                  IN THE SUPREME COURT OF IOWA
                                 No. 07–0363

                              Filed August 7, 2009


KATHLEEN J. COMPIANO, MOSS PROPERTIES, LLC, MARIAH HOWARD,
and EVAN HOWARD,

      Appellants,

vs.

BOARD OF REVIEW OF POLK COUNTY,

      Appellee.



      Appeal from the Iowa District Court for Polk County, Carla T.

Schemmel, Judge.



      Appeal by taxpayers from decision by district court in a proceeding to

protest an assessment of real estate for tax purposes. AFFIRMED.



      Dennis P. Ogden of Belin Lamson McCormick Zumbach Flynn, PC,

Des Moines, for appellants.



      John P. Sarcone, County Attorney, and Ralph E. Marasco, Jr.,

Assistant County Attorney, for appellee.
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CADY, Justice.

      In this appeal by the owners of real estate from a decision by the

district court denying a protest of the assessment of the real estate, we

affirm the decision of the district court.

      I. Background Facts and Proceedings.

      Kathleen Compiano owns a one-half interest in a parcel of real estate

located at 7900 Hickman Road in Windsor Heights. The other owners are

Mariah Howard, Evan Howard, and Moss Properties, LLC. The parcel covers

approximately eight acres. An 84,000 square foot building is located on the

property. Kathleen and the other owners purchased the property in 1985.

For many years, the building was occupied by a Richman Gordman retail

store under a lease, which continued after Kathleen and the other owners

purchased the property. A distributing company took over occupancy of the

building under a fifteen-year lease in 1990 after Richman Gordman filed for

bankruptcy protection. The lease arrangements have provided a profitable

return for the owners.

      The property has been managed by Thomas Compiano since it was

purchased by the owners. Thomas Compiano is the son of Kathleen. At the

time of trial, Kathleen was eighty-six years old.

      In early 2005, the distributing company notified Thomas Compiano it

would not renew the lease and planned to move its operation from the

building on August 31, 2005.       Since that time, Compiano has had only

modest success in finding new tenants to occupy the entire space of the

building. He has also attempted, without success, to sell the property with

the help of David Little, a vice-president of Terrus Real Estate Group. Little

became the listing agent for the property in July 2006.

      The Polk County Assessor valued the property for tax purposes on

January 1, 2005, at $4,179,000.              The owners timely protested the
                                      3

assessment in May 2005 by filing a petition with the Polk County Board of

Review. They claimed the property was assessed for more than the value

authorized by law and ultimately asserted the assessed value should be $3.5

million.   Following a hearing, the board of review determined the market

data showed the property was not overassessed. It denied the protest.

      The owners filed an appeal from the decision by the board of review

with the district court. The district court heard the appeal in October 2006.

Little and Compiano both testified at the hearing the real estate had a

market value of $3.5 million.

      Little testified he sought to determine the market value of the property

after he became the listing agent.     He was unable to find any sales of

comparable property in Windsor Heights within the preceding six-month

period that would allow him to value the property under the comparable-

sales method of valuation. Instead, he valued the property under the income

method of valuation.    Under this method, he considered the amount of

income produced by the property and applied a capitalization rate to reach a

market value of $3.5 million. He believed the comparable-sales approach to

valuation can be misleading in the commercial real estate market and has

found from his experience that investors in commercial real estate reach a

sales price based on the income potential of the property.

      Compiano testified he has been unable to lease all of the available

space in the building after the distributing company left in August 2005. He

also testified one of the tenants in the building would be leaving in 2008,

and the building was in need of maintenance and updating. Compiano is a

CPA and has been involved in the commercial real estate business in the

Des Moines area for over twenty-five years.       He testified the value of

commercial real estate is driven by the cash flow of the property, and this
                                      4

concept was largely responsible for his opinion that the property had a value

of $3.5 million.

      The board presented evidence from a commercial appraiser with the

Polk County Assessor’s Office in support of the appraisal. It also introduced

a two-page summary of an appraisal analysis of the property prepared by a

former commercial appraiser of the assessor’s office.       This report was

prepared by the assessor’s office for the board of review.       The owners

objected to the report as hearsay.

      The district court denied the protest appeal. It found the owners “did

not meet their burden to have two ‘disinterested’ witnesses testify.” It also

found comparable sales in the Des Moines area could have been utilized to

value the property under the comparable-sales approach, and the owners

improperly limited their search for comparable sales.    Finally, the district

court determined the assessment analysis performed by the county assessor

was sound.

      The owners filed an appeal from the decision of the district court that

presents four claims of error. First, they claim the district court misapplied

the burden of proof in tax-assessment cases by requiring the owners to

produce two disinterested witnesses to testify to the value of the property as

a prerequisite to establishing their claim that the property was overassessed.

Second, they claim the district court erred in finding Little and Compiano

were not disinterested witnesses. Third, they claim the appraisal analysis

introduced by the board was hearsay, and the district court erred in

admitting it into evidence. Finally, they claim the evidence produced at the

hearing before the district court supported a finding that the assessment

should be reduced to $3.5 million.
                                      5

      II. Standard of Review.

      We review tax protests de novo. Boekeloo v. Bd. of Review, 529 N.W.2d

275, 276 (Iowa 1995).

      III. Overview of Applicable Law.

      Real estate in Iowa is assessed for the purpose of annual taxation.

Iowa Code § 428.4 (2003). The assessment determines the value of the real

estate as of January 1 of the year of the assessment, and the amount of the

assessment is used to determine the amount of taxation. See id.

      The county assessor values and assesses the real estate and reports

the results to the director of revenue.     Id.   See generally id. § 441.17

(discussing duties of assessor). Property is assessed at its actual value, id.

§ 441.21(1)(a), which is determined by the market value of the property in

the year the property is valued, id. § 441.21(1)(b). The assessor is guided by

certain statutory requirements in determining the market value of real

estate, as well as written rules adopted by the department of revenue. Id.

§ 441.21(1); Soifer v. Floyd County Bd. of Review, 759 N.W.2d 775, 778–79

(Iowa 2009). One of the statutory requirements is the assessor must use the

comparable-sales approach to the valuation of real estate when comparable

sales are available. Iowa Code § 441.21(1); Soifer, 759 N.W.2d at 779 n.2.

An assessor can resort to the other methods of valuation only when

comparable sales cannot readily be established.      Iowa Code § 441.21(2);

Soifer, 759 N.W.2d at 782 (noting statute requires comparable-sales

approach be used unless market value cannot be determined under this

method); see also Ross v. Bd. of Review, 417 N.W.2d 462, 464–65 (Iowa

1988) (discussing Iowa Code § 441.21).

      A taxpayer is permitted to protest an assessment made by the county

assessor. Iowa Code § 441.37. A local body known as the board of review

hears the protest and is authorized to change the assessment.        Id.   The
                                             6

grounds for a protest are limited by statute. Id. § 441.37(1). They include

an    inequitable      assessment       compared       with    other     like    property,

overassessment of the property, and any error in the assessment of the

property. 1 Id.

       An appeal may be taken from the decision of the board of review to the

district court. 2 Id. § 441.38. In an appeal from a decision by the board of

review, the district court hears the case in equity and determines anew those

assessment issues previously presented to the board. Id. § 441.39. No new

grounds may be raised in district court, but additional evidence may be

presented.     Id. § 441.38.       There is no presumption the assessment or

valuation at issue was correct. Id. § 441.39.

       In an appeal by a taxpayer challenging an assessment, the burden at

the district court hearing, as before the board of review, is on the taxpayer to

prove one of the statutory grounds for protest. Eagle Foods Ctrs., Inc. v. City

of Davenport Bd. of Review, 497 N.W.2d 860, 862–63 (Iowa 1993); Equitable

Life Ins. Co. v. Bd. of Review, 281 N.W.2d 821, 824 (Iowa 1979).                       The

taxpayer must establish a ground for protest by a preponderance of the

evidence. Richards v. Hardin County Bd. of Review, 393 N.W.2d 148, 151

(Iowa 1986). Yet, if the taxpayer

       “offers competent evidence by two or more disinterested
       witnesses that the market value of the property is less than the
       market value determined by the assessor, the burden of proof
       [shifts to] the officials or persons seeking to uphold such
       valuation [to establish no grounds for protest exist].”

       1The  other grounds to protest are the property is not assessable, the property is
exempt from taxes or misclassified, and there is fraud in the assessment. Iowa Code
§ 441.37(1).
       2Beginning  in the assessment year January 1, 2007, appeals from the board of
review regarding assessments, valuations, or equalization may be taken to a statewide
property assessment appeal board in lieu of a direct appeal to the district court. Iowa Code
§ 441.37A(1) (2009). An appeal to the board is a contested case under chapter 17A. Id. A
party who is adversely affected by the decision of the board may subsequently seek judicial
review under chapter 17A. Id. § 441.38B.
                                           7

Equitable Life Ins. Co., 281 N.W.2d at 823 (quoting Iowa Code § 441.21

(1973)). Ultimately, the burden of proof is one of persuasion. 3

       The procedure in district court actually creates a two-step process.

Carlon Co. v. Bd. of Review, 572 N.W.2d 146, 150 (Iowa 1997). The district

court first makes an independent determination on the grounds of protest

based on all the evidence.         Id.; see also Richards, 393 N.W.2d at 150

(recognizing district court determines valuation issues based on totality of

evidence); Equitable Life Ins. Co., 281 N.W.2d at 827 (stating courts do not fix

assessment as an original matter, but only consider grounds for protest

urged before the board of review). If the taxpayer fails to shift the burden of

proof to the board, the grounds for protest must be established by the

taxpayer.     Richards, 393 N.W.2d at 151; see Ross, 417 N.W.2d at 465

(“[F]ailing to shift burden of proof is not equivalent to failing to satisfy the

burden of proof.”). If the proof offered by the taxpayer fails to establish the

grounds for protest, the assessment is affirmed. See Equitable Life Ins. Co.,

281 N.W.2d at 827 (stating a court is not an independent assessing

tribunal). Conversely, if the court determines the grounds of protest have

been established, it must then determine the value or correct assessment of

the property.    Carlon Co., 572 N.W.2d at 150; Equitable Life Ins. Co., 281

N.W.2d at 827. This process is the second step. Here, the court makes its

independent determination of the value based on all the evidence.

Cablevision Assocs. VI v. Fort Dodge Bd. of Review, 424 N.W.2d 212, 214–15

(Iowa 1988); Richards, 393 N.W.2d at 150. If the record is inadequate to

determine the value of the property, the court may remand the case for




       3The burden of persuasion actually comes into play after all of the evidence is
introduced at the hearing. 2 John W. Strong, McCormick on Evidence § 336, at 409 (5th ed.
1999).
                                        8

additional evidence to make the determination. Cablevision Assocs. VI, 424

N.W.2d at 215.

      IV. Issues Presented for Appeal.

      Our review of the tax assessment procedure in Iowa helps frame and

dispose of the issues presented on appeal. The owners assert the evidence

before the district court established the property was assessed for more than

the value authorized by law, and the district court should have set the

assessed value at $3.5 million. The owners claim the district court failed to

reach this conclusion because it misapplied the burden of proof, erred in

finding Compiano and Little were not disinterested witnesses, and admitted

an appraisal report into evidence at the district court hearing in violation of

the rule against hearsay.

      A. Burden of Proof. It is a basic tenet that the failure to shift the

burden of proof in a tax assessment case is not equivalent to the failure to

satisfy the burden of proof.      Ross, 417 N.W.2d at 465.         Clearly, the

production of competent evidence by two disinterested witnesses in tax

assessment    cases   only   pertains   to   shifting   the   burden   of   proof.

Nevertheless, appeals from a district court are de novo. We make our own

review of the evidence and determine if the burden of proof shifts based on

an evaluation of the evidence found in the record.

      B. Competent Evidence of Two Disinterested Witnesses. We have

defined a “disinterested witness” in tax assessment cases as a person “who

has no right, claim, title, or legal share in the cause or matter in issue, and

who is lawfully competent to testify.” Post-Newsweek Cable, Inc. v. Bd. of

Review, 497 N.W.2d 810, 813 (Iowa 1993). The district court found Thomas

Compiano was not disinterested because his mother was an owner of the

property, and he managed the property. It found Little was not disinterested

because he was the real estate agent for the property.
                                          9

      The statute not only requires two disinterested witnesses, it also

specifically requires the evidence offered by a disinterested witness to be

competent before the burden of proof shifts to the board.           Boekeloo, 529

N.W.2d at 279.      Thus, if the evidence offered by the witnesses is not

competent, the status of the witness as interested or disinterested is

irrelevant to the issue of shifting the burden of proof. Evidence is competent

under the statute when it complies “with the statutory scheme for property

valuation for tax assessment purposes.” Id.; accord Soifer, 759 N.W.2d at

782 (quoting Boekeloo, 529 N.W.2d at 279).

      The legislative scheme for the valuation of real estate for purposes of

assessing   taxes   begins   with   the       market-value   approach,   based   on

“comparable sales of other properties.” Ross, 417 N.W.2d at 464; see also

Iowa Code § 441.21(1)(b); Soifer, 759 N.W.2d at 782. Under our statutory

scheme, the alternative methods to the comparable-sales approach to

valuation of property cannot be used when adequate evidence of comparable

sales is available to readily establish the market value by that method. Ross,

417 N.W.2d at 465. Thus, a witness must first establish that evidence of

comparable sales was not available to establish market value under the

comparable-sales approach before the other approaches to valuation become

competent evidence in a tax assessment proceeding. See Soifer, 759 N.W.2d

at 782 (noting if evidence “does not comport with the statute, the evidence is

not relevant and is, therefore, inadmissible”).

      In this case, Little and Compiano both failed to show comparable sales

were not available to establish market value.           Little essentially took the

position that the use of the comparable-sales approach as the sole method to

value commercial property of the type in this case would be misleading, and

he opined that potential buyers of such property prefer to determine the

sales price based on the income potential of the property. Consequently, he
                                         10

basically substituted his approach to the valuation of commercial property

for the approach adopted by the legislature. Even though Little also testified

he could find no comparable sales, he limited his search of comparable sales

to the first six months of 2006 and further limited his search to the suburb

of Des Moines where the property was located. Again, our legislature has

provided for a different scheme. Real estate is valued as of January 1 of the

assessment year, which in this case was 2005.           Additionally, we have

previously said that comparable sales do not need to be “within the

assessor’s geographical area.”     Carlon Co., 572 N.W.2d at 150.        Little

acknowledged there were many sales of similar property in the Des Moines

area, particularly in West Des Moines and Clive. See Soifer, 759 N.W.2d at

792 (holding witness inappropriately limited search for comparable sales to

town where property was located rather than canvassing a broader

geographic area).

      Compiano also ignored the comparable-sales approach to valuing real

estate.   Like Little, he essentially testified the market price of commercial

real estate is driven by the potential cash flow of the property. He failed to

consider other sales of like property.

      We conclude the opinions on market value expressed by Little and

Compiano did not comply with the statutory scheme for valuing property for

the purposes of tax assessment. Both witnesses failed to use the sales-price

approach to valuing property, and both witnesses failed to show that

comparable sales were not readily available in the relevant assessment.

Accordingly, the burden of proof did not shift to the board of review.

      C. Proof of Overassessment. The protest by the owners in this case

was that the property was “assessed for more than the value authorized by

law.” Iowa Code § 441.37(1)(b). To prove “an assessment is excessive under

the law, [the taxpayer] must use the assessment methods as prescribed by
                                      11

the law.” Ross, 417 N.W.2d at 465. In this case, the evidence offered by the

owners did not follow the law and was “not relevant under this record to the

correct legal assessment” of the property. Id. Accordingly, the owners failed

to establish the property was overassessed, and we need not consider if the

appraisal report offered by the board was improperly admitted into evidence

at the district court hearing.

      V. Conclusion.

      On our de novo review, we conclude the owners failed to meet their

burden of proof. We affirm the decision of the district court.

      AFFIRMED.

      All justices concur except Wiggins, J., who takes no part.
