                                    No. 13273

        I N THE SUPREME COURT OF THE STATE O M N A A
                                            F OTN

                                      1976



THE DEPARTMENT OF REVENUE OF THE
STATE O MONTANA,
       F

                               Appellant,



PACIFIC P W R AND LIGHT COMPANY,
         O E

                               Respondent.



Appeal from:        District Court o f t h e F i r s t J u d i c i a l D i s t r i c t ,
                    Honorable P e t e r G. Meloy, Judge p r e s i d i n g .

Counsel of Record:

     For A p p e l l a n t :

             Robert A. Poore argued, B u t t e , Montana
             R. Bruce McGinnis a r g u e d , Helena, Montana

     For Respondent:

             Murphy, Robinson, Heckathorn and P h i l l i p s ,
              K a l i s p e l l , Montana
             Douglas D Dasinger argued, Ka l i s p e l l , Montana
                            .
             Mark    H. Peterman a r g u e d , P o r t l a n d , Oregon



                                              Submitted:        October 21, 1976

                                                 Decided : DEC 2 9       1976
Mr. Justice Frank I. Haswell delivered the Opinion of the Court.

       This appeal involves the validity of the Montana Department

of Revenue's method of assessment of taxes on the Montana property

of an interstate electric utility.    The state tax appeal board

and the district court held the method of assessment invalid,

reduced the assessment, and a 1974 tax reduction of approximately

$100,000 resulted. We reverse.

      By way of overview, the general method of assessment

by the Department of Revenue (DOR) was the unitary method of

assessment. DOR used a formula calculated to value the utility's

operating property in Montana on the basis of its value as a part
of the utility's total interstate electric generating and trans-
                                the
mission system.  The validity of/method of assessment by use

of this formula is the underlying issue on appeal.

       Pursuant to statute, Pacific Power & Light Company (Utility)

submitted its annual statement of earnings, stock, and debt
information to DOR for use in assessing its Montana properties.

DOR assessed the Utility based on information contained in the

statement using the "unitary" method of assessment employed in
valuing the property of interstate corporations and systems. A

three-factor formula of stock and debt, cost of plant, and

capitalization of income was employed.    Each of the factors was

used to ascertain a TOTAL system value.   These were as follows:

      ----.    -
       INDICATOR OF VALUE
                       ---.                    TOTAL UTILITY
                                                       --
                                               SYSTEM VALUE
       Stock and debt                      $1,076,198, 551
       Plant at Cost                       $1,347,395, 000

       Income (Capitalized at 8.25%
               over 2 years)               $    857,201,842
                                                                                 ,
Each of t h e s e i n d i c a t o r s was weighted by a percentage r e f l e c t i n g

D O R I S e v a l u a t i o n of i t s r e l a t i v e importance i n t h e o v e r a l l s t r u c t u r e

of t h e U t i l i t y ' s e l e c t r i c system.           Stock and d e b t was a s s i g n e d

a weight of 10%; p l a n t a t 50%; and income a t 40%.                                  These v a l u e s ,

when t o t a l e d , r e s u l t e d i n a composite e s t i m a t e d t o t a l v a l u e f o r

t h e U t i l i t y ' s e n t i r e i n t e r s t a t e e l e c t r i c g e n e r a t i n g and t r a n s m i s s i o n

system of $1,124,198,092.

            The n e x t s t e p i n t h e assessment procedure involved a l l o c a -

t i o n of a proper p o r t i o n of t h i s system v a l u e t o t h e p h y s i c a l p l a n t

l o c a t e d i n Montana.          DOR c a l c u l a t e d t h e r a t i o of t h e c o s t of t h e

Montana p l a n t t o t h e t o t a l p l a n t and o b t a i n e d a percentage of 1.60%.

The v a l u e of t h e two water p l a n t s of t h e U t i l i t y i n Montana were

excluded on t h e b a s i s they were n o t a continuous p a r t of t h e opera-

t i o n of t h e i n t e r s t a t e e l e c t r i c system and a c c o r d i n g l y were taxed

a t t h e county l e v e l .          DOR a l s o computed t h e r a t i o of Montana p l a n t

t o t o t a l p l a n t on a revenue producing b a s i s and determined Montana

produced 2.37% of t o t a l system revenue.                            These two r a t i o s were

averaged and r e s u l t e d i n a f i n a l r a t i o of 2% r e p r e s e n t i n g t h e

p o r t i o n of t o t a l system value of Montana o p e r a t i n g p r o p e r t i e s .                      The

weighted e s t i m a t e of t o t a l system v a l u e was m u l t i p l i e d by t h i s 2%

f i g u r e t o o b t a i n t h e v a l u e of Montana p r o p e r t y of $22,4839962.

T h i s v a l u e was e q u a l i z e d a t 44%, t h e percentage f i g u r e used i n

e q u a l i z a t i o n of computations of e l e c t r i c a l u t i l i t y p r o p e r t y , f o r

a t o t a l a s s e s s e d v a l u e of $9,892,943.

           The U t i l i t y o b j e c t e d t o t h e foregoing assessment on t h e

ground t h a t i t r e s u l t e d i n imposition by Montana of a p r o p e r t y

t a x on g e n e r a t i n g f a c i l i t i e s l o c a t e d o u t s i d e t h e s t a t e .     I t argued

t h i s made i t s system unique and by reason t h e r e o f , DORIS method

of assessment was i l l e g a l and i n e q u i t a b l e .                 The U t i l i t y contended

t h e h i s t o r i c c o s t of Montana's p o r t i o n of t h e system must b e u t i l i z e d
i n computing t h e c o s t o f p l a n t i n d i c a t o r .        The u t i l i t y ' s a s s e r -

t i o n was t h a t a f i g u r e of $23,118,600 was a proper f i g u r e f o r

c o s t of p l a n t t o be "weighted" by 50% t o g i v e a t o t a l Montana

p l a n t v a l u e of $11,5591300.           T o t a l i n g of t h e a l t e r n a t e p l a n t

c o s t w i t h t h e o t h e r two f i g u r e s ( s t o c k and d e b t ; c a p i t a l i z e d income)

computed i n t h e same manner a s DORY y i e l d s a t o t a l v a l u a t i o n of

$19,127,710.          T h i s f i g u r e , "when equalized"             a t 44% g i v e s a t o t a l

a s s e s s e d v a l u e of $8,416,192, a s s e r t e d by t h e U t i l i t y t o b e t h e

correct figure.

           The U t i l i t y a l s o o b j e c t e d t o D O R ' s computation o f t h e

a l l o c a t i o n f a c t o r used t o determine t h e percentage of t o t a l system

v a l u e i n Montana.        I t claimed t h e only proper elements f o r com-

p a r i s o n were i n - s t a t e system c o s t compared t o t o t a l system c o s t .

The U t i l i t y claimed any a t t e m p t t o compare revenue produced i n

Montana t o t o t a l system revenue would r e s u l t i n t a x a t i o n of o u t -

o f - s t a t e p r o p e r t i e s because a l l i t s g e n e r a t i n g f a c i l i t i e s were

l o c a t e d o u t s i d e Montana.

           A h e a r i n g b e f o r e DOR was h e l d a t t h e ' U t i l i t y l s r e q u e s t

and     r e s u l t e d i n a r e f u s a l t o a l t e r D O R ' s assessment.          The U t i l i t y

appealed D O R 1 s d e c i s i o n t o t h e s t a t e t a x appeal board (STAB) and

a m a j o r i t y of STAB determined t h e U t i l i t y ' s methodology and f i n a l

assessment computations t o b e c o r r e c t .                 The p e r t i n e n t f i n d i n g s of

f a c t of t h e m a j o r i t y were:

                "The Department of Revenue used a reasonable
           approach t o a l l o c a t e system s t o c k and debt v a l u e
           t o Montana.

                  "The Department of Revenue had information a v a i l a b l e
           t o show t h e a c t u a l h i s t o r i c c o s t of p l a n t i n Montana,
           b u t they s u b s t i t u t e d a n a l l o c a t e d v a l u e of p l a n t t h a t
           r e s u l t e d i n a f i c t i t i o u s amount t h a t was i n excess of t h e
           a c t u a l c o s t of p l a n t .
       "The Department of Revenue plant cost values and
       the corrected values are as follows:

       "The Department of Revenue computations:
       " System                Montana            Ratio

        $1,335,568,826      $21,310,719            1.60%

       "Whereas, the correct total of all properties should
       be:

       "System                 Montana            Ratio
       $1,372,463,365       $23,118,600           1.68%

       "Difference :

        - --
       "System                 Montana            -- -
                                                  Ratio

       $36,894,539          $1,807,881              .08%11
The STAB majority concluded:

           "The unitary approach to value is a proper method
       to be utilized but in some instances must be modified
       to produce equitable results.



           "The Department of Revenue adopted a fundamentally
       wrong principle of assessment when, knowing the actual
       historic cost of the subject plant, they substituted
       an allocated value of plant that exceeded the actual
       cost; thereby violating the requirement to determine
       the actual cash value for taxation of that portion of
       the plant and property situa ted in Montana .I
                                                    '
Based on these conclusions, STAB ordered DOR to utilize the 1.68%

ratio and the "correct totals" set forth above.

       STAB member Peterson dissented and submitted findings and
conclusions in dissent, asserting the methodology employed by DOR
to be correct. The pertinent part of the dissent was expressed in
this language :
       "Market value is based on the concept of what a willing
       and informed buyer would pay a willing and informed seller.
       It is inconceivable that income would not be considered
       in such a hypothetical transaction. Therefore, when in-
       come is not considered in calculating the ratio of the
          s u b j e c t u t i l i t y company's property i n Montana i n
          r e l a t i o n t o t h e value of t h e system i n o t h e r s t a t e s
          which t h e company o p e r a t e s , t h e e f f e c t i s t o export
          value out of Montana. '1

          DOR appealed t h e S A decision t o t h e d i s t r i c t c o u r t , Lewis
                              T B

and Clark County, which upheld t h e S A d e c i s i o n .
                                      T B                                     DOR appealed

t o t h i s Court.

          A t i s s u e h e r e i s a determination of t h e proper method of

v a l u a t i o n of t h e U t i l i t y ' s Montana operating p r o p e r t i e s .     Montana

has u t i l i z e d t h e 3 - f a c t o r , u n i t a r y assessment approach f o r

a p p r a i s a l of i n t e r s t a t e u t i l i t y property f o r many y e a r s .   The

method has been approved by t h i s Court i n t h e p a s t a s a f a i r and

a p p r o p r i a t e way of determining t h e value               of t h e Montana p o r t i o n of

an i n t e r s t a t e e n t i t y f o r property t a x a t i o n .   Yellowstone Pipe Line

Co. v. S t a t e Board of Equalization, 138 Mont. 603, 358 P.2d 55;

Western A i r l i n e s , Inc. v. Michunovich, 149 Mont. 347, 350, 351,


                                                           1t
           I n d i s c u s s i n g t h e "unitary" o r          going concern'' approach

i n Western A i r l i n e s , I n c . , we s t a t e d :

          If*   **     The ' u n i t a r y ' method r e p r e s e n t s an attempt t o
          r e a l i z e a f a i r assessment value on property which i s
          not h a b i t u a l l y loca ted i n any given s t a t e , b u t which
          i s used e x t e n s i v e l y i n i n t e r s t a t e commerce. The under-
          lying philosophy of t h e ' u n i t a r y ' method i s t h a t
          property so used forms a p a r t of an organic system and
          may be assessed i n terms of t h e economic c o n t r i b u t i o n
          which each compenent makes t o t h e e n t i r e system. This
          approach has been firmly e s t a b l i s h e d i n a s e r i e s of de-
          c i s i o n s of t h e Supreme Court of t h e United S t a t e s .             ***
          "A good statement of t h e purpose and operation of t h e
          I
            u n i t a r y ' method i s found i n Pullman C o . v. Richardson,
          261 U.S. 330, 338, 43 S.Ct. 366, 368, 67 L ed 682.

                "'And, i f t h e property be p a r t of a system and have
                an augmented value by reason of a connected opera-
                 t i o n of t h e whole, i t may be taxed according t o i t s
                value a s p a r t of t h e system, although t h e o t h e r p a r t s
                be o u t s i d e t h e s t a t e ; i n o t h e r words, t h e t a x may be
                yade t o cover t h e enhanced value whichcomes t o t h e
                p r o p e r t y i n t h e s t a t e through i t s organic r e l a t i o n t o
                the-system."'
                ---                     (Emphasis added.)
          The U t i l i t y urges t h i s Court t o hold t h e a c t u a l c o s t

of t h e physical p l a n t a s an appropria te measure of "value"

f o r assessment purposes and a s s e r t s t h e method u t i l i z e d by DOR

r e s u l t s i n an a r t i f i c i a l and contrived "value".           Section 84-

401, R.C.M.      1947, r e q u i r e s assessment of property a t i t s " f u l l

cash value".        Value does n o t equal c o s t .           Western Union Telegraph

Co. v. Taggart, 163 U.S.              1, 16 S . C t .   1054, 41 L ed 49; Cleveland

&c Railway Co. v. Backus, 154 U.S.                   439, 445, 14 S.Ct. 1122,

38 L ed 1041. I n Cleveland                a d e c i s i o n involving s t a t e t a x a t i o n of

i n t e r s t a t e railway property, the United S t a t e s Supreme Court s a i d :

          "*   **       t h e value of property r e s u l t s from t h e use t o
          which i t i s put and v a r i e s with t h e p r o f i t a b l e n e s s of
          t h a t use, p r e s e n t and prospective, a c t u a l and a n t i c i -
          pated. There i s no pecuniary value o u t s i d e of t h a t
          which r e s u l t s from such use. The amount and p r o f i t a b l e
          c h a r a c t e r of such use determines t h e v a l u e , and i f
          t h e property i s taxed a t i t s a c t u a l cash value i t i s
          taxed upon something which i s c r e a t e d by t h e uses t o which
          i t i s put.      **    *I1



          The e l e c t r i c system property of t h e U t i l i t y i n Montana,

although only 1.6% of t h e t o t a l u t i l i t y system, provides 2.37%

of t h e t o t a l annual revenue of t h e U t i l i t y .         Any measure of t h e

    -
value of t h i s property must include c o n s i d e r a t i o n of t h e use t o
--.-


which t h e property i s put and t h e income c o n t r i b u t e d t o t h e

system.      DOR, i n an e f f o r t t o a s s e s s t h i s value, averaged t h e

1.6% f i g u r e , representing t h e Montana share of t h e p h y s i c a l p l a n t

w i t h i n t h e t o t a l e l e c t r i c a l system, with t h e 2.37% f i g u r e repre-

senting t h e income           provided by Montana through e f f e c t i v e , e f f i c i e n t

use of t h e p l a n t .     This averaging yielded t h e 2% used a s an

a p p r o p r i a t e percentage of t o t a l value of t h e u t i l i t y ' s property

w i t h i n Montana.       This r e f l e c t s a c o n s i d e r a t i o n of t h e worth o r value

of t h e Montana property a s a p a r t of an on-going, p r o f i t a b l e e n t e r -

p r i s e , t h e value of t h e p a r t s of which i s g r e a t e r when combined i n t o
an i n t e g r a t e d u t i l i t y system.    To accept t h e U t i l i t y ' s contention

t h a t a c t u a l c o s t i s c o n t r o l l i n g ( a s d i d STAB and t h e d i s t r i c t

c o u r t ) i s t o ignore t o t a l l y t h e "value" flowing from t h e operation

of t h e system.        Again, i n Western A i r l i n e s , I n c . t h e Court s t a t e d :
                                   -

          "Thus t h e ' u n i t a r y ' method determines not only t h e
          a p p r o p r i a t e share of t h e e n t i r e e n t e r p r i s e which may
          be taxed by each s t a t e but a l s o determines t h e 'en-
          hanced value' a t t r i b u r a b l e t o t h e equipment used by
          v i r t u e of i t s being a component p a r t of t h e system.
          The ' u n i t a r y ' method assumes t h a t t h e value of t h e
          e n t i r e system, a s a going concern, i s somewhat g r e a t e r
          than t h e t o t a l f a i r market value of i t s equipment."

See a l s o :    Yellowstone Pipe Line Co. v. S t a t e Board of Equal.,

supra.

          W f u r t h e r hold t h a t DOR c o r r e c t l y excluded t h e waterplant
           e

f a c i l i t i e s t h a t a r e taxed l o c a l l y by t h e counites where they a r e

located.        These water p l a n t s a r e not properly a p a r t of t h e operating

i n t e r s t a t e e l e c t r i c a l system and a s such do not a f f e c t t h e valua-

t i o n s of i n t e r s t a t e p r o p e r t i e s d e a l t with i n t h i s opinion.      The

exclusion of t h e s e p r o p e r t i e s r e q u i r e s a f f i r m a t i o n of t h e 1.60%

f i g u r e used by DORY r a t h e r than t h e 1.68% o f f e r e d a s an a l t e r n a -

t i v e by t h e U t i l i t y , i n applying t h e u n i t a r y assessment method.

          The judgment of t h e d i s t r i c t c o u r t i s reversed.                The

assessment of DOR i s r e i n s t a t e d i n conformity with t h i s opinion.
Hon. L. C. Gulbrandson, ~ i s t r i c t
Judge, sitting for Justice Wesley
Castles.
