The Audit Report (Volume 11, Issue 1)

By:  Kirk Boone

In 2011, one of my first audits and site inspections with TMA was transformed into the experience of a lifetime.  It offered the opportunity to be a witness in a way that I had never imagined.

Two and a half years ago, I wrote an article in The Audit Report cautioning readers not to miss the forest for the trees.  It urged readers to beware when an opinion of value uses the right definitions and equations, but the final result doesn’t make sense.  As a government assessment professional, be wary when asked to make broad percentage reductions in value, without being certain that the compenents and cost amounts used to calculate assessed value were accurate in the first place; the initial value may have been too low!

A property tax case that TMA has been involved with for the past three years was all about not missing the forest for the trees.  It taught me that when we don’t have the answers, we have to rely on other sources to get where we need to be.  Trusted sources include: knowledgeable individuals, organizations like IAAO, and companies like TMA.  One knowledgeable individual that took on this assisgnment with me was Tom Tucker, PPS and Vice President of Operations for TMA, one of the nation’s top experts in auditing.  Tom led the cost reconciliation portion of the assignment, while I led the economic obsolescence analysis portion.

This case involved a taxpayer in Arizona:  Phoenix Cement.  Phoenix Cement is a great asset for the community in which it is located, Clarkdale, Arizona in Yavapai County.  Phoenix Cement provides a great amount of tax base for the area.  They are, for good reason, a pride of their owners, the Salt River Pima-Maricopa Indian community.  In recent years, they have been recognized multiple times for their safeety, efficiency, quantity, and quality.

Phoenix Cement asked the county for a $60 million reduction in value for each of the years 2010 and 2011, primarily due to what they felt was obsolescence not considered in the county’s appraisal.  The taxpayer had every right to appeal their value and ask for this reduction.  However, this case also involved a county that chose to investigate closely before acting.  The county reached out to Tax Management Associates, Inc. for advice.  Yavapai County, Arizona learned TMA only works for state and local government and we have a 30 year history of providing quality by design in the area of property tax consulting and auditing.  This was the largest property tax reduction request in the county’s history; and if granted, would result in a huge refund that would fall on the backs of other taxpayers in Yavapai County.  That is something the county assessor, Pam Pearsall, did not take lightly.  Pam wanted to ensure all taxpayers of Yavapai County were treated fairly.

The taxpayer’s argument: Cement production has decreased every year since its peak in 2005.  It had decreased to a low point in 2009 and 2010, to about half of the 2005 levels.  The demand just wasn’t there, classic economic obsolescence, right?

Our responses: Before reducing a value based on the reported amounts shown on the tax listing (rendition form), let’s verify the reported amounts are correct through a book audit.

Additionally, prior to calculating economic obsolescence, let’s verify it really exists.  In other words, don’t just look at the calculations, but examine all surrounding facts.

First, the book audit.  The reported amounts on the taxpayer’s rendition were incorrect.  The TMA audit found approximately $60 million in unreported costs ranging from supplies and spare parts to actual equipment and fixed assets.  Remember, the taxpayer requested a reduction in value of about $60 million.  The taxpayer expert’s initial proposed total value was $57 million.  What if the assessor had just accepted $57 million and not requested assistance from other sources?  The taxpayer filed a motion in limine to prevent any discussion in the ensuing trial of the amounts found by TMA.  The taxpayer’s attorney referred to these unreported amounts as “noise” being introduced to detract from the true issue of obsolescence.  The motion in limine was denied.

Second, the economic obsolescence.  The principle of anticipation states that value is the present worth of future benefits, not past benefits.  Market activity and economic indications leading up to the appraisal dates of 2010 and 2011 indicated an upcoming strong recovery in cement manufacturing.  Phoenix Cement had prepared for this market recovery and made plans to expand production, installing $30 million in new equipment leading up to the years in question, even though production was down.  Finally, we argued that it’s not proper to compare all years to the peak year, as the taxpayer’s appraisal asked the county to do.  Doing so makes normal years of production appear to be bad years.  The inutility penalty calculation in the taxpayer’s appraisal, in our opinion, was unwarranted.

As a staff member of the North Carolina Property Tax Commission, I was forbidden by the NC Administrative Code to be a witness in a Property Tax Commission trial.  However, as a TMA employee, I was asked to not only be the county’s expert witness, but their only witness.  My first experience as a witness was going to be a big one.  A four-day bench trial was held in January 2014.  I’m not going to lie, I was apprehensive.  There were times that I didn’t have the answer, but I relied on those other sources of knowledge and strength mentioned earlier.  Tom Tucker flew to Arizona to provide support during the week of trial.  Our legal team, consisting of Roberta Livesay and Joseph Hourigan, was well-versed and extremely knowledgeable – seemingly on top of everything.  The whole TMA team was behind Yavapai County.  IAAO, ASA, and other texts were reviewed in great depth that week.  The source of strength that stands out most for me occurred when the county assessor, perhaps sensing my anxiety, handwrote a prayer for me.  I put it in my pocket only seconds before I stepped on the witness stand.  I’ll keep it forever and I’m happy to share the words of that prayer with others.

The court agreed that the taxpayer failed to report all taxable property for each of the subject years.  The judge accepted everything TMA found in the book audit.  The court further agreed with TMA’s expert testimony that there was no additional economic obsolescence to be considered in the county’s appraisal.  There are normal production cycles in the cement industry and all years of production are not expected to be at the same levels as the peak year.  Buyers of cement manufacturing equipment are aware of this expectation when investments are made in production equipment.  The court also allowed the fullest penalty allowed by law.  Rather than a reduction for tax year 2010 from $117,159,130 to $57 million, the judge affirmed an increase in value from $117,159,130 to $152,525,388.  The 2011 year was afforded a similar increase.  Belowing is a link to the ruling.

I can now be a first-hand witness to not miss the forest for the trees.  It’s a saying that can be applied in both property tax and in life.  Remember to reach out to the right resources when you may not have all the answers.  Do you know who you can reach out to for help?  To view the final decision of this case, please visit our website at