                      NOTICE: NOT FOR OFFICIAL PUBLICATION.
  UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL
                  AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.



                                     IN THE
              ARIZONA COURT OF APPEALS
                                 DIVISION ONE


                 TRANSWESTERN PIPELINE COMPANY,
                         Plaintiff/Appellee,

                                         v.

              ARIZONA DEPARTMENT OF REVENUE, et al.,
                       Defendants/Appellants.

                              No. 1 CA-TX 19-0006
                               FILED 8-6-2020


                    Appeal from the Arizona Tax Court
                           No. TX2016-000931
                                TX2016-000951
                              (Consolidated)
                The Honorable Christopher T. Whitten, Judge

   AFFIRMED IN PART; VACATED IN PART; REMANDED WITH
                      INSTRUCTIONS


                                    COUNSEL

Mooney, Wright & Moore, PLLC, Mesa
By Paul J. Mooney, Paul Moore, Jim L. Wright
Co-Counsel for Plaintiff/Appellee

Norton, Rose, Fulbright US, LLP, Houston, TX
By Andrew P. Price
Co-Counsel for Plaintiff/Appellee

Arizona Attorney General's Office, Phoenix
By Lisa A. Neuville, Jerry A. Fries, Nancy K. Case
Counsel for Defendants/Appellants
                    TRANSWESTERN v. ADOR, et al.
                        Decision of the Court



                      MEMORANDUM DECISION

Judge James B. Morse Jr. delivered the decision of the Court, in which
Presiding Judge David D. Weinzweig and Judge Jennifer M. Perkins joined.


M O R S E, Judge:

¶1           The Arizona Department of Revenue ("Department") appeals
from the tax court's entry of judgment in favor of Transwestern Pipeline
Company, LLC ("Transwestern"). For the following reasons we affirm in
part, vacate in part, and remand for proceedings consistent with this
decision.

             FACTS AND PROCEDURAL BACKGROUND

¶2            Transwestern owns approximately 2,500 miles of natural gas
pipeline that crosses five states, including Arizona (the "Property"). In
Arizona, the pipeline spans Apache, Coconino, Maricopa, Mohave, Navajo,
Pinal, and Yavapai Counties, and those counties tax the Property based on
values determined by the Department. At all times relevant to this case,
Transwestern was a wholly-owned subsidiary of Energy Transfer Partners
("ETP"), and was regulated by the Federal Energy Regulatory Commission
("FERC").

¶3            This case arises out of the valuation of Transwestern's
Property for ad valorem tax purposes. After a revision, the Department
assessed the full cash value of the Arizona portion of the Property at
$639,690,000 for the 2016 tax year and at $614,375,000 for the 2017 tax year
("revised valuations"). Transwestern filed complaints in tax court claiming
the Department's assessments improperly exceeded the Property's market
value. The tax court consolidated the cases. After discovery, the
Department filed "error corrected" full-cash values of $743,266,000 for the
2016 tax year and $712,891,000 for the 2017 tax year ("error-corrected
valuations"). At summary judgment, the tax court rejected the error
corrected valuations.

¶4          The court held an eight-day bench trial, recording over a
thousand pages of testimony. The trial centered on the testimony and
reports of Transwestern's expert Robert Reilly ("Reilly") and the
Department's expert Brent Eyre ("Eyre"). Transwestern presented three



                                     2
                         TRANSWESTERN v. ADOR, et al.
                             Decision of the Court

other witnesses, including a rebuttal expert, Hal Heaton. Reilly and Eyre
conducted appraisals of Transwestern and filed extensive reports. Both
experts conducted their appraisals through a unitary valuation in which
they first determined the value of all Transwestern property, then removed
non-taxable property, and allocated the taxable value of property located in
Arizona. See A.R.S. § 42-14204(H)(1). The parties stipulated at trial to
allocation factors of 54.9872% and 54.4233% for tax years 2016 and 2017,
respectively.

¶5            Both experts estimated the market value of Transwestern
based on a hypothetical arms-length transaction between a willing buyer
and seller. For his market value appraisals, Reilly used income and cost
methods. Similarly, Eyre used income, cost, and market data methods.
Both experts reconciled their results by assigning a weight to each valuation
method to establish the market value of the Property. The following table
summarizes the Department's revised valuation, error-corrected valuation,
the market values proposed by both experts, and the market-value
determination of the tax court, for each tax year:1

               Dep'ts Revised     Dep'ts Error-    Reilly's Market    Eyre's        Tax Court's
    Tax Year
               Statutory Value corrected Statutory      Value         Market       Market Value

     2016        639,690,000       743,266,000       362,000,000     774,942,735    402,861,521
     2017        614,375,000       712,891,000       368,000,000     733,987,070    392,264,642

¶6            The tax court issued a seven-page ruling detailing its findings
and conclusions. In general, the court found that "[e]ach party presented
compelling evidence related to the fair market value of the Property" but
expressed that Reilly's qualifications were more impressive than Eyre's. In
valuing the Property, the tax court accepted Reilly's overall unit valuations,
but rejected Reilly's exclusion of certain intangible assets,2 and allocated the
values as stipulated. The tax court found that the fair market value of the
Arizona portion of the pipeline was $402,861,521 and $392,264,642 for tax
years 2016 and 2017, respectively, and entered judgment in favor of
Transwestern. The Department timely appealed, and we have jurisdiction
pursuant to A.R.S. § 12-170(C) and -2101(A)(1).




1      The table's values are allocated to Arizona using each valuer's
allocation factor.
2      Inclusion of the intangible assets amounted to approximately $5
million and is not disputed on appeal.


                                                 3
                     TRANSWESTERN v. ADOR, et al.
                         Decision of the Court

                               DISCUSSION

¶7             The Department asks us to reverse the tax court's decision and
values and instead recognize the Department's values. We address three
issues in this appeal. First, whether competent evidence supports the tax
court's values based on Reilly's income approach. Second, whether the
court erred when it accepted Reilly's reduction based on economic
obsolescence in the cost approach. Finally, whether the court erred when it
rejected the Department's error-corrected valuations.

I.     Legal Principles.

¶8             In reviewing a judgment entered after a bench trial, we view
the evidence in the light most favorable to upholding the tax court's
decision. Eurofresh, Inc. v. Graham County, 218 Ariz. 382, 385, ¶ 14 (App.
2007). We will sustain the tax court's findings of fact "unless they are clearly
erroneous. A finding of fact is not clearly erroneous if substantial evidence
supports it[.]" Kocher v. Ariz. Dep't of Revenue, 206 Ariz. 480, 482, ¶¶ 8-9
(App. 2003) (citations omitted). We review mixed questions of law and fact
de novo. Eurofresh, 218 Ariz. at 385, ¶ 14. Whether an appraisal technique
is proper pursuant to standard appraisal methods is a mixed question of
law and fact reviewed de novo. Id. at 387, ¶ 23.

¶9             Arizona taxes property at its full cash value determined by
either a statutory method of valuation, if provided, or by standard appraisal
methods. A.R.S. § 42-11001(6); Nordstrom, Inc. v. Maricopa County, 207 Ariz.
553, 556, ¶ 9 (App. 2004). Arizona law provides a statutory valuation
formula for pipelines. See A.R.S. §§ 42-14201 to -14204. But full cash value,
"shall not be greater than market value regardless of the method prescribed
to determine value for property tax purposes." A.R.S. § 42-11001(6).3 Fair
market value is defined as the "amount at which property would change
hands between a willing buyer and a willing seller, neither being under any
compulsion to buy or sell and both having reasonable knowledge of the


3      From 1989 to 2006, the pipeline statutory formula was "the exclusive
method for calculating full cash value." Ariz. Dep't of Revenue v. Questar S.
Trails Pipeline Co., 215 Ariz. 577, 580-81, ¶¶ 14, 19 (App. 2007) (citation
omitted); see also 1989 Ariz. Sess. Laws, ch. 33, § 2 (1st Reg. Sess.). In 2006,
the legislature amended A.R.S. § 42-11001 to provide that full cash value
cannot exceed market value. See 2006 Ariz. Sess. Laws, ch. 143, § 2 (2nd
Reg. Sess.). Prior to 1989, full cash value was synonymous with market
value. See SFPP, L.P. v. Ariz. Dep't of Revenue, 210 Ariz. 151, 153, ¶ 9 (App.
2005).


                                       4
                     TRANSWESTERN v. ADOR, et al.
                         Decision of the Court

relevant facts." Bus. Realty of Ariz., Inc. v. Maricopa County, 181 Ariz. 551,
553 (1995) (quoting Fair Market Value, Black's Law Dictionary (6th ed. 1990)).

¶10            "Value, like beauty, is often defined by the eye of the beholder.
It is incapable of being calculated with mathematical precision and
therefore necessarily must be estimated." Ariz. Dep't of Revenue v. Trico Elec.
Coop., Inc., 151 Ariz. 544, 549 (1986). The tax court must begin with the
factual presumption that the Department's valuations are "correct and
lawful." A.R.S. § 42-16212(B); see Dep't of Prop. Valuation v. Trico Elec. Coop.,
Inc., 113 Ariz. 68, 70 (1976). "The taxpayer may overcome this presumption
by presenting competent evidence that the taxing authority's valuation is
excessive." Eurofresh, 218 Ariz. at 386, ¶ 16. Evidence is competent for this
purpose if derived "by standard appraisal methods and techniques which
are shown to be appropriate under the particular circumstances involved."
Id. (citation omitted). The three standard appraisal methods are market
data, income, and cost. See Maricopa County v. Sperry Rand Corp., 112 Ariz.
579, 581 (1976). Transwestern had the dual burden to rebut the statutory
presumption and show that a lower valuation is correct. Graham County v.
Graham Cnty. Elec. Coop., Inc., 109 Ariz. 468, 469-70 (1973). On appeal, we
review whether the tax court's decision was based on competent evidence.
See Magna Inv. & Dev. Corp. v. Pima County, 128 Ariz. 291, 293 (App. 1981).

II.    Income Methods.

¶11          The Department challenges three aspects of Reilly's income
methods: the capitalization rate, the reduction of revenue to account for
income taxes, and the income forecasts.

       A.     Capitalization Rate.

¶12            The Department first challenges Reilly's capitalization rate
("WACC") as inflated based on an unsupported company-specific risk
premium. According to the Department's calculations, the tax court's
decision to include the additional premium increased the cost of equity
which in turn substantially decreased the estimated market value of
Transwestern under the income approach. The Department also noted that
Reilly's WACC exceeds the FERC maximum rate of return and was "wildly
inconsistent with the WACC" used by other Transwestern valuations and
that this inconsistency is attributable to the company-specific risk premium.

¶13          For his 2016 valuation, Reilly used the average of three
models to estimate the cost of equity component of the WACC: two
modified capital asset pricing models ("CAPM"), and the dividend growth



                                       5
                     TRANSWESTERN v. ADOR, et al.
                         Decision of the Court

model.4 Reilly did not use the dividend growth model in his 2017 valuation
due to data constraints and thus relied solely on the CAPMs. In a CAPM,
the cost of equity is calculated using the risk-free rate, the equity-risk
premium, and the industry beta. Beta measures the risk of the overall
market and when valuing a privately held company it is commonly
calculated using the average beta of publicly traded companies in the same
industry. Shannon Pratt, The Lawyer's Business Valuation Handbook 122-23
(2000) [hereinafter Pratt 2000]. Reilly developed a WACC of 10.2% and
9.8% for the 2016 and 2017 tax years, respectively. Eyre used WACCs of
7.11% and 7.8%.

¶14            Reilly's cost of equity included a small-company risk
premium of 1.8% in 2016 and 2% in 2017, and a company-specific risk
premium of 3%. In his report, Reilly identified risks associated with
Transwestern, including: (1) low marketability, (2) few potential buyers, (3)
high transaction costs, and (4) limited diversity of operations. At trial,
Reilly testified that the company-specific risks in this case involved
"depreciating assets," a "lack of diversification," a "lack of liquidity," and
dependence on a "key customer." Eyre, by contrast, concluded that neither
the company-specific risk premium nor the small-company risk premium
was warranted. The tax court found Reilly's analysis, which "included both
premiums in the calculation of his [WACC], to be more credible."

¶15           The Department's main argument is that the company-
specific risks duplicate the risks already accounted for in the small-
company risk premium and the industry beta. Specifically, the Department
asserts there is no evidence in the record that Transwestern uniquely
suffered from the identified company-specific risks—illiquidity, key
customer dependence, and depreciating assets—while other companies in
the pipeline industry do not. The Department also argues that Reilly failed
to provide sufficient factual basis for the premium; either specific financial
analysis to determine whether a company-specific risk premium is
appropriate or the amount of such a premium.

¶16        Citing Reilly's testimony, Transwestern argues that the
company-specific risk premium is a standard appraisal method. The
Department does not dispute that an appraiser using standard appraisal
methods could consider company-specific risks, but it stresses that the

4      See generally Minn. Energy Res. Corp. v. Comm'r of Revenue, 886
N.W.2d 786, 794-95 (Minn. 2016) (discussing capital asset pricing model);
Union Pac. R. Co. v. Dep't of Revenue, 843 P.2d 864, 880-81 (Or. 1992)
(discussing dividend growth model).


                                      6
                     TRANSWESTERN v. ADOR, et al.
                         Decision of the Court

evidence must still show risks specific to the company, above general risks
to the entire industry.

¶17             "[T]he cost of equity capital is not capable of [] mathematical
precision . . . and in fact is a judgment call, enlightened by consideration of
all the relevant factors." Litchfield Park Serv. Co. v. Ariz. Corp. Comm'n, 178
Ariz. 431, 437 (App. 1994) (citation omitted). However, the company-
specific risk premium is controversial. See Kenneth Ayotte & Edward R.
Morrison, Valuation Disputes in Corporate Bankruptcy, 166 U. Pa. L. Rev. 1819,
1829 (2018) ("Empirical finance research provides evidence against the
existence of company-specific risk premia in the real world."). Courts have
noted that, "[t]o judges, the company specific risk premium often seems like
the device experts employ to bring their final results into line with their
clients' objectives, when other valuation inputs fail to do the trick." Del.
Open MRI Radiology Assoc., P.A. v. Kessler, 898 A.2d 290, 339 (Del. Ch. 2006).
Thus, those proposing such adjustments "must overcome some level of
baseline skepticism founded upon judges' observations over time of how
parties have employed the quantitative tool of a company-specific risk
premium." In re Sunbelt Beverage Corp. S'holder Litig., C.A. No. 16089-CC,
2010 WL 26539, at *12 (Del. Ch. Jan. 5, 2010) (as revised). A company-
specific risk premium can be appropriate only "to the extent that the
company has risk factors that have not already been reflected in the general
equity risk premium as modified by [the industry] beta and the small
company size premium." Gesoff v. IIC Indus., Inc., 902 A.2d 1130, 1157-58
(Del. Ch. 2006) (quoting Pratt 2000 at 125); see also CNB Int'l, Inc. v. Kelleher
(In re CNB Int'l, Inc.), 393 B.R. 306, 320 (Bankr. W.D.N.Y. 2008) (noting
company-specific risks are duplicative of small-company risks unless the
"particular circumstances indicate a business having risks other than those
that would be associated with its status as a smaller enterprise."), aff'd on
other grounds, 440 B.R. 31 (W.D.N.Y. 2010).

¶18           Because the taxpayer bears the dual burden of producing
competent evidence to overcome the statutory presumption that the
Department's valuation is correct and to support a lower valuation,
Transwestern must support its assertion of a company-specific risk with
fact-based evidence. Graham Cnty. Elec. Coop., 109 Ariz. at 469-70. On
appeal, we review de novo whether an appraisal technique is proper and
need not accept the tax court's findings based upon an improper method.
Eurofresh, 218 Ariz. at 386-87, 390, ¶¶ 17, 23, 36; see also Graham Cnty. Elec.
Coop., 109 Ariz. at 471 (rejecting expert's use of the capitalization-of-income
method when valuing non-profit utility). Although we do not reweigh the
evidence, we need not defer to the tax court's conclusion based on Reilly's
testimony when we cannot find competent record evidence that


                                       7
                      TRANSWESTERN v. ADOR, et al.
                          Decision of the Court

Transwestern specifically suffered from the specific risk factors accepted by
the court. See Pima County v. Cyprus-Pima Mining Co., 119 Ariz. 111, 119
(1978) (finding expert's capitalization-of-income method was not
competent evidence when he departed from projected copper prices and
failed to adjust for inflation); cf. Magna Inv. & Dev., 128 Ariz. at 294 ("[S]ince
competent evidence supports [the tax court's] conclusion, we decline to
intervene[.]").

¶19            First, we agree with the Department that there is no
reasonable dispute that all pipelines are depreciating assets. Transwestern
provides no evidence that it suffers more depreciation than any other
pipeline company. See Sunbelt Beverage, 2010 WL 26539, at *13 (concluding
that "risks to everyone in the industry . . . are not risks that merit inclusion
of a company-specific risk premium."); see also Minn. Energy Res. Corp. v.
Comm'r of Revenue, 886 N.W.2d 786, 793 (Minn. 2016) (noting the "tax court
excluded a company-specific risk factor from its calculation of MERC's cost
of equity based on a lack of evidentiary support in the record for the
proposition that MERC's business was riskier than the market"). Because
Transwestern bears the burden of providing such evidence, it was error to
add a company-specific risk premium based on depreciation. See Graham
Cnty. Elec. Coop., 109 Ariz. at 469-70.

¶20            As for key-customer dependence, Reilly testified that
Transwestern's "largest customer by far is BP. BP accounts for over 15
percent of their revenue in each year." He also testified that "[t]he top 10
customers account for over two thirds of the revenue of Transwestern." But
we again agree with the Department that there is no evidence in the record
that Transwestern uniquely suffered from these risks in comparison to
others in the pipeline industry. The record thus fails to show that this factor
does not duplicate the adjustment already contemplated in the industry
beta. This distinguishes the cases cited by Transwestern, which included
evidence of company-specific risks. See Blue Book Servs., Inc. v. Amerihua
Produce Inc., 337 F. Supp. 3d 802, 816-17 (N.D. Ill. 2018) (denying summary
judgment to exclude company-specific risk premium when calculating
reduction in value due to alleged company data breach); Estate of Giustina
v. Comm'r., 111 T.C.M. (CCH) 1551, 2016 WL 3264351, at *5 (T.C. 2016)
(permitting a company-specific risk premium when valuing 41% interest in
a limited partnership when partnership agreement restricted the sale of the
interest to other limited partners); Buchwald v. Renco Group, 539 B.R. 31, 41,
43-44 (S.D.N.Y. 2015) (allowing a company-specific risk premium to
account for company's needed technology changes and inability to pay its
debt); Keach v. U.S. Trust Co. N.A., 313 F. Supp. 2d 818, 853-54 (C.D. Ill. 2004)
(noting that experts agreed on applicability of a company-specific risk


                                        8
                     TRANSWESTERN v. ADOR, et al.
                         Decision of the Court

premium due to dependency on sweepstakes marketing and finding expert
advocating for smaller premium more persuasive).

¶21            The parties spend a good deal of their briefing disputing the
liquidity factor. Reilly testified that "lack of liquidity" was one of the
company-specific factors but Transwestern's rebuttal expert, Hal Heaton,
admitted that "[l]iquidity is a part of the [small-company] size premium."
Other courts have recognized this redundancy. See Gearreald v. Just Care,
Inc., No. 5233-VCB, 2012 WL 1569818, at *11 (Del. Ch. Apr. 30, 2012) (finding
the size premium captures the fact that smaller companies tend to be less
liquid). Eyre also criticized this factor, noting that Transwestern is a
subsidiary of a large publicly-traded company and a premium for liquidity
"undermines shareholder value" and violates the market value premise of
a willing buyer/seller because ETP would not accept such an adjustment.
Reilly denied that the two premiums were duplicative because the small-
company premium only accounts for small publicly traded companies.

¶22            But liquidity, like the remaining alleged company-specific
factors—diversification, marketability, few potential buyers, and high
transaction costs—are all factors associated with Reilly's valuation of
Transwestern as a private, rather than a public, company. The record
contains no persuasive authority that standard appraisal practices permit a
privately held company to include a company-specific risk premium
because it is privately held. Cf. Richard Brealey et al., Principles of Corporate
Finance 476 (10th ed. 2011) (discussing calculation of the WACC for valuing
a privately held company without referencing a company-specific risk
premium); Ayotte & Morrison, supra, at 1829 (noting that evidence does not
support small private companies receiving a company-specific risk
premium even where lack of diversification is a valid concern). Therefore,
we are not persuaded by this justification for the inclusion of a company-
specific risk premium. See Eurofresh, 218 Ariz. at 390, ¶ 36 (holding that on
appeal this Court will review, as a matter of law, whether to apply a
particular appraisal method).

¶23           It was Transwestern's burden to show that the company-
specific risk premium was "appropriate under the circumstances." Id. at
386, ¶ 17. Transwestern failed to carry that burden. Accordingly, we must
vacate and remand for the tax court to redetermine an appropriate WACC
based on the evidence presented and without a company-specific risk
premium.




                                       9
                     TRANSWESTERN v. ADOR, et al.
                         Decision of the Court

       B.     Reduction for Income Tax.

¶24            The Department also argues that Reilly's income-approach
methods are not competent because, even though Transwestern does not
pay any income tax, he reduced Transwestern's income by assuming an
annual federal and state income tax liability of 39%. The tax court made no
specific findings regarding Reilly's income reduction to account for income
tax. On appeal, we must determine whether the taxpayer presented
competent evidence that supports the tax court's decision. See Magna Inv.
& Dev., 128 Ariz. at 293; see also Cyprus-Pima Mining Co., 119 Ariz. at 114
(reviewing whether sufficient evidence supports the court's valuation when
its "findings of fact provide us with little, if any, basis as to why the court
found the State's valuation to be excessive").

¶25           The parties do not dispute that, as pass-through entities,
neither Transwestern nor its parent company, ETP, directly pay any federal
income tax on Transwestern's revenue. Instead, as a Master Limited
Partnership ("MLP"), any tax liability would fall to ETP's individual
partners. See generally Inquiry Regarding the Commission's Policy for Recovery
of Income Tax Costs, 81 Fed. Reg. 94366-01, 9366-67, ¶¶ 4-7 (Dec. 23, 2016)
(describing MLP business model).

¶26            To calculate income, Reilly started with the net operating
income Transwestern reported to FERC on its FERC Form 2. The net
operating income reflects a reduction for accrued deferred income tax
liability, which is the difference between the amount of taxes collected in
rates and the taxes actually paid. See FERC, Cost-of-Service Rates Manual 11
(June 1999). Although Transwestern's cash income is higher, "[i]n essence,
ratepayers are prepaying the income taxes and the pipeline will have use of
these extra dollars until it has to pay more income taxes in subsequent years
as its taxable deduction for depreciation decreases." Id.

¶27          Instead of using Transwestern's net operating income, which
accounts for the deferred income taxes, Reilly calculated Transwestern's
earnings before income and taxes ("EBIT") and then reduced the EBIT by
the full 39% tax rate. This resulted in what Reilly called a "normalized
income" that was lower than Transwestern's net operating income. Reilly
used this normalized income to determine Transwestern's value.

¶28          On appeal, the Department contends that the deferred taxes
should be included in the calculation of income but does not specifically
address Reilly's "normalization" which decreased Transwestern's net




                                      10
                     TRANSWESTERN v. ADOR, et al.
                         Decision of the Court

operating income by the full tax rate. We find the record supports both
deductions.

¶29           First, when calculating income to determine value for
property tax purposes, courts have looked to the pipeline's net operating
income. See In re Colonial Pipeline Co., 347 S.E.2d 382, 384 (N.C. 1986) (noting
both experts "capitalized projected net operating income"); N. Nat. Gas Co.
v. Comm'r of Revenue, 8864-R, 2019 WL 2490771, at *13-14, *50-53, *13 n.84
(Minn. T.C. June 4, 2019) (utilizing net operating income reported on FERC
Form 2 when pipeline accrued deferred income taxes). Although
Transwestern paid no income tax, it accumulated a deferred income tax
liability. The deferred taxes are not income for FERC purposes and
Transwestern does not earn a rate of return on investments made with this
money. See FERC, Cost-of-Service Rates Manual 12 (June 1999); see also Pac.
Power & Light Co. v. Dep't of Revenue, 775 P.2d 303, 305 (Or. 1989) (explaining
that "property purchased in this way actually costs the utility nothing, so
no return needs to be earned on that property."). The deferred income taxes
are effectively an interest free loan. See Shannon P. Pratt & Roger J.
Grabowski, Cost of Capital: Applications & Examples 538 n.25 (5th ed. 2014)
("Most regulatory commissions consider deferred income taxes part of the
capital structure but typically allow a zero rate of return on the amount on
the basis that the account is equivalent to a no-cost loan."). Therefore, the
net operating income reported on Transwestern's FERC Form 2 was
competent evidence for use in the income methods.

¶30            Second, the record reflects that Reilly's additional reduction
was "appropriate under the particular circumstances[.]" Eurofresh, 218 Ariz.
at 386, ¶ 16. Reilly provided several justifications for this normalization,
including that Transwestern's "members are subject to income tax related
to the [Transwestern] income." Brad Whitehurst, Executive Vice President
of Tax for ETP, explained that different ETP partners are subject to different
taxation levels "because some are enjoying the benefit of depreciation
because they're new partners. The older partners aren't." This aspect of
partnership law supports Reilly's normalization. See ExxonMobil Oil Corp.
v. FERC, 487 F.3d 945, 954 (D.C. Cir. 2007) ("[I]nvestors in a [MLP] are
required to pay tax on their distributive shares of the partnership income,
even if they do not receive a cash distribution."). Finally, we note that other
states have performed similar calculations when valuing MLP owned
pipelines. See Enbridge Energy, Ltd. P'ship v. Comm'r of Revenue, 8858-R, 2019
WL 2853133, at *26-28 (Minn. T.C. June 25, 2019) (applying "sound appraisal
judgment" to deduct imputed income taxes instead of only taxes actually
paid), aff'd in part, rev'd in part on other grounds, __ N.W.2d __, 2020 WL
3818130 (Minn. 2020).


                                      11
                      TRANSWESTERN v. ADOR, et al.
                          Decision of the Court

¶31          Moreover, Eyre admitted in his deposition that taxes had to
be accounted for because the owners of ETP pay taxes. At trial, Eyre's
criticism of Reilly's approach was limited to two statements that the
normalization was "different from the reality of Transwestern." But that
was not in dispute. Critically, Eyre's review appraisals did not address
Reilly's reduction of additional income taxes or argue that Reilly's
normalization violated standard appraisal techniques.

¶32           Our role is not to determine the preferred method for
calculating Transwestern's income. See Navajo County v. Four Corners Pipe
Line Co., 106 Ariz. 511, 522 (1970) ("[I]t is not the function of the judiciary to
promulgate tax assessment regulations in the form of judicial opinions.").
Because our record in this case reflects that Transwestern met its burden to
present competent evidence, we affirm the tax court's calculation of
Transwestern's income for use in the income methods.

       C.     Discrepancies       with        Other   Reports    Prepared      by
              Transwestern.

¶33            At trial, the court admitted two other valuations of
Transwestern, conducted by BVA Group and KMPG. The purpose of these
valuations was not for use in this case. According to the tax court, BVA
Group and KMPG "arrive[d] at conclusions that tend to support [the
Department's] valuation." The Department argues that Reilly used
artificially low income forecasts when compared to KPMG and BVA.

¶34             Although the tax court found the disparity between these
valuations and Reilly's "troubling," the court concluded that BVA Group
and KMPG sought to evaluate the "fair value," not the "fair market value,"
of Transwestern and "[a]lthough there is only one word of difference in the
titles of the two types of evaluations, there is a world of difference between
the two." The record thus indicates that the court considered the KPMG
and BVA Group reports but gave them little weight. That the tax court did
not weigh the evidence or interpret it in a manner favorable to the
Department does not indicate that the court either ignored it or did not
understand it.

III.   Cost Approach and Economic Obsolescence.

¶35           The Department also argues that Transwestern failed to
provide sufficient evidence to support Reilly's cost approach. Specifically,
the Department contends that Transwestern's evidence failed to meet the
strict requirements to show economic obsolescence and alternatively



                                         12
                      TRANSWESTERN v. ADOR, et al.
                          Decision of the Court

contends that Reilly's methodology for calculating the obsolescence was
flawed.

¶36            Both experts applied a cost approach and performed the
historical cost less depreciation ("HCLD") method. HCLD is "sometimes
referred to as 'net book value'." Western States Association of Tax
Administrators, Appraisal Handbook: Unit Valuation of Centrally Assessed
Properties II-8 (2009). The tax court noted that both experts obtained "very
similar opinions of the [HCLD] of the unit." Both experts opined that the
unportioned HCLD for the 2016 and 2017 tax years was approximately $1.8
billion. The experts differed on whether the value should be reduced for
obsolescence. Reilly determined that additional deductions of 59% and 60%
were needed to account for economic obsolescence for tax years 2016 and
2017, respectively.

¶37             In property valuations, "[o]bsolescence, a form of
depreciation, is defined as a loss of value and is classified as either
functional or economic." Nordstrom, 207 Ariz. at 559, ¶ 27. This Court has
defined economic obsolescence as "a loss in value caused by forces external
to the property and outside the control of the property owner." Ariz. Dep't
of Revenue v. Questar S. Trails Pipeline Co., 215 Ariz. 577, 580, ¶ 12 (App. 2007)
(quoting Magna Inv. & Dev., 128 Ariz. at 293). The term is also defined as "a
temporary or permanent impairment of the utility or salability of an
improvement or property due to negative influences outside the property."
Eurofresh, 218 Ariz. at 386, ¶ 22 (quoting Appraisal Institute, The Appraisal
of Real Estate 363 (12th ed. 2001)).

¶38           This Court addressed the application of economic
obsolescence to property valuations in Eurofresh. We held that to establish
the existence of economic obsolescence, a taxpayer must offer probative
evidence of (1) the cause of the obsolescence, (2) the quantity of the
obsolescence, and (3) that the asserted cause of the obsolescence actually
affects the subject property. Eurofresh, 218 Ariz. at 390, ¶ 37.

¶39            As a threshold matter, we note that Reilly obtained his values
to calculate the HCLD from Transwestern's FERC fillings. The Department
contended at trial that the HCLD already includes economic obsolescence
as a form of depreciation because obsolescence is included in the definition
of depreciation for FERC purposes. See 18 C.F.R. pt. 201, subpt. 12 (2020)
(including "obsolescence" and "changes in demand" in the definition of
"depreciation"); see also Nw. Pipeline Corp. v. Adams County, 131 P.3d 958, 962
(Wash. Ct. App. 2006) (holding that pipeline was entitled to "no additional
obsolescence deduction" beyond that used "in its annual FERC and SEC


                                       13
                     TRANSWESTERN v. ADOR, et al.
                         Decision of the Court

reports"). Because the Department did not address this issue on appeal we
assume, without deciding, that the use of economic obsolescence in this
case was not duplicative. See Calpine Const. Fin. Co. v. Ariz. Dep't of Revenue,
221 Ariz. 244, 250, ¶ 31 (App. 2009) (holding issues not addressed in briefing
are waived).

       A.     Cause of Economic Obsolescence.

¶40            Transwestern's witnesses identified several external forces
causing economic obsolescence: (1) the increased cost of labor and material
during construction of the "Phoenix lateral"5 (from anticipated costs of $711
million to $870 million in actual costs), (2) the economic downturn during
the 2008-2009 recession decreased demand, (3) the decreased price of
natural gas, and (4) competition from green energy. As Reilly conceded,
"[t]here's no 1 factor . . . in this case that caused economic obsolescence."

¶41           The tax court found that "Transwestern has proved through
the testimony of its witnesses and expert that the value of the Property
suffered from economic obsolescence." Specifically, the court noted that the
massive cost overruns and dramatic downturns in the economy, with
related decrease in demand, resulted in obsolescence.

¶42           The Department counters that the decision to build the
Phoenix lateral, and the resulting cost overruns, were not "external" factors
and could have resulted from poor management decisions.                   The
Department also alleges the testimony of Transwestern's witnesses
contradicted each other. For example, Whitehurst, who started working for
Transwestern in 2014, acknowledged that Phoenix is growing but less than
expected. And Beth Hickey, ETP Senior Vice President for Interstate
Natural Gas, testified that Transwestern experienced decreased utilization
after 2008, but utilization was so high in 2014 that it invested $24.5 million
in a compression station to increase the capacity on the Phoenix lateral.
Then, after Transwestern built the New River compression station it was
used for less than "100 hours" each year. The Department concludes that



5       The "Phoenix lateral" was a pipeline project proposed in late 2005 to
connect Transwestern with the Phoenix Metropolitan Area. An application
for its construction was filed with FERC in 2006 and construction began in
2007. It was completed in 2009 with a capacity of 500MMcf/d. In 2013,
Transwestern built the New River compression station, at the cost of $24.5
million, which increased the Phoenix Lateral's capacity to 660MMcf/d.



                                      14
                     TRANSWESTERN v. ADOR, et al.
                         Decision of the Court

Transwestern's own actions in expanding capacity to handle more business
contradicts its claim of obsolescence.

¶43            Conflicting evidence does not affect the competency of a
valuation method, "[r]ather[] it is a factor that the [fact finder] must weigh
in its analysis." Trico, 113 Ariz. at 70. We "defer to the tax court's factual
findings if the record supports them." 100 Val Vista/Montgomery LLC v. Pinal
County, 247 Ariz. 50, 54, ¶ 14 (App. 2019). The record supports the tax
court's finding that the 2008-2009 recession was a "negative influence" on
the Property's value. See Eurofresh, 218 Ariz. at 386, ¶ 22. Economic
conditions are a recognized source of economic obsolescence. See Four
Corners, 106 Ariz. at 515 (noting "economic obsolescence is the decrease in
value of the pipe-line in servicing those areas for which it was intended to
be used"); Eurofresh, 218 Ariz. at 387, ¶ 22 n.6 (noting that economic
obsolescence can be caused by "actual or probable changes in economic or
social conditions." (quoting Hometowne Assocs., LLP v. Maley, 839 N.E.2d
269, 273 (Ind. T.C. 2005))); see also ADOR, Assessment Procedures Manual
2.1.16-.17 (Effective March 1, 2011) (identifying example of economic
obsolescence as "changes in the economy that create changes in supply or
demand for properties like the subject").

¶44           Accordingly, competent evidence supports the tax court's
finding that the Property experienced economic obsolescence.

       B.     Quantity of Economic Obsolescence.

¶45           Reilly arrived at his external obsolescence estimate by using
the capitalization of income loss method. According to Reilly's report, in
the capitalization of income loss method, economic obsolescence is
estimated by comparing the Transwestern profitability measures (with
economic obsolescence) to selected profitability measures (without
economic obsolescence). The difference between these two profitability
measures—the income loss—represents the amount of economic
obsolescence.

¶46           The first analysis Reilly conducted to quantify the economic
obsolescence was to compare the recent rates of return with historical rates
of return. Reilly noted that Transwestern's rate of return "decreased
substantially following the construction of the Phoenix lateral pipeline.
This occurred due to factors related to this construction project as well as
industry-wide factors (such as increasing competition and decreasing
demand)." For tax year 2015, Reilly used the returns from 2004 to 2006 as
his benchmark and compared the earnings with 2010 to 2014. Reilly found



                                     15
                    TRANSWESTERN v. ADOR, et al.
                        Decision of the Court

that Transwestern earned returns on investment 50% to 60% less than they
were earning pre-recession and pre-Phoenix lateral. From this he
calculated an estimated obsolescence of 56%. For tax year 2017, he
calculated an estimated obsolescence of 55%.

¶47            The second analysis Reilly conducted to quantify the
economic obsolescence was a comparison to guideline pipeline companies.
See Eurofresh, 218 Ariz. at 390, ¶ 39 (discussing how a taxpayer may
calculate "obsolescence based on other 'comparable' properties"). Reilly
compared Transwestern's rate of return to the return of six pipelines of a
similar size and age that operate in the southwestern United States.
Specifically, Reilly selected the pipelines with the highest returns. Reilly
reasoned that using the highest returns as the benchmark allowed him to
compare Transwestern to companies that have the least amount of
economic obsolescence. From this he calculated an estimated obsolescence
of 62% for 2016 and 64% for 2017.

¶48         Reilly averaged the two estimates to reach his calculations of
economic obsolescence.

¶49           The Department asserts numerous criticisms of Reilly's
analysis, but those arguments go to the weight of evidence, not its
admissibility. The weight given expert testimony is within the sole
province of the tax court. Magna Inv. & Dev., 128 Ariz. at 294.

      C.     Actual Effect on the Property.

¶50            Citing Eurofresh, the Department argues that the tax court
erred by not requiring that the measurements be tied to the alleged cause
of the obsolescence. But Eurofresh contains no such requirement. In that
case the taxpayer merely asserted that the external obsolescence was market
wide. Eurofresh, 218 Ariz. at 385, 392, ¶¶ 13, 48. We held that it is not
sufficient "to simply assert that a property's value should be reduced
because of external obsolescence observed elsewhere." Id. at 390, ¶ 39.
Instead, the taxpayer must prove that the asserted cause of the obsolescence
actually affects the subject property. Id. Here, the tax court found that the
asserted causes of the obsolescence affected the value of Transwestern. The
court found that:

      Transwestern has proved through the testimony of its
      witnesses and expert that the value of the Property suffered
      from economic obsolescence. Among other evidence that the
      property lost value because of external forces, was the fact
      that The Natural Gas Supply Association ranked the return


                                     16
                     TRANSWESTERN v. ADOR, et al.
                         Decision of the Court

       on equity of Transwestern pipeline in 2014 at 29th of the 32
       pipelines it measured. Mr. Whitehurst testified that 'we
       would tell anybody that this (Transwestern) was a big miss …
       a huge miss … wrong place, wrong time.' While there could
       be other reasons for this underperformance, the testimony
       was compelling that the reasons described above caused it.

Evidence in the record supports these findings, and Transwestern
presented competent evidence supporting its expert's cost approach.
Accordingly, the court did not err by reducing the Property's value for
economic obsolescence.

IV.    The Tax Court Erred in Denying the Department's Motion for
       Partial Summary Judgment.

¶51            The Department also appeals the tax court's denial of its
motion for partial summary judgment to replace the revised valuations of
the Property with the error-corrected valuations of the Property. See
Transwestern Pipeline Co. v. Ariz. Dep't of Revenue, TX 2016-000931, 2018 WL
3192537 (Ariz. Tax Ct. May 15, 2018) (tax court order). Transwestern asserts
that this issue is moot because the tax court found that the revised values
exceeded the market value of the Property and the error-corrected values
exceed the revised values. Generally, "we will dismiss an appeal as moot
when our action as a reviewing court will have no effect on the parties."
Cardoso v. Soldo, 230 Ariz. 614, 617, ¶ 5 (App. 2012). Because we vacate the
tax court's finding regarding the company-specific risk premium, we
address this issue, which might arise on remand.

¶52           We review de novo the tax court's denial of the Department's
motion for summary judgment and the court's interpretation of the relevant
tax statutes. See SolarCity Corp. v. Ariz. Dep't of Revenue, 243 Ariz. 477, 480,
¶ 8 (2018).

¶53           In June 2015, the Department sent Transwestern an initial
valuation of $713,430,000 for the 2016 tax year. Transwestern Pipeline, TX
2016-000931, at *1. In large part, that valuation was based upon information
provided by Transwestern in its rendition report ("First Rendition"). Id.
"Pursuant to A.R.S. § 42-14002(B) the parties conferred about that
valuation." Id. The Department asked Transwestern to deduct any
"acquisition adjustment" from the information it provided in its First
Rendition and to submit a new rendition report, which it did ("Second
Rendition"). Id. After Transwestern did so, the Department sent a notice of
decision setting the 2016 full cash value at $639,690,000. Id.



                                      17
                     TRANSWESTERN v. ADOR, et al.
                         Decision of the Court

¶54          At trial before the tax court, Transwestern produced internal
documents and emails during discovery, including a spreadsheet listing
certain Transwestern assets. Id. After reviewing these disclosures, the
Department asserted that Transwestern erred in the way it calculated the
"Arizona Original Costs" used in its Second Rendition. Id. "Accordingly, in
January 2017, the Department sent a Notice of Proposed Error Correction
which increased the 2016 full cash value from $639,690,000 to $743,266,000,"
and the 2017 value from $614,375,000 to $712,891,000. Id.; see A.R.S. § 42-
16252. On appeal, the Department argues that both A.R.S. § 42-16251(3)(d)
(misreporting) and A.R.S. § 42-16251(3)(e)(vi) (objective error) apply in this
case.6

¶55            Arizona law provides a "procedure for correcting of errors
occurring in assessing or collecting property taxes, whether they inure to
the benefit of the taxpayer or the government." Lyons v. State Bd. of
Equalization, 209 Ariz. 497, 502, ¶ 21 (App. 2005) (quoting 1994 Ariz. Sess.
Laws, ch. 323, § 53 (2d Reg. Sess.)). "Error" is defined in A.R.S. § 42-16251(3)
as "any mistake in assessing or collecting property taxes resulting from: . . .
(d) Misreporting or failing to report property if a statutory duty exists to
report the property."

¶56           The tax court held that the "misreporting" section did not
apply because the "Department admit[ted] that the information and data
[Transwestern] used in its computation had all been provided to it before it
calculated the 2016 value." Transwestern Pipeline, TX 2016-000931, at *2. We
disagree.

¶57           We have previously held that "mistake" is not a technical
word that holds particular meaning within the law. Ariz. Dep't of Revenue
v. S. Point Energy Ctr., LLC, 228 Ariz. 436, 440, ¶ 15 (App. 2011). "We
therefore apply its common meaning, which is '[a]n error, misconception,
or misunderstanding; an erroneous belief.'" Id. (quoting Mistake, Black's
Law Dictionary (8th ed. 2004)).

¶58          The undisputed facts show that in the First Rendition,
Transwestern misreported its system plant in service property and in the
Second Rendition, Transwestern misreported its Arizona plant in service
property. This failure caused the Department to incorrectly calculate the
Property's value. That the First Rendition contained the correct Arizona


6      Because we vacate the tax court's ruling under the misreporting
section, we need not consider the Department's argument that the report
consisted of an objective error under A.R.S. § 42-16251(3)(e)(vi).


                                      18
                     TRANSWESTERN v. ADOR, et al.
                         Decision of the Court

plant in service property does not make the Second Rendition any less
inaccurate and thus still constitutes an "error."

¶59          Although the Department had the necessary information after
receiving the Second Rendition, that does not negate the fact that
Transwestern misreported information in that report. That misreporting
left the Department with the erroneous belief that the Second Rendition
represented an accurate value of the Property.

¶60            Accordingly, the tax court erred when it denied the
Department's motion for summary judgment. On remand, the tax court
shall use the error-corrected values as the statutory full cash values, subject
to the requirement that full cash value "shall not be greater than market
value[.]" A.R.S. § 42-11001(6).

V.     Attorney Fees.

¶61            Transwestern requests its fees on appeal pursuant to A.R.S. §
12-348(B)(1), which authorizes an award of fees to a party that "prevails by
an adjudication on the merits" in a challenge to the "assessment, collection
or refund of taxes." A.R.S. § 12-348(B)(1). In our discretion, we decline to
award Transwestern its attorney fees. See Wilderness World, Inc. v. Ariz.
Dep't of Revenue, 182 Ariz. 196, 202 (1995) (as amended) (noting "the award
of attorneys' fees in tax cases [is] discretionary").

                               CONCLUSION

¶62           For the foregoing reasons, we affirm the judgment of the tax
court in part, vacate in part, and remand. On remand, the tax court shall
determine whether the "error-corrected" full cash values exceed the market
values. If necessary, the tax court must then determine the market value of
the property for 2016 and 2017 consistent with this decision and without
the inclusion of a company-specific risk premium.




                          AMY M. WOOD • Clerk of the Court
                          FILED: AA



                                        19
