       IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON

UNITED AIRLINES, INC., a Delaware
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KING COUNTY, a governmental entity,                                                              ir
and WASHINGTON STATE                            PUBLISHED OPINION                V?              CD C/J

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DEPARTMENT OF REVENUE,                                                           en              z:<
                                                FILED: June 6, 2016
                    Respondents.


       Becker, J. — An administrative refund of taxes under chapter 84.69 RCW

is not available as an avenue for challenging an alleged error in determining the

valuation of property. To challenge a tax as unlawful or excessive, a taxpayer

must pay the tax under written protest and then file suit under RCW 84.68.020.

Because the appellant in the present case attempted to use the administrative

refund process to challenge the appraisal method by which appellant's property

interest was valued, the trial court properly dismissed the action on summary

judgment.

      Summary judgment rulings are reviewed de novo. Summary judgment is

authorized when no genuine issue of material fact exists and the moving party is

entitled to judgment as a matter of law. A material fact is one upon which the
No. 73606-0-1/2



outcome of the litigation depends in whole or in part. Samis Land Co. v. City of

Soap Lake. 143 Wn.2d 798, 803, 23 P.3d 477 (2001).

       Appellant United Airlines is a commercial air carrier that flies in and out of

SeaTac International Airport, which is located in King County. United has leased

property at SeaTac since the airport opened in the 1940's. Several of the leases

have been short in nature, but they have always been renewed. In January

2006, United and the Port of Seattle agreed to a six-year lease.

       The port, as a municipal corporation, is exempt from taxation on property it

owns at SeaTac. RCW 84.36.451 (1)(a). This exemption does not apply to

United's leasehold. RCW 84.36.451 (2)(a). A nongovernment entity leasing

government-owned property has a taxable possessory interest. Clark-Kunzl Co.

v. Williams, 78 Wn.2d 59, 64, 469 P.2d 874 (1970).1

      The basis of valuation of a taxable leasehold estate is established by

statute. "Taxable leasehold estates must be valued at such price as they would

bring at a fair, voluntary sale for cash without any deductions for any

indebtedness owed including rentals to be paid." RCW 84.40.030(2). The

parties agree that the value of a taxable possessory interest "is normally

something less" than the value of a fee ownership. See George Kinnear &




      1United, an "airplane company," RCW 84.12.200(1 )-(2), is subject to
assessment by the Department of Revenue, rather than by the county in which it
operates. RCW 84.12.270; see also RCW 82.29A. 130(1) (exempting such
companies from paying the leasehold excise tax).
No. 73606-0-1/3


Clyde B. Rose, Wash. Dep't of Revenue, Procedure Guide for the Appraisal

of Possessory Interests 2 (Nov. 1970),2 which provides as follow:

       1.   DEFINITIONS AND NATURE OF POSSESSORY INTERESTS

              Taxable possessory interests are private interests in
       property owned by a tax exempt body, usually a public agency.
              A taxable possessory interest constitutes a private right to
       the possession, and use of such property for a period of time. It
       constitutes the ownership of property for some time less than
       perpetuity. It is a portion of the bundle of rights that would normally
       be included in a fee ownership, and its value therefore is normally
       something less than the value in perpetuity of the whole bundle.
       Before 2006, the department employed an imputed return approach to

valuing possessory interests in airline leaseholds at SeaTac. The value was

computed using a discounted cash-flow model that capitalized the net annual

lease payments assuming a seven-year remaining life.3

       In 2006, the department decided to change to a variation of what is

known as a residual approach for valuing possessory interests. The residual

approach first computes the present value of the leasehold by capitalizing the net

amount of lease payments for a single year using a capitalization rate determined

from a review of rate studies. The second step is to consider the present value

of the government-owned reversionary interest and to subtract it if it has any

material value. Using the residual approach, the department "looked for

evidence suggesting that the lease would not be renewed at the end of its

express term." Where the evidence suggested that the lease would continue to

be renewed into the foreseeable future, the port's reversionary interest "was


      2 Clerk's Papers at 45 (Exhibit 1, declaration of Kathy Beith, assistant
director of the property tax division for the Washington State Department of
Revenue).
      3 Clerk's Papers at 33 (declaration of Kathy Beith).
No. 73606-0-1/4


considered to be minimal." According to the department, a significant difference

is that the residual approach used a direct capitalization method, whereas the

imputed return approach used limited-life yield capitalization.4

      The residual approach resulted in valuations that were significantly higher

than the valuations calculated under the imputed return approach.5 Using the

residual approach, the department, at least in some cases, calculated the value

of the government-owned reversionary interest at "nil" or "zero."6

      After receiving objections from airline companies, and after internal study

and discussion, the department agreed to change from the residual approach to

a modified version of the earlier imputed return approach. This methodology

used the actual lease term rather than a hypothetical perpetual lease.7

       United requested an administrative refund of taxes paid to King County

from 2009 through 2011. For each year, the department had valued United's

possessory interest by using the residual approach and assuming a hypothetical

perpetual lease. The county denied the request.

       United brought this action in superior court in December 2013. The

department intervened to defend the county and to protect its own interests. The

department moved for summary judgment seeking affirmance of the county's

denial of United's refund claim. United filed a cross motion for summary

judgment. The court granted the department's motion. United appeals.




       4 Clerk's   Papers   at   34 (declaration of Kathy Beith).
       5 Clerk's   Papers   at   320-21 (declaration of Kathy Beith).
       6 Clerk's   Papers   at   331 (deposition testimony of Kathy Beith).
       7 Clerk's   Papers   at   35 (declaration of Kathy Beith).
No. 73606-0-1/5



       At the outset, it is important to understand that requesting an

administrative refund of taxes is different from filing suit to challenge a tax as

unlawful or excessive. To challenge a tax as unlawful or excessive, a taxpayer

must pay the tax under written protest. The protest must set forth all of the

grounds upon which such tax is claimed to be unlawful or excessive. RCW

84.68.020. The next step, which must be taken within a short window of time, is

to bring an action in court to recover the tax. RCW 84.68.060. United paid the

taxes, but not under protest. United did not file suit to challenge the tax as

unlawful or excessive. United is proceeding under the administrative refund

statute, RCW 84.69.020.

       A request for an administrative refund is directed to the county treasurer

rather than to a court. RCW 84.69.030(1 )(b).8 A refund request may be filed

within three years after the due date of the payment to be refunded. RCW

84.69.030(1). Payment under protest is not required. RCW 84.69.170. With

some exceptions not relevant here, a request for an administrative refund will not

be granted if the basis for the request is a claimed error in the valuation of the

property. RCW 84.69.020.

       Upon receiving a request for an administrative refund of ad valorem taxes,

the county treasurer determines whether the request fits any of the limited

statutory circumstances set forth in 16 subsections of RCW 84.69.020. Ifthe

county treasurer rejects the request, an action may be brought in superior court

to contest the treasurer's decision. RCW 84.69.120.



       8 In King County, the responsibility for handling such requests has been
delegated to the county assessor.
No. 73606-0-1/6



       The 16 subsections are, in general, readily recognizable as situations in

which there has been an administrative mistake in the collection of taxes that can

be corrected without a reappraisal of the property. For example, taxes may be

refunded if they were paid more than once, paid as a result of a clerical error in

extending the tax rolls, paid with respect to an improvement which did not exist

on the assessment date, or paid under levies or statutes adjudicated to be illegal

or unconstitutional. RCW 84.69.020(1), (3), (5)-(6).

       United based its request for a refund on RCW 84.69.020(2). Under this

subsection, taxes must be refunded if they were paid "as a result of manifest

error in description." Manifest error means "an error in listing or assessment,

which does not involve a revaluation of property." WAC 458-14-005(14). A

manifest error may be, for example, an error in the legal description, a clerical or

posting error, double assessments, misapplication of statistical data, incorrect

characteristic data, incorrect placement of improvements, or erroneous

measurements. WAC 458-14-005(14)(a)-(g).

       Relevant here, a "manifest error" includes "the assessment of property

exempted by law from taxation." WAC 458-14-005(14)(h). United claims it was

taxed on the port's reversionary interest, which is tax-exempt. According to

United, the department's use of the residual approach violated the legal

requirements of Washington law for valuing a possessory interest because it

determined the value of the port's reversionary interest to be nominal or nil.

       The value to be taxed in a leasehold over tax-exempt public property is

the "value of the right to use the property over the period of the lease." Pier 67,
No. 73606-0-1/7



Inc. v. King County, 78 Wn.2d 48, 55-56, 469 P.2d 902 (1970) (emphasis added),

cert, denied. 401 U.S. 911 (1971). United relies on Pier 67, and particularly the

above-quoted statement, as authority demonstrating that it was manifest error for

the department to use a methodology that assumes a hypothetical perpetual

lease term. But the suit in Pier 67 was brought as a challenge to valuation of

taxes paid under protest, not as a challenge to the denial of a request for an

administrative refund. Pier 67, 78 Wn.2d at 49. The court discussed the

standards to be used in valuing leaseholds under RCW 84.40.030(2). The court

recognized that the statute makes no particular method of appraisal mandatory

so long as the assessor fulfills his ultimate responsibility "to determine the true

cash value of the property." Pier 67, 78 Wn.2d at 58 (emphasis added).

Because the court was concerned with the standards and methods for valuation

of property, the reasoning in Pier 67 is not on point in this case.

       United also relies on Duwamish Warehouse Co. v. Hoppe, 102 Wn.2d

249, 684 P.2d 703 (1984). But that case also involved a challenge to valuation,

not a request for an administrative refund. A warehouse was built on land leased

from the port. The assessor valued the warehouse at its full market value, even

though the lease provided that ownership of the structure would automatically be

transferred to the port at the end of the lease term. The Supreme Court held that

the assessor was obliged to consider the port's reversionary interest. "To

disregard the fact that this building reverts to the Port at the end of the lease

term, long before its useful life is up, would be to disregard a factor which plainly

would affect the price negotiations between a willing buyer and a willing seller.
No. 73606-0-1/8



The result is a nonuniform valuation much higher than the true and fair market

value in money which the statute commands." Duwamish Warehouse Co., 102

Wn.2d at 256.


       United argues that in this case, the department similarly disregarded the

port's reversionary interest. The facts here are not necessarily similar. Unlike in

Duwamish Warehouse Co., the department's methodology for valuing airline

leaseholds did not fail to consider the port's reversionary interest; rather, the

department considered the port's reversionary interest and assigned it a value of

nil if it was reasonable to assume that the airline would continue to renew its

lease into the foreseeable future. But in any event, what United is challenging is

the department's use of a particular appraisal methodology to determine the

amount a willing buyer would pay a willing seller for United's possessory interest.

Ifthe department erred by determining that the value of the port's reversionary

interest was negligible under the circumstances, it was an error in valuing the

port's reversionary interest, not an error in describing United's possessory

interest. As discussed above, an error in valuation is not allowed as a basis for

an administrative refund. RCW 84.69.020. An error in valuation can be

redressed only ifthe taxpayer pays the tax under protest and brings suit under

chapter 84.68 RCW.

       A manifest error that will justify an administrative refund must be an error

that "can be corrected by reference to the records and valuation methods applied

to similarly situated properties, without exercising appraisal judgment." WAC

458-14-005(14)(j). United contends the county assessor could have easily



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No. 73606-0-1/9



corrected the alleged error without exercising appraisal judgment. "All that is

necessary is to determine the remaining life of the lease and capitalize the lease

income over the remaining life of the lease."

       It is not obvious that capitalizing the lease income over the remaining life

of United's lease would yield the true cash value of United's possessory interest.

The department contends that United's proposed approach is flawed because it

uses a direct capitalization rate in a yield capitalization model without any

analytical data to support that choice. United does not refute this contention.

And even if United's proposed approach is an acceptable method of appraisal, it

is not the only one. No rule of thumb can be formulated to fit every situation.

Pier 67, 78 Wn.2d at 58. Appraisal judgment is required.

       United offers a California case as authority for the proposition that taxation

of an airline's possessory interest must be based on the remaining term of its

lease. Am. Airlines v. County of Los Angeles, 65 Cal. App. 3d 325, 135 Cal.

Rptr. 261 (1976). To the extent that Am. Airlines holds it is illegal to anticipate

that an airline lease will be renewed when it does not include a renewal option, it

does not change our conclusion that United is alleging an error in valuation.

Under Washington's statutory scheme, an error in valuation is not a proper

subject for a request for an administrative refund.

       United contends a trial is necessary because the expert witnesses in the

case offered contradictory opinions. An appraiser testifying on behalf of United

opined that the department effectively taxed the airline as if it owned the

leasehold property in fee simple. An expert witness testifying on behalf of the
No. 73606-0-1/10


department disagreed. These disagreements do not create a material issue of

fact because they relate to a dispute over how to arrive at a fair and accurate

valuation of United's property.

       In summary, the use of an appraisal method that assigned a nil value to

the port's reversionary interest after consideration of all the circumstances cannot

be characterized as the manifest error of assessing property exempted by law

from taxation. The trial court did not err in dismissing United's suit on summary

judgment.

      Affirmed.




WE CONCUR:




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