In re Mci Worldcom Network Services, Inc.

912 N.E.2d 920

454 Mass. 635

In the Matter of the Valuation of MCI WORLDCOM NETWORK SERVICES, INC. (and sixteen companion cases).

SJC-10300

Supreme Judicial Court of Massachusetts, Suffolk.

Argued March 5, 2009.

Decided September 10, 2009.

William A. Hazel, Boston, for the taxpayers.

Richard G. Chmielinski, Assistant City Solicitor, for Board of Assessors of Newton.

Anthony M. Ambriano for Board of Assessors of Boston.

Daniel A. Shapiro, Assistant Attorney General (Daniel J. Hammond, Assistant Attorney General, with him) for Commissioner of Revenue.

Rosemary Crowley & David J. Martel, Springfield, for Massachusetts Association of Assessing Officers, amicus curiae, submitted a brief.

Present: MARSHALL, C.J., IRELAND, SPINA, COWIN, CORDY, BOTSFORD, & GANTS, JJ.

CORDY, J.

This case presents challenges to the Commissioner of Revenue's central valuations, made pursuant to G.L. c. 59, § 39 (§ 39), of the "machinery, poles, wires and underground conduits, wires and pipes" (§ 39 property) of the taxpayer telephone companies for fiscal year (FY) 2004, FY 2005, and FY 2006. In deciding those challenges, we must resolve several issues including (1) whether the Appellate Tax Board (board) correctly upheld the commissioner's valuations for FY 2005 and FY 2006; (2) whether the board applied the wrong standard of review in modifying the commissioner's valuations for FY 2004; (3) whether a municipality must appeal from the commissioner's valuations in order to be entitled to relief under § 39; (4) whether one of the taxpayers qualifies for the corporate utility exemption under G.L. c. 59, § 5, Sixteenth, thus relieving it from the taxation of certain of its "machinery"; and (5) whether January 1, 2004, or July 1, 2004, is the proper date for determining the ownership status of property for purposes of the corporate utility exemption.

We conclude that the board properly affirmed the commissioner's valuations for FY 2005 and FY 2006, and erred in reducing the commissioner's valuations for FY 2004. We also agree with the board that a municipality must file a petition appealing from the commissioner's valuation in order to secure relief in the form of an increase in that valuation; MCI Metro Access Transmission Services, LLC (MCImetro), does not qualify for the corporate utility exemption; and the proper date for ascertaining the ownership status of § 39 property is the first day of January preceding the fiscal year for which the tax will be assessed based on the commissioner's valuation.

1. The parties. MCI WorldCom Network Services, Inc. (MWNS), and MCImetro (collectively, MCI taxpayers) provide "land-line" voice, broadband data transfer, and Internet services in the Commonwealth using fiber optic cables, conduits, and electric machinery. MWNS is a long-distance telephone provider incorporated in Delaware.¹ MCImetro is a competitive local exchange company providing local telephone service. It was formed as a Delaware limited liability company in 1998, and was taxed as a division of MWNS until 2004, when it elected to be taxed as a separate corporation for Federal tax purposes. Under a Chapter 11 bankruptcy reorganization of WorldCom, Inc. (owner of MCI taxpayers), the assets of MCImetro (including the § 39 property) were transferred to Brooks Fiber Communications of Massachusetts, Inc. (Brooks).² The MCI taxpayers claim that this transfer occurred prior to July 1, 2004. The board of assessors for the city of Boston (Boston assessors) and the board of assessors for the city of Newton (Newton assessors) are charged with assessing taxes on § 39 property that the commissioner has valued.

2. Background. Each year, the commissioner is required to conduct and certify centralized valuations of the § 39 property of all telephone and telegraph companies according to a particular schedule.³ G.L. c. 59, § 39. First, telephone companies must file a return with the commissioner by March 1 listing all of the § 39 property that the company held on January 1 of the same year. Id. For the years in question, the commissioner required telephone company taxpayers to file forms denoted "State Tax Form 5941" to assist with the valuation of that property.⁴ By May 15, the commissioner must conduct a centralized valuation of the § 39 property and certify that valuation to the property owners and the local boards of assessors where the property is located. Id. The assessors then use those valuations to assess taxes on the property owners for the fiscal year beginning July 1. G.L. c. 59, §§ 29, 38.

MWNS and MCImetro filed Form 5941 for FY 2004 and FY 2005. Additionally, MWNS filed Form 5941 for FY 2006. The inventory of both companies was based on financial accounting books that had been prepared for the United States Securities and Exchange Commission.⁵ For FY 2004 and FY 2005,⁶ the commissioner conducted valuations of § 39 property owned by both MWNS and MCImetro. For FY 2006, the commissioner valued only the § 39 property of MWNS because MCImetro had transferred all of its § 39 property to Brooks prior to the date of the FY 2006 valuation.

The two preferred methods for conducting valuations of property are the "market study method," which compares the property at issue to similar, recently sold property, and the "income capitalization method," which calculates the present value of the income that property will produce. See Blakeley v. Assessors of Boston, 391 Mass. 473, 477, 462 N.E.2d 278 (1984); Correia v. New Bedford Redevelopment Auth., 375 Mass. 360, 362, 377 N.E.2d 909 (1978) (Correia). However, those methods may be unavailing "where the special character of the property makes it substantially impossible to arrive at value on the basis of capitalized net earnings or on the basis of comparable sales." Blakeley v. Assessors of Boston, supra, citing Correia, supra at 362-364, 377 N.E.2d 909. In such circumstances, the commissioner may use a third method: "depreciated reproduction cost" (DRC), defined as "[t]he current cost of reproducing a property less depreciation from deterioration and functional and economic obsolescence." Correia, supra at 362, 377 N.E.2d 909.⁷ That is the method elected by the commissioner for the fiscal years at issue.

The commissioner hired consultant George E. Sansoucy to assist in the appraisal of the § 39 property using the DRC method.⁸ Sansoucy first determined the theoretical cost of newly reproducing the § 39 property.⁹ Next, he discounted that amount by the value of the property's physical depreciation, which he calculated using straight line depreciation based on the Federal Communication Commission's service life tables for twenty-three different categories of property.¹⁰ Finally, he imposed a further discount by concluding that MWNS was entitled to an economic obsolescence deduction of twenty-five per cent in FY 2005 and FY 2006, and that MCImetro was entitled to that same deduction for FY 2005. For reasons explained further below, Sansoucy did not recommend, and the commissioner did not apply, a separate obsolescence deduction for FY 2004.

The MCI taxpayers appealed from those valuations to the board, arguing that the property's actual value was "substantially lower ... than the valuation certified by the commissioner of revenue." G.L. c. 59, § 39. The Boston assessors and the Newton assessors also appealed to the board, arguing that the value of the MCI taxpayers' property in their cities was "substantially higher ... than the valuation certified by the commissioner of revenue" (emphasis added). Id.¹¹ The appeals were consolidated into a single action on August 4, 2006.

In the consolidated appeal before the board, the parties submitted statements of agreed facts with exhibits, called lay and expert witnesses, introduced expert valuation reports, and filed posttrial briefs and reply briefs. For the purposes of this appeal the central witnesses were Jerome Weinert (witness for MCI taxpayers, qualified as an expert in the areas of depreciation, functional obsolescence, and valuing telephone companies); Mark Rodriguez and Mark Pomykacz (witnesses for the Boston assessors and Newton assessors, qualified as experts in appraisal); and Sansoucy (witness for the commissioner, qualified as an expert in utility and telephone company personal property valuation and engineering).

In a detailed decision, the board affirmed the commissioner's valuations for FY 2005 and FY 2006; however, for FY 2004, the board required the commissioner to apply the same twenty-five per cent economic obsolescence deduction that the commissioner had applied in the later years. The board rejected other arguments made by both the taxpayers and the local assessors, as described below. MWNS filed an appeal and an application for direct appellate review, which we granted.

3. Discussion. In an appeal to the board of a valuation made under § 39, the appellant has 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 of revenue." G.L. c. 59, § 39. "Our review of a board decision is limited to questions of law." Bell Atl. Mobile of Mass., Corp., Ltd. v. Commissioner of Revenue, 451 Mass. 280, 283, 884 N.E.2d 978 (2008) (Bell Atl.), citing Towle v. Commissioner of Revenue, 397 Mass. 599, 601, 492 N.E.2d 739 (1986). "We will not disturb the board's findings so long as they are supported by substantial evidence and a correct application of the law." Bell Atl., supra, citing Koch v. Commissioner of Revenue, 416 Mass. 540, 555, 624 N.E.2d 91 (1993). Although the interpretation of statutes is a question of law that we resolve, the board's interpretation of tax statutes "may be given weight by this court" because it is an agency charged with the administration of tax law. Bell Atl., supra, quoting Commissioner of Revenue v. McGraw-Hill, Inc., 383 Mass. 397, 401, 420...