for Newton using his CORLD approach exactly equals the $35,019,843 value that he allocated to Newton from his DCF approach.
Moreover, Mr. Weinert's technique for determining economic obsolescence will always produce this transformational result regardless of the preliminary cost value conclusions. Even varying the inputs that Mr. Weinert uses to arrive at his preliminary cost conclusions will have no effect on his final value conclusions because Mr. Weinert's economic obsolescence technique will always result in his final value conclusions equaling his DCF values. Under these circumstances, the Board finds that the method that Mr. Weinert used to determine and apply economic obsolescence for his CORLD approach is faulty because, among other reasons, it serves to eviscerate his CORLD methodology of any analytical consequence by transforming the preliminary values derived from his CORLD method into the final values derived from his DCF method, which, for ad valorum taxation purposes, is not a favored approach.
In examining the underpinnings of Mr. Weinert's DCF analysis itself, the Board finds that it was premised on several highly subjective and speculative assumptions as well as various conceptual errors. First, Mr. Weinert based his income projections on Verizon's historical data for calendar years 2000 to 2007 "assuming similar performance and trends" to the "historical results." Surprisingly, he did not ask for or use Verizon's projections and simply based his forecasts on past revenue information. There was no analysis of "the regulatory, competitive and technological changes in the industry" that Mr. Weinert stated in his appraisal report require that "the inputs to the appraisal procedures . . . reflect adjustments to historical data or . . . the use of differing assumptions than those assumptions which were relied upon in the past." Mr. Weinert did not even separately analyze historic or projected FIOS revenues, which were derived from a proprietary product that he, at least in other areas of his valuation analysis, considered crucial to Verizon's future and was at least partly responsible for the purported demise of the use of copper cables. While other evidence indicated that FIOS revenues were generating growth momentum throughout Massachusetts and in Newton, Mr. Weinert did not directly address FIOS revenue growth in his DCF analysis, despite including the substantial costs associated with its build-out. The Board finds that Mr. Weinert's failures in these regards served to suppress his revenue projections. As Mr. Sansoucy admonished, using only historical data is backward looking and does not constitute a genuine projection as intended by a DCF method.
Second, the Board finds that Mr. Weinert failed to account for all of Verizon's revenues related to the § 39 property at issue in these consolidated appeals. Verizon affiliates use Verizon facilities to furnish services such as FIOS and Internet services. The affiliates pay Verizon access charges, and those charges are included in Verizon's revenue. The affiliates, however, collect the retail revenue from the customers purchasing these services. A similar arrangement is used for non-affiliates who also collect retail charges for services provided over Verizon's facilities. Consequently, the revenue, which Mr. Weinert analyzed for his DCF method, did not reflect the true earning capacity of the § 39 property, and his revenue projections were somewhat understated as a result.
Third, Mr. Weinert did not demonstrate that Verizon's historic data were consistent with that of its competitors. Therefore, he never showed that he relied on competent market data in his analysis. The Board finds that even a DCF analysis should reference market data for the purposes associated with these consolidated appeals.
Fourth, Mr. Weinert took a deduction for income taxes in each year of his DCF analysis of 34% of his "Earnings Before Interest and Income Taxes." Without providing any real support for this deduction, he testified that 34% included both federal and state income taxes and was the "the statutory rate." Interestingly, the actual rates, which do appear in Mr. Weinert's appraisal report, were significantly lower than his so-called "statutory rate" in six of the eight years that he examined. The actual rates are summarized in the following tables.
Tax Years 2000-2003
Tax Year
2000 2001 2002 2003
Inc. bef. Inc. Tax 644,327,518 475,262,316 270,773,003 -184,931,410
Inc. Tax
206,815,205
166,718,632
59,134,223
-111,624,213
Inc. Tax Rate
32.1%
35.1%
23.6%
-60.4%
Tax Years 2004-2007
Tax Year
2004 2005 2006 2007
Inc. bef. Inc. Tax 66,258,964 153,951,732 55,664,509 110,801,121
Inc. Tax
-7,470,099
16,486,705
-3,004,982
897,358
Inc. Tax Rate
-11.3%
10.7%
-5.4%
0.8%
Mr. Sansoucy posited that a before-tax capitalization rate should be used to account for such taxes. The Board finds that the deductions for income taxes, which Mr. Weinert took in his DCF method, lacked sufficient support.
Fifth, Mr. Weinert deducted property taxes as an expense in his DCF method. The methodology espoused in Valuing Machinery and Equipment, upon which Mr. Weinert extensively relied for many parts of his valuation assignment, is to "add[] the effective tax rate to the conventionally derived discount rate." Ibid. at 174. Mr. Weinert failed to follow this approach.
In addition to these five enumerated issues concerning Mr. Weinert's DCF methodology, the Board also disagrees with his allocations of his DCF values for Massachusetts to Newton and Boston. Mr. Weinert appears to have used different allocations methods for Newton and Boston, and those methods were not based on any accepted appraisal authority. Moreover, Mr. Weinert applied "discount rates with inflation" to discount cash flows that do not appear to reflect the effects of inflation. This pairing is illogical and is an improper appraisal practice under the circumstances.
Furthermore, in the Statement of Appraisal Standard 2, contained in the Uniform Standards of Professional Practice (2008-2009 ed.) ("USPAP"), the Appraisal Institute recognizes that [b]ecause DCF analysis is profit oriented and dependent on the analysis of uncertain future events, it is vulnerable to misuse." Accordingly, USPAP suggests that a DCF analysis be applied in conjunction with "other approaches" to value. Here, Mr. Weinert relied solely on his DCF method for determining the value of Verizon Massachusetts. USPAP also suggests that "the assumptions" used in the DCF analysis "be both market and property specific." Here, for his revenue and expense inputs, Mr. Weinert relied solely on Verizon's historical data without any reference to competitors. In addition, USPAP suggests that if the appraiser uses commercial software, he "should cite the name and version of the software and provide a brief description of the methods and assumptions inherent in the software." Mr. Weinert also failed to do that here.
Lastly in this regard, the value indications that Mr. Weinert derived from his DCF analysis are significantly different from the value indications that he developed using a direct capitalization approach. The percentage differences are summarized in the following table.
Fiscal Year 2005 2006 2007 2008 2009
Difference (%) 28.8 38.5 27.8 23.5 18.1
As stated in The Appraisal Institute, The Appraisal of Real Estate (12th ed. 2001):
Both direct capitalization and yield capitalization are market-driven, and when applied correctly each should result in similar value indications for a subject property. In applying the income capitalization approach, the appraiser need not be limited to a single capitalization method. With adequate information and proper use, direct and yield capitalization methods should produce similar value indications. If differences arise, the appraiser should check that the various techniques are being applied correctly and consistently.
Ibid. at 495. The value indications derived by Mr. Weinert's two income capitalizations approaches here indicate that his techniques were not applied "correctly and consistently."
In sum, the Board finds that the more serious flaws associated with Mr. Weinert's CORLD valuation methodology include: (1) the use of Verizon's July 23, 2008 revised asset listings as the starting point for fiscal year 2005 and 2006 valuations, instead of the costs and vintage years of the assets reported on Verizon's Forms 5941; (2) the use of a utilization deduction in conjunction with other forms of functional and economic obsolescence; (3) the use of a net salvage deduction; (4) the use of certain techniques and calculations for depreciation; and (5) the approach and assumptions for determining economic obsolescence.
The Board's Findings Regarding the Commissioner's Valuation Methodology
As the Board found in MCI at 2008-311-12, the Board also finds here that the Commissioner's trended reproduction cost new less depreciation methodology for centrally valuing telephone companies' § 39 property was a proper approach and furthered the important Legislative purpose behind § 39 of providing a standardized state-wide valuation system for telephone companies that promotes uniformity, equality, objectivity and fairness in valuing telephone companies' § 39 property in all of the various municipalities in which such property is located. The Commissioner's valuation methodology is based on objective information that is capable of being, and is, categorized by property type and uses readily available, verifiable, and complementary indices. The methodology is capable of being updated by the Commissioner annually, thereby assuring that the values for the fiscal year at issue are based on timely data. The methodology is also consistent with a statutory scheme of valuing the personal property of telephone companies according to items and information listed on an annually-made "return" or, in case no or a defective return is made, according to the Commissioner's estimate of the value of the property consistent with her best information and belief. See G.L. c. 59, §§ 39-42.
The Commissioner's starting point for fulfilling her statutory mandate under G.L. c. 59, § 39 to centrally value each telephone and telegraph company's § 39 property by May 15th before the start of the corresponding fiscal year is each company's completed Form 5941, which constitutes the "return" required by G.L. c. 59, § 41. The Board finds that these forms are an appropriate beginning to her cost methodology. The inventory reported on Forms 5941 in these consolidated appeals "relate[d] so far as is possible, to the situation of the company and its property on January first of the year when made." The Board finds in these consolidated appeals, however, that the value of both CWIP and poles and wires over public ways should also have been included in the Commissioner's 2005 through 2008 certified valuations of Verizon's § 39 property. While the Commissioner included those values in her fiscal year 2009 certified valuations, she did not do so for earlier fiscal year certifications. The Board finds that the data for CWIP and poles and wires over public ways reported on Verizon's July 23, 2008 asset lists is the best available information for that property for fiscal years 2005 through 2008.
For fiscal years 2005 through 2008, the Commissioner had a policy of not centrally valuing CWIP or poles and wires over public ways. The Board finds that for Massachusetts ad valorem property tax purposes and as posited by the Assessors, this policy was erroneous because, as more fully explained in the Opinion below, the relevant statutes required that all property owned in the municipalities on the valuation date that was not specifically exempt, should have been valued. Consequently, on the evidence here, CWIP and poles and wires over public ways constitute § 39 property, which should have been reported to the Commissioner by the telephone companies and centrally valued by the Commissioner as they were for fiscal year 2009. Accordingly, the Board finds that the Commissioner's reliance on the fiscal year 2009 version of Forms 5941, which included values for Verizon's CWIP and poles and wires over public ways, as the starting point in her trended reproduction cost new less depreciation valuation methodology was appropriate.
Relying on the original cost of the § 39 property and its vintage year or year of purchase, the Commissioner trended and depreciated that original cost using a "composite multiplier," which combined the trending factor with the depreciation factor to, in one calculation, arrive at the cost to currently reproduce the property as of the valuation date and determine its depreciated value. For the trending of telephone personal property and the generators, the Commissioner relied on the TPI Index and the Handy-Whitman Index, respectively. Mr. Weinert also relied on the TPI Index but used a mid-year convention instead of the end-of-the-year convention that the Commissioner used. As the Board found in MCI at 2008-316 and finds here, the TPI Index for telephone property and the Handy-Whitman Index for generators complemented the § 39-property reporting format required by the Commissioner and the FCC service life or depreciation tables. These readily available indices provided ample categorization and grouping and function well within a standardized central valuation system. The Board further finds that Mr. Sansoucy's selection and the Commissioner's adoption of an end-of-the-year convention were acceptable for § 39 central valuation purposes.
The Commissioner used straight-line depreciation, incorporating FCC service lives for each FCC property category account, in accordance with FCC Docket No. 98-137 (December 17, 1999), with a floor of 30% for the telephone property and 60% for the generators. Mr. Sansoucy recommended, and the Commissioner adopted, straight-line depreciation because it works well with an automated system, is predictable and is verifiable. Mr. Sansoucy also recognized that utility property is well maintained to assure its full functionality and is almost without exception in very good condition. Mr. Sansoucy used the FCC service lives because they were based on objective data provided to the FCC from the telephone industry regarding actual retirements of property, and they are verifiable. The FCC also reviews its service lives on an on-going basis and will change them, if warranted. In addition, because of the similarity of equipment and similar pace of technological change among telecommunications providers, as well as the convergence of services offered by these providers, the Board finds, as it did in MCI at 2008-316-17, that it was appropriate to apply the FCC service lives to all telecommunications companies subject to central valuation. Mr. Sansoucy further noted that the FCC service lives allow for not only an orderly decrease in value over time, but also the inclusion of all or most aspects of depreciation.
Mr. Sansoucy explained that "a floor is where the depreciation is stopped after a certain number of years have occurred so that if the property is still in existence, used, useful, and operating, it does not depreciate any further by virtue of its continued ag[ing]." Based primarily on the justifications contained in Mr. Sansoucy's testimony and report, the Board, again as in MCI at 2008-316-19, agreed with the Commissioner's use of straight-line depreciation and the FCC service lives with suitable floors.
The Board also finds, as it did in MCI at 2008-318, that a 30% floor was appropriate for the telephone property because, as Mr. Sansoucy suggested, it reflected the property's continuing vitality as part of a revenue producing system, its incumbency and exclusivity, and its maintenance, as well as the considerable original investment in associated direct and indirect costs, particularly regarding the outside plant. Mr. Sansoucy testified that it is not uncommon to incorporate a floor concept for ad valorum taxation purposes, citing New York State as an example. After applying his adjustment for economic obsolescence, the effective floor is actually only 22.5%. As it did in MCI at 2008-318, the Board also concurs here with the 60% floor that Mr. Sansoucy selected, and the Commissioner adopted, for generators. This limit properly reflected the generators' limited use, high degree of maintenance, and retained residual value, which Mr. Sansoucy confirmed with market data.
The Board also finds, as it did in MCI at 2008-318-19, that the suggested depreciation floors worked in concert with the FCC service lives, which are intended to determine a rate of depreciation for property allocated over its useful life. When, as here, the property retains considerable value well in excess of salvage value as it approaches and reaches the end of its service life, it is appropriate, for ad valorem property tax purposes, to use a depreciation floor to reflect the value that the non-retired property maintains while it remains part of the income-generating system.
For fiscal years 2005 through 2009, the Commissioner subtracted an additional 25% economic obsolescence from the values obtained from the automated central valuation methodology. This deduction resulted from Mr. Sansoucy's studies and analyses of general market trends for a variety of telephonic companies in Massachusetts as well as submissions from and discussions with knowledgeable representatives from the telecommunications industry indicating that the Commissioner's proposed values were excessive because of, among other things, technological advances, competition, and the overall state of the industry. Mr. Sansoucy also examined ARMIS reports and 10-K filings for Verizon New England, as well as public filings for Verizon Massachusetts, which, in the first case, indicated declining revenue of approximately 22% from its peak in 1997 to its trough in 2007 and, in the second instance, a 40% increase in call volume per access line coupled with a 35% decrease in access lines. Mr. Sansoucy interpreted this information to mean that economic pressures on telecommunications companies clearly existed, but they were not "something that is falling off the cliff." Recognizing the inherent difficulty in quantifying economic obsolescence, the Board, as it did in MCI at 2008-319-20, finds that the Commissioner's use of a 25% deduction to account for economic obsolescence was reasonable under the circumstances present in these consolidated appeals.
For fiscal year 2006 and thereafter, the Commissioner, on Mr. Sansoucy's recommendation, did not apply the 25% economic obsolescence deduction to property in service less than one year. Beginning in fiscal year 2008, the Commissioner, again on Mr. Sansoucy's recommendation, did not apply the 25% economic obsolescence deduction to generators. In fiscal year 2009, the Commissioner added categories for reporting CWIP and poles and wires over public ways and included them in her certified central valuations consistent with the Board's March 3, 2008 Order in the Initial Phase of these consolidated appeals and its decision in MCI.
With respect to these adjustments in Mr. Sansoucy and the Commissioner's methodology, the Board finds that the economic obsolescence adjustment should be applied to property in service less than one year and also to generators because they are part of the telecommunications system as soon as they are connected to it and, as a result, they immediately experience the same economic obsolescence that all the other components experience as part of that system. Neither Mr. Sansoucy nor the Commissioner offered any appraisal authority for singling out the generators, or property in service less than one year, from the application of economic obsolescence otherwise applied to Verizon's § 39 property. The Board further finds that Mr. Sansoucy and the Commissioner's valuation methodology will always effectively value generators at least 45% to the good even after applying the economic obsolescence. That percentage is still within the value range that Mr. Sansoucy determined was appropriate for the second-hand generator market that he researched, albeit at the lower end.
Notwithstanding the Board's findings in these regards, the record does not contain sufficient information for the Board to determine the extent to which the Commissioner's failure to apply the economic obsolescence deduction to property less than one year old and generators affects the fair cash values for the § 39 property in Newton and Boston. In any event, Verizon does not directly contest this issue, and the Assessors generally accept the Commissioner's certified values for fiscal years 2005 through 2009 provided the values for CWIP and poles and wires over public ways are added to the 2005 through 2008 certified values. Accordingly, and in keeping with the Supreme Judicial Court's comments and holding in In the Matter of the Valuation of MCI Worldcom Network Services, Inc., 454 Mass. at 646, the Board will not substitute its own judgment regarding this deduction for the Commissioner's in these circumstances.
Summaries of the Board's findings regarding the fair cash values of Verizon's § 39 property in Newton and Boston for fiscal years 2005 through 2009 are contained in the following two tables, respectively.
Newton
Fiscal Year
Commissioner's Certified Values
($)
CWIP
($) Poles & Wires Over Public Ways
($)
Total Value
($)
2005 20,798,600 317,900 7,941,400 29,057,900
2006 19,203,900 17,558,900 8,532,700 45,295,500
2007 22,874,000 130,300 31,772,100 54,776,400
2008 23,676,700 630,100 26,526,100 50,832,900
2009 57,738,100 234,300 33,398,900 57,738,100
Boston
Fiscal Year
Commissioner's Certified Values
($)
CWIP
($) Poles & Wires Over Public Ways
($)
Total Value
($)
2005 174,141,000 909,300 39,114,300 214,164,600
2006 157,810,600 1,419,100 42,051,800 201,281,500
2007 157,177,700 1,268,300 42,427,100 200,873,100
2008 178,164,300 4,948,600 51,500,000 234,612,900
2009 230,655,200 1,414,600 50,906,800 230,655,200
The differences between the Board's findings and the Commissioner's certified values for Verizon's § 39 property located in Newton and Boston for fiscal years 2005 through 2009 are summarized in the following two tables, respectively.
Newton
Fiscal Year 2005 2006 2007 2008 2009
Board's Fair Cash Values ($)
29,057,900
45,295,500
54,776,400
50,832,900
57,738,100
Commissioner's Certified Values ($)
20,798,600
19,203,900
22,874,000
23,676,700
57,738,100
Difference ($) 8,259,300 26,091,600 31,902,400 27,156,200 0
Difference (%) 40 136 140 115 0
Boston
Fiscal Year 2005 2006 2007 2008 2009
Board's Fair Cash Values ($)
214,164,600
201,281,500
200,873,100
234,612,900
230,655,200
Commissioner's Certified Values ($)
174,141,000
157,810,600
157,177,700
178,164,300
230,655,200
Difference ($) 40,023,600 43,470,900 43,695,400 56,448,600 0
Difference (%) 23 28 28 32 0
The Board finds that, based on the actual dollar differences and the percentage differences between the Commissioner's certified values and the Board's findings on fair cash value, the Assessors proved that the fair cash values of Verizon's § 39 property located in Newton and Boston were substantially higher than the values certified by the Commissioner for fiscal years 2005 through 2008. Based on Newton's, Verizon's and the Commissioner's "Stipulation of Agreed Values" and the actual dollar differences and the percentage differences between the Commissioner's certified values and the agreed values, the Board further finds that the fair cash values of Verizon's § 39 property located in Newton were substantially higher than the values certified by the Commissioner for fiscal years 2003 and 2004, as summarized in the table repeated below.
Fiscal Year Commissioner's Certified Value
($)
Agreed Value ($)
Difference ($)
Difference (%)
2003 34,882,200 48,017,000 13,134,800 37.7
2004 33,389,900 47,151,100 13,761,200 41.2
Verizon failed to prove that the fair cash values of its § 39 property located in Newton and Boston were substantially lower than the values certified by the Commissioner for fiscal years 2005 through 2009.
Summary
In sum, the Board finds and rules that:
It has jurisdiction over the consolidated appeals relating to Newton and Boston;
In accordance with the "Stipulation of Agreed Values" submitted to the Board by the Newton Assessors, Verizon, and the Commissioner, the fair cash value of Verizon's § 39 property located in Newton for fiscal year 2003 is $48,017,000, a $13,134,800 increase over its certified value and for fiscal year 2004 is $47,151,100, a $13,761,200 increase over the certified value for fiscal year 2004. These values are substantially higher than the values certified by the Commissioner;
Verizon is taxable on all of its poles and the wires thereon erected upon public ways under G.L. c. 59, § 2 and G.L. c. 59, § 18, First;
Only those cities and towns that filed petitions under § 39 may seek to establish that the value of Verizon's § 39 property in their city or town was substantially higher than the value certified by the Commissioner;
The Board's rulings and decisions in the Initial Phase of these consolidated appeals apply to all fiscal years at issue in these consolidated appeals, fiscal years 2003 through 2009, and cannot, as Verizon argues, be applied prospectively only;
The Board's rulings and decisions in the Valuation Phase of these consolidated appeals regarding the taxability of CWIP apply to all years at issue in the Valuation Phase of these consolidated appeals, fiscal years 2003 through 2009, and cannot, as Verizon argues, be applied prospectively only;
The Board's findings, rulings and decisions in the Valuation Phase of these consolidated appeals regarding the valuation of Verizon's § 39 property located in Newton and Boston apply to all years at issue in the Valuation Phase of these consolidated appeals, fiscal years 2003 through 2009, but only to Newton and Boston, respectively; and
Verizon is taxable on all its CWIP under G.L. c. 59, § 2 and G.L. c. 59, § 18, First.
On the basis of these findings and rulings and its subsidiary and ultimate findings regarding valuation, supra, the Board finds that the Newton Assessors proved that the fair cash value of Verizon's § 39 property located in Newton was substantially higher than the valuations certified by the Commissioner for fiscal years 2003 through 2008. The Board further finds that the Boston Assessors proved that the fair cash value of Verizon's § 39 property located in Boston was substantially higher than the valuations certified by the Commissioner for fiscal years 2005 through 2008. The Board also finds that Verizon failed to prove that the fair cash value of its § 39 property located in Newton and Boston was substantially lower than the valuations certified by the Commissioner for fiscal years 2005 through 2009.
Therefore, with respect to the fiscal year 2003 through 2008 appeals brought by the Newton Assessors, the Board decided them for the appellant Newton Assessors as follows:
Docket
Number Fiscal
Year Commissioner's Certified Values ($) Board's Values
($) Increase to Values
($)
C265966 2003 34,882,200 48,017,000 13,134,800
C269574 2004 33,389,900 47,151,100 13,761,200
C273836 2005 20,798,600 29,057,900 8,259,300
C279719 2006 19,203,900 45,295,500 26,091,600
C285500 2007 22,874,000 54,776,400 31,902,400
C290518 2008 23,676,700 50,832,900 27,156,200
With respect to the fiscal year 2005 through 2008 appeals brought by the Boston Assessors, the Board decided them for the appellant Boston Assessors as follows:
Docket
Number Fiscal
Year Commissioner's Certified Values ($) Board's Values
($) Increase to Values
($)
C273728 2005 174,141,000 214,164,600 40,023,600
C279581 2006 157,810,600 201,281,500 43,470,900
C285613 2007 157,177,700 200,873,100 43,695,400
C290511 2008 178,164,300 234,612,900 56,448,600
In accordance with G.L. c. 59, § 39, the Newton Assessors and the Boston Assessors are authorized to assess additional taxes for said fiscal years based on the increases to the valuations established by the Board.
With respect to the fiscal year 2009 appeals brought by the Newton Assessors in Docket Number C296729 and the Boston Assessors in Docket Number C296568, the Board decided them for the appellees, Verizon and the Commissioner.
With regard to the following appeals brought by Verizon against the Commissioner and the Assessors of Newton, the Board decided them for the appellees:
Docket Number Fiscal Year
C273602 2005
C279520 2006
C285320 2007
C289619 2008
C295777 2009
With regard to the following appeals brought by Verizon against the Commissioner and the Assessors of Boston, the Board decided them for the appellees:
Docket Number Fiscal Year
C273564 2005
C279464 2006
C285261 2007
C289483 2008
C295606 2009
OPINION
Initial Phase
As the Board previously found, ruled, and discussed in its March 3, 2008 Order, which addressed the issues raised in the Initial Phase of these consolidated appeals, the Board reiterates here its findings and rulings that:
Verizon is taxable on all of its poles and the wires thereon erected upon public ways under G.L. c. 59, § 2 and G.L. c. 59, § 18, First;
Only those cities and towns that filed petitions under § 39 may seek to establish that the value of Verizon's property in their city or town was substantially higher than the value certified by the Commissioner; and
The Board's rulings and decisions in these appeals apply to all years at issue in these appeals, fiscal years 2003 through 2009, and cannot, as Verizon argues, be applied prospectively only.
Poles and the Wires Thereon on Public Ways
The Board finds and rules that Verizon was taxable on all of its poles and the wires thereon erected upon public ways under G.L. c. 59, § 2 and G.L. c. 59, § 18, First, as well as its poles and the wires thereon erected upon private property for the fiscal years at issue.
Verizon and the Commissioner concede that Verizon's underground conduits, wires and pipes laid in public ways and its poles, underground conduits and pipes, together with the wires thereon or therein, laid in or erected upon private property are taxable under G.L. c. 59, § 18, Fifth, but argue that § 18, Fifth is the sole authority for taxation of poles and wires. However, in RCN Beco-Com, LLC v. Commissioner of Revenue, et al, Mass. ATB Findings of Fact and Reports, 2003-410, aff'd 443 Mass. 198 (2005) ("RCN Beco-Com"), both this Board and the Supreme Judicial Court ("Supreme Judicial Court" or "Court") specifically rejected the taxpayer's argument that the clauses of § 18 are mutually exclusive in holding that all of the taxpayer's personal property, which included "all wires laid in or erected upon public ways," was taxable under § 18, First. RCN Beco-Com, Mass. ATB Findings of Fact and Reports at 2003-471.
In upholding the Board on all the legal issues it decided, the Supreme Judicial Court noted that "RCN concedes that its non-machinery tangible personal property (in Newton, its wires and underground conduits) is taxable under G.L. c. 59, § 18, First." RCN Beco-Com, 443 Mass. at 208. RCN had argued, however, that G.L. c. 59, § 18, Second governed the taxation of machinery; because, as a non-corporate entity, RCN's non-manufacturing machinery was not taxable under § 18, Second, and clauses Third through Seventh were also not applicable to it, RCN maintained that its non-manufacturing machinery was not subject to tax. After observing that its previous decisions had not addressed the issue of whether the various clauses of § 18 were mutually exclusive, the Court ruled that "[t]he plain text of the statute does not preclude the application of clause First to machinery that does not fall under the purview of clause Second. Thus, the board was correct in finding that all of RCN's personal property was subject to taxation." RCN Beco-Com, 443 Mass. at 209.
The Court's analysis in reaching this conclusion is equally applicable to the present appeals. Section 18, First was enacted in 1918 as the "final step in the change of the principle of situs in taxing tangible personal property from the old rule of mobilia sequuntur personam by which the situs of all personal property was deemed to be at the domicile of the owner to the present practice of basing situs almost wholly on the physical location of the property." P. Nichols, Taxation in Massachusetts (3rd ed. 1938) 278. In contrast, § 18, Fifth, like § 18 Second at issue in RCN Beco-Com, had already been enacted at the time § 18, Clause First was enacted. The applicable version of Clause Fifth is the result of three enactments: it was originally enacted in 1902 to tax the underground conduits, wires and pipes of corporations other than railway companies laid in public streets (St. 1902, c. 342, § 1); it was later amended, in response to Coffin v. Artesian Water Co., 193 Mass. 274 (1906) (holding that water pipes and mains located on private property were not taxable to the owner of the pipes and mains) to provide that poles, underground conduits, and pipes, together with the wires "thereon or therein, laid in or erected upon private property" were taxable to the owners of such property (St. 1909, c. 439, § 1); finally, it was amended to exclude poles and wires of street railway companies upon private rights of way not owned by the company (St. 1913, c. 458, § 1).
Because § 18, First was enacted after § 18, Fifth, it cannot be maintained in these consolidated appeals that § 18, Fifth is the exclusive provision under which Verizon may be taxable on its poles and wires; rather, as the Court held in RCN Beco-Com, § 18, First was enacted to tax "'all tangible personal property' not otherwise exempt in the city or town where it is situated" . . . which "presumably included personal property not previously subject to tax." RCN Beco-Com, 443 Mass. at 208.
The attempt by Verizon and the Commissioner to distinguish the clear holding of RCN Beco-Com that all of RCN's personal property was subject to taxation, including its wires laid in or erected upon public ways, on the ground that Verizon was a corporation is unavailing. There is nothing in G.L. c. 59, § 2 (providing in relevant part for the taxation of all personal property that is not "expressly exempt") or § 18, First that conditions taxability on the corporate or other jural status of the owner. Compare G.L. c. 59, § 5, cl. 16(1)(d) (providing that only corporate utilities, including telephone company corporations such as Verizon, qualify for property tax exemption for all property other than "real estate, poles, underground conduits, wires and pipes and machinery used in manufacture or in supplying or distributing water"). Although § 18, Fifth, like the relevant provision of § 18, Second cited by the taxpayer in RCN Beco-Com, contains a corporate requirement, Verizon, like RCN, is taxable on their poles and wires erected upon public ways under § 18, First, which has no such requirement.
As it did in RCN Beco-Com, the Board also rejects the argument by Verizon and the Commissioner that Assessors of Springfield v. Commissioner of Corporations and Taxation, 321 Mass. 186 (1947) controls the decision of these appeals. In Assessors of Springfield, the assessors argued that certain equipment and poles and wires erected upon public ways owned by New England Telephone and Telegraph Company constituted "machinery" taxable under G.L. c. 59, § 39 and § 18, Second. The Court rejected the argument that this property was machinery, and further observed that the assessors "rightly do not contend here, as they did before the [B]oard, that the poles of the taxpayer together with the wires thereon erected upon public ways were subject to local taxation" under § 18, Fifth. Id. at 194. After quoting the relevant language from § 18, Fifth, the Court noted that the "statute makes no provision for the taxation of poles with the wires thereon erected upon public ways but taxes only those located on private property." Id.
Subsequent decisions of the Court make clear that the "statute" which the Court found did not provide for the taxation of poles and wires erected upon public ways was § 18, Fifth, and not § 18 in its entirety, and that such property is taxable under § 18, First. In two decisions dealing with the issue of whether a cable television operator was taxable on its poles and wires erected upon public ways, the Court observed that the issue of whether such property was taxable under § 18, First had not been argued. See Warner Amex Cable Communications Inc. v. Assessors of Everett, 396 Mass. 239, 241, n. 2 (1985) ("Neither the [B]oard nor the assessors in their brief have relied on the introductory language of § 18 or on § 18, First, to justify the city's right to assess Warner's aerial distribution system located over public ways."); Nashoba Communications Limited Partnership v. Assessors of Danvers, 429 Mass. 126, 127, n. 1 (1999) ("We note that, as in Warner Amex . . . neither the board nor the assessors have relied on the introductory language of § 18 or on § 18, First, to justify the assessors' right to assess the property at issue in this case."). Similarly, the issue of the taxability of such property under the introductory language of § 18 or § 18, First was not raised or decided in Assessors of Springfield.
Further, the Court in RCN Beco-Com specifically relied on § 18, First in ruling that the "the [B]oard was correct in finding that all of RCN's personal property was subject to taxation." RCN Beco-Com, 443 Mass. at 209. Accordingly, while Assessors of Springfield stands for the proposition that poles and wires erected upon public ways are not taxable under § 18, Fifth, Warner Amex, Nashoba Communications, and RCN Beco-Com clearly indicate that § 18, First is an independent source of authority for the taxation of such poles and wires.
The Board's ruling that Verizon is subject to property tax on its poles and wires erected upon public ways is consistent with the statutory provisions dealing with the taxation of telephone company property. First, G.L. c. 59, § 39 provides that the following property is to be centrally valued by the Commissioner and taxed by local boards of assessors: "machinery, poles, wires and underground conduits, wires and pipes." By specifically providing for the valuation and assessment of poles and wires under § 39, the clear legislative intent is to subject such property to taxation. Further, the legislative purpose of § 39 was to "ensure consistency and competence in the valuation of a Statewide system" and to remedy problems faced by the various local boards of assessors "in attempting to value a portion of a system that crossed municipal boundaries and the resulting disparate valuations for affected companies." RCN Beco-Com, 443 Mass. at 198. Section 39 would be rendered essentially meaningless, and the purpose behind its enactment left largely unfulfilled, if only poles and wires erected upon private property were subject to tax.
Second, the corporate utility exemption under G.L. c. 59, § 5, clause 16(1)(d), which applies to corporations such as Verizon but not to non-corporate entities such as RCN, specifically carves out from the corporate utility exemption "real estate, poles, underground conduits, wires and pipes, and machinery used in manufacture or in supplying or distributing water." Again, it makes little sense to specifically provide that poles and wires are not exempt, and are therefore taxable, if only poles and wires erected upon private property were subject to tax.
Finally, G.L. c. 59, § 2 provides that all personal property within the commonwealth is subject to tax, unless it is expressly exempt. There is nothing in § 5, clause 16(1)(d) or elsewhere that exempts poles and wires erected upon public ways from tax. Section 18, First provides the place where and the person to whom poles and the wires thereon erected upon public ways are to be assessed. RCN Beco-Com 443 Mass. at 209. Accordingly, the Board finds and rules that Verizon is taxable on all of its poles and the wires thereon erected upon public ways under G.L. c. 59, § 2 and G.L. c. 59, § 18, First.
Valuation Higher Than That Certified by the Commissioner
The Board finds and rules that, in order for it to establish a valuation higher than that certified by the Commissioner, a city or town must have filed an appeal with the Board for the relevant fiscal year. G.L. c. 59, § 39 authorizes the Board to establish a substantially higher or substantially lower valuation than that certified by the Commissioner provided that: "in every such appeal, the appellant shall have the burden of proving that the value of the machinery, poles, wires, and underground conduits, wires, and pipes is substantially higher or substantially lower, as the case may be, than the valuation certified by the Commissioner." (Emphasis added).
Therefore, it is the appellant that bears the burden of proving that the value of § 39 property is substantially higher than the value certified by the Commissioner; where a city or town is only an appellee -- that is, where it has filed no appeal itself -- § 39 provides no mechanism for the Board to find a value substantially higher than that certified by the Commissioner. In MCI, the Board faced the same issue and interpreted § 39 there as it does here. Recently, in In the Matter of the Valuation of MCI Worldcom Network Services, Inc., 454 Mass. at 646-47, the Supreme Judicial Court agreed with Board's interpretation in MCI. Accordingly, the Board rules here that only those cities and towns that filed petitions under § 39 may seek to establish that the value of Verizon's properties in their city or town was substantially higher than the value certified by the Commissioner.
The Assessors further contend that, under § 9 of Chapter 321 of the Act of 1933, which was made applicable to this Board by § 4 of Chapter 400 of the Acts of 1937, "the [Board] in considering any appeal brought before it may make such decision as equity may require and may reduce or increase the amount of the assessment appealed from." As the Supreme Judicial Court stated in In the Matter of the Valuation of MCI Worldcom Network Services, Inc., 454 Mass. 635 (2009):
That sentence has never been cited by a Massachusetts appellate case, nor has it been codified in the general laws, G.L. c. 58A (board's enabling act). Indeed, the "act" to which the language refers makes no reference to the commissioner's valuation of telephone company property, or § 39 appeals from those valuations. . . . Even if that sentence retains any force, it is subordinated to the contrary, plain language of § 39, which was rewritten in 1955 to require that the "appellant" bears the burden of proving the commissioner's valuation to be too high or too low. See St. 1955, c. 344, § 31. "[W]hen the provisions of two statutes are in conflict, 'the more specific provision, particularly where it has been enacted subsequent to a more general rule, applies over the general rule.'" Commonwealth v. Harris, 443 Mass. 714, 739, 825 N.E.2d 58 (225)(Marshall, C.J., concurring in part and dissenting in part), quoting Doe v. Attorney Gen. (No. 1), 425 Mass. 210, 215, 680 N.E.2d 92 (1997).
Id. at 647-48.
Accordingly, the Board rules here that this provision has no validity in the context of § 39 appeals.
Fiscal Years Affected by Board's Ruling
The Board's rulings and decisions in the Initial Phase of these consolidated appeals apply to all years at issue in these appeals, fiscal years 2003 through 2009, and cannot, as Verizon argues, be applied prospectively only.
There is simply no support for Verizon's suggestion that the Board's ruling should be applied only prospectively. The Board is required to render a decision in appeals before it. See G.L. c. 59, § 39 (requiring the Board to "hear and decide" appeals from Commissioner's valuation of telephone company property, including poles and wires) and G.L. c. 58A, § 13 (requiring the Board to make decision in each appeal heard by it). There is nothing that gives the Board the authority to render advisory opinions or declaratory judgments. Rather, the Board must render decisions regarding the valuations raised in the subject appeals.
In addition, Verizon's argument that prospective application of a Board ruling that poles and wires erected upon public ways is required because such a ruling would amount to an unanticipated "change in policy" and an "overruling" of Assessors of Springfield is without merit. First, the Commissioner's determination that poles and wires erected upon public ways need not be included in Verizon's return under G.L. c. 59, § 41 is inconsistent with the underlying statutes and is therefore entitled to no deference. Massachusetts Hospital Association, Inc. v. Department of Medical Security, 412 Mass. 340, 346 (1992). Further, the Court in RCN Beco-Com rejected the taxpayer's claim, like Verizon's claim here, that it had the right to rely on the Commissioner's prior practices:
Most significantly, neither [Commissioner of Revenue v.] BayBank Middlesex, [421 Mass. 736 (1996)] nor any other cases cited by RCN as precedent to bind the commissioner involved a third party with its own statutory right of appeal which would be harmed by the application of the commissioner's past practice. In this matter, G.L. c. 59, § 39 specifically affords the assessors an independent right to challenge the commissioner's valuation of a telephone company's statutory property.
RCN Beco-Com, 443 Mass. at 207.
In addition, as described above, the Board's ruling in these appeals does not "overturn" Assessors of Springfield. The Board's ruling that poles and wires erected upon public ways are taxable is not based on either § 18, Second or § 18, Fifth, the two statutes addressed by the Court in Assessors of Springfield. Rather, the ruling is based on § 18, First, a statutory basis left open by the Court in Warner Amex and Nashoba Communications, and finally adopted by it in RCN Beco-Com. Accordingly, the Board's ruling is applicable for all fiscal years at issue in these consolidated appeals.
Valuation Phase
Reporting Requirements & Jurisdiction
The question arises as to whether the Board has jurisdiction over Verizon's appeals for fiscal years 2006 and 2007 where Verizon failed to submit Forms 5941 by the preceding March 1st. The Board, however, finds and rules that it does have jurisdiction over the appeals that Verizon filed for these fiscal years.
In its findings, supra, the Board found that for each of the years at issue, Verizon timely made returns to the Commissioner on Forms 5941. In rendering this finding, the Board also found, supra, that the course of conduct between Verizon and the Commissioner was of probative value on the issue of Verizon's inability "to comply . . . for reasons beyond [its] control" in meeting the March 1st date for making its returns to the Commissioner on Forms 5941. The Board further found that the Commissioner's granting of extensions under the circumstances present in the fiscal year 2006 and 2007 appeals constituted reasons beyond Verizon's control in making its returns to the Commissioner on Forms 5941. The Board recognized that the changes in the Forms 5941s, their instructions, published filing deadlines, and other related mailings and matters, as well as the Commissioner's granting of extensions and failure to promulgate any formal guidance, in conjunction with the evolving state of the law, all of which the Board found was beyond the control of Verizon, justified Verizon making its returns to the Commissioner after the March 1st date for these two fiscal years.
From the Commissioner's perspective, the Board found, supra, that the forms were filed seasonably with the necessary information for the BLA to make timely central valuation determinations and certifications on or before the May 15th date. The Board determined that the Commissioner was not prejudiced by the post-March 1st filings and she has acknowledged that the many changes that the BLA implemented during this time period created some confusion and misunderstandings.
Accordingly, the Board concluded that any delays by Verizon in making its returns to the Commissioner on appropriately informative Forms 5941 for fiscal years 2006 and 2007 were not fatal to the Board's jurisdiction over these appeals because they fell within the "for reasons beyond [Verizon's] control" savings provision in G.L. c. 59, § 41.
Section 41 provides, in pertinent part, that:
Every telephone . . . company owning any property required to be valued by the commissioner under section thirty-nine shall annually, on or before a date determined by the commissioner but in no case later than March first, make a return to the commissioner . . . . This return shall be in the form and detail prescribed by the commissioner and shall contain all information which he shall consider necessary to enable him to make the valuations required by section thirty-nine, and shall relate, so far as is possible, to the situation of the company and its property on January first of the year when made. . . . Failure to make the return required by this section shall bar the company from any appeal of the commissioner's determination of value under section thirty-nine, unless such company was unable to comply with such request for reasons beyond such company's control. (Emphasis added.)
As the Board ruled in MCI at 2008-336-38, the Board likewise rules here that the savings clause comes into play when returns do not comply with § 41's requirements, not just when a company fails to make any return at all. The Board finds and rules that the phrase "[f]ailure to make the return required by this section" means the failure of a company to submit a return that, for example, "is in the form and detail prescribed by the [C]ommissioner" or when a company submits a return that is deficient in some way. The Board previously interpreted virtually identical language contained in G.L. c. 59, § 42. In RCN Beco-Com, the Board noted that "G.L. c. 59, § 42 provides that in the event a telephone . . . company 'fail[s] to make the return required by [§ 41] the commissioner shall estimate the value of the property of the [company] according to his best information and belief.' In other words, the Commissioner has an affirmative duty to value telephone . . . companies' § 39 property even if the return is inadequate for the Commissioner's purposes." (Emphasis added.) RCN Beco-Com at 2003-442.
Accordingly, in RCN Beco-Com, the Board determined that, as used in § 42, the failure to make the return required by § 41 means the failure to make a return without inadequacies or, in other words, submitting a return that is not adequate for the Commissioner's central valuation purposes. That determination is the equivalent of the Board's finding and ruling here with respect to the nearly identical language and phrase used in § 41. "'"[W]here the Legislature uses the same words in several sections which concern the same subject matter, the words "must be presumed to have been used with the same meaning in each section."'" Whitehall Co., Ltd. v. Beverages Control Commission, 7 Mass. App. Ct. 538, 540 (1979) (quoting Insurance Rating Bd. v. Commissioner of Ins., 356 Mass. 184, 188-189 (1969) (quoting Liddell v. Standard Acc. Ins. Co., 283 Mass. 340, 346 (1933)). Moreover, the Board's interpretation of tax statutes is entitled to deference. See Xtra, Inc. v. Commissioner of Revenue, 380 Mass. 277, 283 (1980) (citing Henry Perkins Co. v. Assessors of Bridgewater, 377 Mass. 117, 121 (1979)).
In the fiscal year 2006 and 2007 consolidated appeals, Verizon submitted returns beyond the March 1st statutory deadline. The Board found, however, that the course of conduct between MCI and the Commissioner, including the Commissioner's granting of extensions and her numerous pronouncements and revisions resulting from the shifting state of the law, establishes that Verizon's failures to timely make the required returns were for reasons beyond its control. This finding comports with the holding in Dexter v. City of Beverly, 249 Mass. 167 (1924), in which the Supreme Judicial Court held that while an express statutory deadline for a taxpayer to make a return of property to the assessors cannot be waived, the course of conduct between the taxpayer and the assessors was probative on whether good cause existed to invoke a savings clause and excuse the taxpayer's failure to timely file its return under G.L. c. 59, § 29. Id. at 169-70. In the instant appeals, the Board finds and rules that the failures to make the returns were for reasons beyond Verizon's control. See MCI at 2008-338-39.
Lastly, and consistent with its findings and rulings in MCI at 2008-339, the Board also finds and rules here that the changes in the Forms 5941s, their instructions, published filing deadlines, and other related mailings and matters, as well as the Commissioner's failure to promulgate any formal guidance, in conjunction with the changing state of the law, and her discretionary granting of extensions and rejecting returns, created snares for the unwary, which constituted "reasons beyond [Verizon]'s control." See Becton Dickinson and Company v. State Tax Commission, 374 Mass. 230, 233 (1978) ("[S]tatutes embodying procedural requirements should be construed, when possible, to further the statutory scheme intended by the Legislature without creating snares for the unwary."). See also SCA Disposal Services of New England, Inc. v. State Tax Commission, 375 Mass. 338, 341 (1978) ("[N]otions of fairness and common sense" should be considered in applying administrative provisions.).
Accordingly, the Board rules that, on these bases, it has jurisdiction over Verizon's appeals.
Construction Work in Progress
Verizon offers various theories suggesting that its CWIP is not taxable. First, Verizon argues that CWIP owned by corporations is not taxable. Next, Verizon posits that its CWIP is exempt from taxation as intangible personal property. Thirdly, Verizon suggests that CWIP relating to poles, wires and underground conduits is not taxable because G.L. c. 59, § 18, Fifth does not impose a tax on poles, wires and underground conduits unless and until they are "erected upon" private ways or "laid in" private or public ways. Finally, Verizon contends that any ruling that CWIP is taxable should be applied prospectively only. These arguments are contrary to the rulings of this Board in the Initial Phase of these consolidated appeals and in MCI, and the rulings of this Board and the holdings of the Supreme Judicial Court in RCN Beco-Com, and, to the extent that they are based on facts, are unsupported by the evidence and the Board's findings.
The general rule in Massachusetts is that "All property, real and personal, situated within the commonwealth, and all personal property of the inhabitants of the commonwealth wherever situated, unless expressly exempt, shall be subject to taxation . . . ." G.L. c. 59, § 2 (emphasis added). Section 18 of Chapter 59 commences with the preamble, "All taxable personal estate within or without the commonwealth shall be assessed to the owner in the town where he is an inhabitant on January first, except . . . ." (Emphasis added). Clause First of c. 59, § 18 provides that "All tangible personal property, including that of persons not inhabitants of the commonwealth, except ships and vessels, shall, unless exempted by section five, be taxed to the owner in the town where it is situated on January first . . . ." (Emphasis added). Thus for personal property tax purposes, all personal property, not just property completed or in service, is subject to tax.
As this Board previously stated and ruled in MCI:
What is most striking about these provisions, in the context of assessment and taxation in these consolidated appeals, is the Legislature's use of the modifier "all" when identifying property to be assessed or taxed. The Legislature, in using this word, expresses no limitations or equivocation. The Board finds and rules that this word is a clear indication of the Legislature's intent, under § 18, to tax all personal property of telephone companies, unless otherwise exempt.
The Boards further finds and rules that this language is clear and unambiguous and should be given its plain meaning. Taxing statutes are to be construed according to their plain meaning. See AMIWoodbroke, Inc., 418 Mass. [92,] 94 [(1984)]. Accordingly, the Board finds and rules here that "all tangible personal property" includes telephone company property that is construction work in progress or is owned but not necessarily "in service." The Board's finding and ruling in this regard is also bolstered by other ad valorem taxing statutes, such as G.L. c. 59, § 11, which authorizes the assessors to assess taxes on real estate even if it is under construction or unoccupied. Having defined and identified the property to be assessed and taxed, the issue then becomes one of fair cash valuation.
MCI at 2008-373-74.
In the Board's March 3, 2008 Order issued in the Initial Phase of these consolidated appeals and in its discussion regarding the taxability of poles and the wires thereon on public ways, supra, the Board confirmed its ruling in MCI and that "the Court in RCN Beco-Com specifically relied on § 18, First in ruling that 'the board was correct in finding that all of RCN's personal property was subject to taxation.' RCN Beco-Com, 443 Mass. at 209" (emphasis added). The same is true with respect to Verizon's § 39 property in these consolidated appeals.
Verizon's argument that clause First cannot be applied to a corporation is unavailing and has already been rejected by this Board. As articulated in its March 3, 2008 Order and its discussion regarding the taxability of poles and the wires thereon on public ways, supra, the Board finds and rules that:
There is nothing in G.L. c. 59, § 2 (providing in relevant part for the taxation of all personal property that is not "expressly exempt") or § 18, First that conditions taxability on the corporate or other jural status of the owner. Compare G.L. c. 59, § 5, cl. 16(1)(d) (providing that only corporate utilities, including telephone company corporations such as Verizon, qualify for property tax exemption for all property other than "real estate, poles, underground conduits, wires and pipes and machinery used in manufacture or in supplying or distributing water"). Although § 18, Fifth like the relevant provision of § 18 Second cited by the taxpayer in RCN [Beco-Com], contains a corporate requirement, Verizon, like RCN, is taxable on their poles and wires erected upon public ways under § 18, First, which has no such requirement.
Accordingly, Verizon's corporate status is immaterial to the taxability of its § 39 property under clause First.
Verizon further argues that even if CWIP is taxable property, that property is exempt under G.L. c. 59, § 5, clause Twenty-fourth, which exempts from taxation "[a]ll intangible property." In analyzing Verizon's claim of exemption, the Board is cognizant of the principle that "[a]n exemption is a matter of special favor or grace and to be recognized only where the property falls clearly and unmistakably within the express words of legislative command." Southeastern Sand & Gravel, Inc. v. Commissioner of Revenue, 384 Mass. 794, 796 (1981) (citations omitted). A claim of exemption must fail if the operative facts merely cast doubt on its claim of exemption. Boston Symphony Orchestra v. Board of Assessors of Boston, 294 Mass. 248, 257 (1936). Trustees of Boston University v. Board of Assessors of Brookline, 11 Mass. App. Ct. 325, 331 (1981)(proof of exemption must leave issue free of doubt). A taxpayer bears a heavy burden to demonstrate its right to a claimed exemption. Assessors of Boston v. Garland School of Home Making, 296 Mass. 378, 384 (1937).
Verizon, however, has not provided sufficient evidence that its cost entries for CWIP represent intangible, rather than tangible, personal property. While Verizon introduced an exhibit (V-3) and some summary testimony regarding what it refers to as "intangibles," such as permitting, labor and engineering costs, it never identified the amount of those costs which it claims represent "intangibles." Verizon has not shown sufficient connection between its CWIP accounting entries and what it claims to be "intangible property."
Moreover, it is well-established that the cost approach to value includes all direct and indirect costs. The Appraisal of Real Estate (13th ed. 2008) at 386. Direct costs include material, labor and related expenditures incurred in the purchase and installation of an asset into functional use, while indirect costs include, among other things, engineering, architect, and professional fees, license and permit fees, and administrative fees. Valuing Machinery at 50-51. See also The Appraisal of Real Estate (13th ed. 2008) at 386 ("To develop cost estimates for the total building, appraisers must consider direct (hard) and indirect (soft) costs. Both types of cost are essential to a reliable cost estimate."). The categories of direct and indirect costs include all of the types of expenses that Verizon claims are "intangible" property. The Board finds no factual predicate, and no legal authority cited, for Verizon's claim of exemption and, accordingly, rejects it.
Verizon next argues that the language of clause Fifth, that property be "laid in or erected upon" property in order to be taxable, express a requirement of final placement or readiness for service. The Board rules that this argument fails for several reasons. First, as the Board found and ruled in its March 3, 2008 Order and its discussion, supra, and as the Supreme Judicial Court held and this Board found in RCN Beco-Com, the property is taxable under clause First so there is no reason to consider the language of clause Fifth. Second, and as the Board found with respect to Verizon's "intangible" argument, Verizon has produced no evidence to show what portion, if any, of its CWIP was not laid in or erected upon a public or private way. The Board will not speculate in this regard. Third, there is nothing in the plain statutory language that imposes a requirement that the property be either finally placed in or ready for service. As this Board ruled in MCI in rejecting a similar claim that property must be "in service," the plain meaning of clause First is that all property is to be assessed and taxed. "The Legislature in using this word, expresses no limitations or equivocations." MCI at 2008-373.
Lastly and similar to its request in the Initial Phase of these consolidated appeals regarding its poles and wires over public ways, Verizon urges the Board to apply prospectively only any decision that Verizon's CWIP is taxable personal property. As the Board discussed in its March 3, 2008 Order and supra:
The Board's rulings and decisions in these appeals apply to all years at issue in these appeals, . . . and cannot, as Verizon argues, be applied prospectively only.
There is simply no support for Verizon's suggestion that the Board's ruling should be applied only prospectively. The Board is required to render a decision in cases before it. See G.L. c. 59, § 39 (requiring Board to "hear and decide" appeals from Commissioner's valuation of telephone company property, including poles and wires) and G.L. c. 58A, § 13 (requiring Board to make decision in each appeal heard by it). There is nothing that gives the Board the authority to render advisory opinions or declaratory judgments. Rather, the Board must render decisions regarding the valuations raised in the subject appeals.
Valuation of Verizon's § 39 Property in Newton and Boston
The assessors are required to assess personal property at its fair cash value. G.L. c. 59, § 38. This mandate is true even if the property is centrally valued by the Commissioner under G.L. c. 59, § 39. See Assessors of Haverhill v. New England Tel. & Tel. Co., 332 Mass. 357, 359 (1955)("The value to be determined by the commissioner under § 39 is the fair cash value of the property."). The standard to be used in determining fair cash value is the "'fair market value, which is the price an owner willing but not under compulsion to sell ought to receive from one willing but not under compulsion to buy.'" Taunton Redevelopment Associates v. Assessors of Taunton, 393 Mass. 293, 295 (1984) (quoting Boston Gas Co. v. Assessors of Boston, 334 Mass. 549, 566 (1956)). "A proper valuation depends on a consideration of the myriad factors that should influence a seller and buyer in reaching a fair price." Montaup Electric Co., v. Assessors of Whitman, 390 Mass. 847, 849-50 (1984).
"The burden of proof is upon the appellant to make out its right as a matter of law to an abatement of the tax." Schlaiker v. Assessors of Great Barrington, 365 Mass. 243, 245 (1974) (quoting Judson Freight Forwarding Co. v. Commonwealth, 242 Mass. 47, 55 (1922)). An appellant, under G.L. c. 59, § 39, challenging the Commissioner's central valuation of telephone company special-purpose property has the burden of proof even if the property poses unusual problems of valuation. MCI at 2008-374-75; cf. Foxboro Associates v. Assessors of Foxborough, 385 Mass. 679, 691 (1982); Reliable Electronic Finishing Co., Inc. v. Assessors of Canton, 410 Mass. 381, 382 (1991). In appeals under § 39, the appellant must show that the Commissioner's valuation of its § 39 property is incorrect or improper and results in certified values that are substantially higher or substantially lower, as the case may be, than the property's fair cash value before the Board may substitute its own valuation. G.L. c. 59, § 39. In the Matter of the Valuation of MCI Worldcom Network Services, Inc., 454 Mass. at 646; see MCI at 2008-277-78.
As discussed in MCI, the relevant statutory sections do not contain definitions of "substantially higher or substantially lower," and they do not otherwise provide direction for measuring or interpreting these terms. MCI at 2008-274. Under these circumstances, the Board looks to the common and approved usage of the term "substantially." G.L. c. 4, § 6, ¶ Third. In MCI, the Board turned to several dictionary definitions. MCI at 2008-277-78. The Board reaffirms here its findings in MCI regarding the meaning of "substantially" and accordingly rules, that "'substantially higher or substantially lower' than the Commissioner's valuation, as used in § 39, means a considerable or large amount and not a mere trifle or nominal amount." MCI at 2008-277-78.
Generally, real estate and personal property valuation experts, the Massachusetts courts, and this Board rely upon three approaches to determine the fair cash value of property: income capitalization; sales comparison; and cost analysis. Correia v. New Bedford Redevelopment Auth., 375 Mass. 360, 362 (1978). However, the income capitalization and DCF methods are often unreliable for valuing utility property. MCI at 2008-375; see also Boston Edison Co. v. Assessors of Boston, 402 Mass. 1, 17 (1988); Iantosca v. Assessors of Weymouth, Mass. ATB Findings of Facts and Reports 2008-929, 952 ("The [DCF] analysis has never been relied on by the Board as a primary valuation methodology."). While Mr. Sansoucy and the Commissioner did not use or perform an income capitalization or DCF approach in centrally valuing Verizon's § 39 property, Mr. Weinert did perform both such approaches. While he did not rely on them in his final valuation of Verizon's § 39 property, he did use his DCF method to measure the amount of economic obsolescence to apply in his CORLD methodology.
With respect to Mr. Weinert's DCF approach, the Board found that it was based on several highly subjective and speculative projections and assumptions as well as various conceptual errors, which rendered the values derived from it unreliable and neither credible nor probative. Moreover, the Board found that, as a valuation technique, Mr. Weinert's DCF approach valued Verizon Massachusetts as an entire business entity and then attempted to back-out the value of the § 39 property. In MCI, the Board found and ruled that such proffered evidence "was not reliable, credible, or probative." MCI at 2008-375-76. The Board rules here that, under the circumstances present in these consolidated appeals, Mr. Weinert's DCF approach is not a suitable valuation tool for valuing Verizon's § 39 property located in Massachusetts, Newton or Boston or for determining the appropriate amount of the economic obsolescence to apply in Mr. Weinert's CORLD approach.
In addition, the Board finds and rules that the sales-comparison approach is virtually impossible to implement when, as here, there are effectively no reliable or comparable sales of telecommunications property. Such sales almost always involve entire business entities or such portions of them that the actual value of the § 39 property (or its equivalent) is extremely difficult to discern. See Montaup Electric Co., 390 Mass. at 850.
"[D]epreciated reproduction [and replacement] cost [methodologies are the] more appropriate [cost analyses for] valuing special purpose property" like the telephone company's § 39 property here. See MCI at 2008-376; Boston Edison Co. v. Assessors of Watertown, 387 Mass. 298, 304 (1982). In these consolidated appeals, the Board found that the most appropriate method to use to value Verizon's § 39 property was a cost analysis. The parties' valuation experts concurred on this point. The Board also found that the Commissioner's valuations were essentially correct except for her omission of the values related to CWIP and poles and wires over public ways for fiscal years 2003 through 2008 and her failure to deduct economic obsolescence for property in service less than one year for fiscal years 2006 through 2009 and for generators for fiscal years 2008 and 2009. The Board rules that, for these fiscal years, the Commissioner's failure to incorporate CWIP and poles and wires over public ways into her valuation resulted in values substantially lower than Verizon's § 39 property's fair cash value. See MCI at 2008-344-51. The Board further rules that, once CWIP and poles and wires over public ways are accounted for, and notwithstanding some minor discrepancies, the Commissioner's RCNLD methodology was and is an appropriate approach to use under the circumstances for valuing Verizon's § 39 property for fiscal years 2005 through 2009. See MCI at 2008-377.
Furthermore, the Board finds and rules that Mr. Weinert's CORLD methodology is fatally flawed in several important respects, including: his use of Verizon's July 23, 2008 revised asset listings as the starting point for his fiscal year 2005 and 2006 valuations; his use of a utilization deduction in conjunction with other forms of functional and economic obsolescence; his use of a net salvage deduction; his use of certain techniques and calculations for ascertaining an appropriate amount of depreciation; and the approach and assumptions that he adopted for determining economic obsolescence. The Board rules that these flaws, considered solo or in concert, rendered the values that Mr. Weinert derived from his CORLD methodology unreliable and, therefore, neither credible nor probative.
With respect to Mr. Weinert's use of Verizon's July 23, 2008 revised asset listings as the starting point for his fiscal year 2005 and 2006 valuations, the Board also rules, after considering all of the evidence, that those lists are not the most accurate rendition of Verizon's § 39 property for fiscal years 2005 and 2006, excepting CWIP and poles and wires over public ways for which those lists constitute the best available evidence; the Forms 5941 are.
In reaching its conclusions in these consolidated appeals, the Board is not required to believe the testimony of any particular witness or to adopt any particular method of valuation that a witness may suggest. Rather, the Board may accept those portions of the evidence that it determines have more convincing weight. Foxboro Associates, 385 Mass. at 683; New Boston Garden Corp. v. Assessors of Boston, 383 Mass. 456, 473 (1981); Assessors of Lynnfield v. New England Oyster House, Inc., 363 Mass. 696, 702 (1972). "The credibility of witnesses, the weight of the evidence, and inferences to be drawn from the evidence are matters for the [B]oard." Cummington School of the Arts, Inc. v. Assessors of Cummington, 373 Mass. 597, 605 (1977) (citations omitted). In evaluating the evidence submitted in § 39 appeals, the Board may select among the various elements of value and form its own independent judgment of fair cash value, see General Electric Co. v. Assessors of Lynn, 393 Mass. 591, 605 (1984); North American Philips Lighting Corp. v. Assessors of Lynn, 392 Mass. 296, 300 (1984), provided:
[t]he appellant has [met] its burden of proving that the value of the [§ 39] property is substantially higher or substantially lower than the valuation certified by the commissioner. G.L. c. 59, § 39. If the appellant fails to meet that burden, the [B]oard is not empowered to substitute its own valuation of the § 39 property. Cf. Assessors of Sandwich v. Commissioner of Revenue, 393 Mass. 580, 586 (1984) ("Only if the taxpayer has met that burden does the [B]oard undertake an independent valuation of the property").
In the Matter of the Valuation of MCI Worldcom Network Services, Inc., 454 Mass. at 646.
The Board need not specify the exact manner in which it arrived at its valuation. Jordan Marsh Co. v. Assessors of Malden, 359 Mass. 106, 110 (1971). "'The market value of . . . property [cannot] be proved with mathematical certainty and must ultimately rest in the realm of opinion, estimate and judgment.'" New Boston Garden Corp., 383 Mass. at 473 (quoting Assessors of Quincy v. Boston Consol. Gas Co., 309 Mass. 60, 72 (1941)).
Based on all of the evidence and reasonable inferences drawn therefrom, the Board finds and rules that the Newton Assessors for fiscal years 2003 through 2008 and the Boston Assessors for fiscal years 2005 through 2008 proved that the fair cash values of Verizon's § 39 property was substantially higher than the certified valuations produced by the Commissioner's methodology, which for those fiscal years failed to include the considerable values associated with CWIP and poles and wires over public ways.
Conclusion
On this basis, with respect to the fiscal year 2003 through 2008 appeals brought by the Newton Assessors, the Board decided them for the appellant Newton Assessors; with respect to the fiscal year 2005 through 2008 appeals brought by the Boston Assessors, the Board decided them for the appellant Boston Assessors; and with respect to the fiscal year 2009 appeals brought by the Newton Assessors and the Boston Assessors, the Board decided them for the appellees, Verizon and Commissioner. With respect to the appeals brought by Verizon against the Commissioner and either the Newton Assessors or the Boston Assessors, the Board decided all of them for the appellees, Commissioner and either the Newton Assessors or the Boston Assessors.
APPELLATE TAX BOARD
By: ________________________________
Thomas W. Hammond, Jr., Chairman
A true copy,
Attest: ______________undefinedundefinedundefinedundefinedundefined_____________
Clerk of the Board
Appendix A
Appeals Related to the City of Newton
Docket
No. Fiscal
Year
Appellant
Appellees
C265966 2003 Newton Assessors Verizon/Commissioner
C269574 2004 Newton Assessors Verizon/Commissioner
C273836 2005 Newton Assessors Verizon/Commissioner
C279719 2006 Newton Assessors Verizon/Commissioner
C285500 2007 Newton Assessors Verizon/Commissioner
C290518 2008 Newton Assessors Verizon/Commissioner
C296729 2009 Newton Assessors Verizon/Commissioner
C273602 2005 Verizon Newton Assessors/Commissioner
C279520 2006 Verizon Newton Assessors/Commissioner
C285320 2007 Verizon Newton Assessors/Commissioner
C289619 2008 Verizon Newton Assessors/Commissioner
C295777 2009 Verizon Newton Assessors/Commissioner
Appeals Related to the City of Boston
Docket
No. Fiscal
Year
Appellant
Appellees
C273728 2005 Boston Assessors Verizon/Commissioner
C279581 2006 Boston Assessors Verizon/Commissioner
C285613 2007 Boston Assessors Verizon/Commissioner
C290511 2008 Boston Assessors Verizon/Commissioner
C296568 2009 Boston Assessors Verizon/Commissioner
C273564 2005 Verizon Boston Assessors/Commissioner
C279464 2006 Verizon Boston Assessors/Commissioner
C285261 2007 Verizon Boston Assessors/Commissioner
C289483 2008 Verizon Boston Assessors/Commissioner
C295606 2009 Verizon Boston Assessors/Commissioner
There are 970 individual appeals associated with these consolidated appeals for which the Boston and Newton appeals were selected as lead cases.
The Board originally used docket number C273560 from an appeal brought by the Assessors of Agawam as the lead docket number for these consolidated appeals. To better reflect that Newton and Boston are the lead communities for purposes of trial and valuation, with the other consolidated appeals being held in abeyance, the Board has now substituted the earliest docket number from the Assessors of Newton and Assessors of Boston appeals.
The docket numbers of all the individual appeals relating to Newton and Boston are listed in Appendix A by fiscal year, appellant, and appellee.
The parties generally consider "dark fiber" to be cables that are part of Verizon's telecommunications plant, but, for whatever reason, are not "lit," that is not in service.
On June 29, 2009, the Legislature amended G.L. c. 59, § 18, Fifth and created another source of authority for specifically taxing poles and the wires thereon erected upon public ways by adding the following two sentences:
Poles, underground conduits, wires and pipes of telecommunications companies laid in or erected upon public or private ways and property shall be assessed to their owners in the cities or towns where they are laid or erected. For purposes of this clause, telecommunications companies shall include cable television, internet service, telephone service, data service and any other telecommunications service providers.
2009 Mass. H.B. 4129, Outside Section 25.
The Board likewise found and ruled in MCI that it may not increase the central valuations determined and certified by the Commissioner under § 39 in municipalities where the boards of assessors had not properly appealed them. MCI at 2008-355. The SJC affirmed this ruling in In the Matter of the Valuation of MCI Worldcom Network Services, Inc., 454 Mass. at 646-48.
In consideration of the parties' and the Board's intention to consolidate all Verizon-related § 39 appeals for all fiscal years, as demonstrated by the parties' previous agreements and Board orders, as well as the Board's Order of April 1, 2008 consolidating all Verizon-related fiscal year 2009 § 39 appeals in the Valuation Phase of these proceedings, the Board now also joins all Verizon-related fiscal year 2009 § 39 appeals into the Initial Phase of the proceedings.
See footnote 7, supra.
As indicated supra, Verizon and the Boston Assessors did not file appeals for fiscal years 2003 and 2004, and the Newton Assessors, Verizon, and the Commissioner agreed to Verizon's § 39 property's value in Newton for these two fiscal years, which the Board also adopted.
This is the figure that appears in several places in Mr. Weinert's appraisal report
See In Re 1998 Biennial Review, 15 FCC Rcd 242 (FCC 1999).
According to The Appraisal Institute, The Appraisal of real Estate (13th ed. 2008), direct costs, which are sometimes referred to as hard costs, include: building permits; materials, products, and equipment; labor used in construction; equipment used in construction; security during construction; contractor's shack and temporary fencing; material storage facilities; power line installation and utility costs; contractor's profit and overhead, including supervision, management, and coordination, as well as insurance; and performance bonds. Indirect costs, which are sometimes referred to as soft costs, include: architectural and engineering fees; appraisal, consulting, accounting, and legal fees; cost of carrying the investment during construction; all risk insurance and ad valorem taxes during construction; costs of carrying the property after construction before stabilization; and administrative expenses, among other costs. Ibid. at 387-88.
"Every owner and board of assessors to whom any such valuation shall have been so certified may, on or before the fifteenth day of June then next ensuing, appeal to the [B]oard from such valuation." G.L. c. 59, § 39. Furthermore, "If any petition . . . is, after the period allowed for filing appeals with the [B]oard, delivered by United States mail, or by such alternative private delivery service as the [B]oard may by rule permit, to the [B]oard, the date of the United States postmark, or other substantiating mark permitted by rule of the [B]oard, affixed on the envelope or other appropriate wrapper in which such petition is mailed or delivered shall be deemed to be the date of delivery, if such petition was mailed in the United States in an envelope or other appropriate wrapper, first class postage, or delivered to such alternative private delivery service, properly addressed to the [B]oard." G. L. c. 58A, § 7. In addition, when the last day of a filing period falls on a Saturday, Sunday, or legal holiday, filings made on the following business day are considered timely. G.L. c. 4, § 9. See Graham v. Assessors of West Tisbury, Mass. ATB Findings of Fact and Reports 2007-321, 325, aff'd, Mass. App. Ct. No. 07-P-1024, Memorandum and Order under Rule 1:28 (November 28, 2008).
Also see the Board's findings, infra, regarding the application of economic obsolescence in the Commissioner's valuation methodology with respect to property in service less than one year and generators.
See footnote 7, supra.
Also see the Board's findings, infra, regarding the application of economic obsolescence in the Commissioner's valuation methodology with respect to property in service less than one year and generators. The Board presumes that the Commissioner did not apply economic obsolescence to CWIP and agrees with that decision. Under the circumstances present in these consolidated appeals, the Board finds that economic obsolescence should not be applied until CWIP becomes part of Verizon's operating system.
The Board finds, however, that the data reported for CWIP and poles and wires over public ways is the best available information and compliments the data regarding assets already reported on corresponding Forms 5941.
For example, the Assessors described in their brief how in Mr. Weinert's CORULD methodology, he used a 2.444 cost multiplier/translator to convert the trended original cost of underground metallic cable with a vintage year of 1981 to a reproduction cost new. Because of the roll-up, however, this account included all pre-1981 vintage year underground metallic cable including that with a 1970 vintage year, which would have had a cost multiplier/translator of 4.62, almost double that used by Mr. Weinert, but for the roll-up. As Mr. Sansoucy showed in his calculations, the corresponding reproduction cost new of this underground metallic cable almost doubles as well. Thus, any pre-1981 vintage year underground cable contained in Mr. Weinert's 1981 account is valued lower than it should be and consequently skews downward his calculation of reproduction cost new, which ultimately lowers his fair cash value estimates. In another example, the Commissioner showed how a 1945 utility pole with an original cost of $200, but reported with a 1981 vintage year results in a difference of 870% in the final valuation of the pole ($95 with the 1981 roll-up as opposed to $731 using the true vintage year of 1945).
This Order, among other things, marks the end of ILECs, like Verizon, being required to provide their broadband facilities to competitors. It also marks the beginning of Verizon's entry into broadband services through the deployment of broadband facilities in local exchanges.
The Financial Accounting Standards Board ("FASB") Financial Accounting Standard No. 143, "Accounting for Asset Retirement Obligations," requires the exclusion of costs of removal from depreciation rates for assets for which the removal costs exceed salvage.
To the extent that Verizon incurred these expenses, they were included in the historical data upon which Mr. Weinert relied in making his expense projections for his DCF approach, which was the basis for his CORLD's economic obsolescence technique.
The record is somewhat confusing regarding Mr. Weinert's use of Iowa curves. He references them and includes numerous pages of them in his appraisal report, but he also speaks of using "straight-line age-life [depreciation, which] is a reasonable approximation of the Iowa Type Curves and simplifies the condition calculation."
Because Mr. Weinert uses fiscal year 2009 figures in the narrative section of his appraisal report, the Board likewise focuses on that fiscal year. The analysis, however, is equally applicable to the earlier fiscal years at issue, for both Boston and Newton, notwithstanding certain inconsistencies and mistakes in Mr. Weinert's methodology.
The composite multiplier also includes the appropriate depreciation floors.
Verizon files annual reports with the FCC known as ARMIS Reports.
See footnote 7, supra.
Because RCN owned no poles in Newton, neither the Board nor the Court specifically addressed the taxability of poles erected on public ways; however, the analyses of the Board and the Court in RCN Beco-Com concerning the taxability of wires under § 18, First is equally applicable to poles erected on public ways.
See footnote 7, supra.
See footnote 11.
This is the lead docket number for these consolidated appeals. See footnote 2, supra.
ATB 2009-851
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