                                  No. 87-264
               IN THE SUPREME COURT OF THE STATE OF MONTANA




PUGET SOUND POWER     &   LIGHT COMPANY,
                 Petitioner and Respondent,
        -vs-
THE DEPARTMENT OF REVENUE OF THE
STATE OF MONTANA,
                 Respondent and Appellant.



APPEAL FROM:     District Court of the First Judicial District,
                 In and for the County of Lewis & Clark,
                 The Honorable Gordon Bennett, Judge presiding.
COUNSEL OF RECORD:
        For Appellant:
                 Larry G. Schuster argued, Dept. of Revenue, Helena,
                 Montana
                                   <
        For Respondent:
                 Bruce R. Toole; Crowley, Haughey, Hanson, Toole &
                 Dietrich, Billings, Montana
                 Ronald L. Berenstain argued; Perkins & Cole, Seattle,
                 Washington



                                       Submitted:   March 2 2 , 1988

                                        Decided:    June 14, 1988

Filed   gUN4
          2     @@y
Mr. Justice R.   C. McDonough delivered the Opinion of the
Court.

     This appeal involves an ad valorem property tax
valuation.   The respondent, Puget Sound Power and Light
Company, (Puget) filed a petition with the State Tax Appeal
Board (Board) claiming that the Department of Revenue
(Department) overvalued Puget's property for 1983.       The
petition raised five issues on the Department's appraisal
methods, and the Board held for the Department on all issues
relevant to this appeal. Puget appealed the Board's decision
to the District Court, and the District Court reversed the
Board on such issues. The Department appeals the District
Court decision, and Puget raises one issue on cross-appeal.
We reverse on the issues raised on appeal and affirm the
issue raised on cross-appeal.
     The issues raised by the Department on appeal are as
follows:

     (1)   Did the Court err by concluding that the Department
may not treat construction work in progress (CWIP) as a
separate indicator of value within the unit method of
valuation?
     (2) Did the Court err by concluding that the Department
may not include an accumulated deferred income tax reserve as
a liability within the stock and debt indicator?
     (3) Did the Court err by concluding that the Department
may not remove the value of the townsite property by
subtracting the locally assessed value of the townsite
property from the allocated Montana value?

     On cross-appeal Puget raises one issue:       Did the
District Court err by refusing to adjust the stock and debt
indicator to reflect the amount of CWIP not expected to go
into service?

     Before addressing these issues, a brief discussion of
the pertinent facts and law is necessary. The parties agree
that Montana law requires the Department to appraise Puget's
taxable property at its market value. Section 15-8-111, MCA.
The statute defines market value as the value a willing buyer
would give to a willing seller, "neither being under any
compulsion to buy or to sell and both having reasonable
knowledge of relevant facts". Section 15-8-111 (2)(a), MCA.
The method used for finding what the statute defines as
market value is left to the Department.
     The Department's administrative rules implement the
requirement to find market value in central assessments such
as the one at issue here primarily by use of the "unit method
of valuation". ARM 5 42.22 .Ill. The aim of this method is
to find the value of the property as a going concern. The
method generally values property in three different ways:
(1) cost indicator, (2) capitalized income indicator, and (3)
stock and debt indicator.         Each method purports an
approximate total value (both in and out of Montana) of the
company appraised.
     The cost indicator, (as used in this appraisal), equates
a company's value with the cost of its depreciated original
cost of investment. The capitalized income indicator values
the company by capitalizing the present value of future
income to be produced by the property. The stock and debt
indicator values the property using the basic accounting
principle; assets = liabilities + owner's equity. Under this
last indicator, the appraiser attempts to ascertain the
amount of liabilities owed and the amount of equity
outstanding. The sum of these two figures should necessarily
equal assets, and thus the company's value.
     In this case, the Department arrived at Puget's value
using the three different methods as follows:       (1) cost
indicator = $1,044,297,534, (2) capitalized income indicator
= $808,843,951, (3) stock and debt indicator = $921,199,487.
Instead of then relying on any one of these valuations, the
Department used a portion of each to determine fair market
value.   In this case, the Department added 40% of the cost
indicator, to 50% of the income indicator, to 10% of the
stock and debt indicator to arrive at an assessed value of
$914,260,940. There is no argument as to the weighting of
these indicators. The Department then added the market value
of Puget's construction work in progress, $475,793,627, to
calculate total value of Puget.    This aggregate figure was
then multiplied by an agreed percentage to arrive at the
value of Puget's property in Montana.
     At this point in the appraisal, the value of Puget's
"non-operating" property must be subtracted from the total
value of the Montana property so that the appraisal will
reflect only Puget's Montana operating property.     In this
case, the townsite property (Puget' s housing for employees)
was properly classified as non-operating property, and its
value, as appraised by Rosebud County (local situs) in the
same manner as other residences, was subtracted from the
total value of Puget's Montana property.
     Two of the issues here concern the Department's
implementation of the unit method.       The first involves
valuing construction work in progress (CWIP) outside the unit
method's traditional indicators, and the second relates to
inclusion of tax deferrals in the stock and debt indicator.
The third issue concerns the use of Rosebud County's
appraisal   of   the   townsite   property   for   removal   of   the
townsite value from the value of all Puget's Montana
property.    The issue on cross-appeal involves Puget's
contentions on the treatment of CWIP not expected to go into
service in the stock and debt indicator.
     This Court has stated previously the standard to be
employed by district courts reviewing decisions by the Board:

          The District Court as a reviewing court may
     reverse or modify the decisions of the State Tax
     Appeal Board and remand the case for further
     proceedings if substantial rights of the appellant
     have been prejudiced because the administrative
     findings, conclusions, or decisions are clearly
     erroneous in view of the reliable, probative and
     substantial evidence of the whole record or are
     arbitrary, capricious, or characterized by an abuse
     of discretion.
Department of Revenue v. Grouse Mountain Development (Mont.
1985), 707 P.2d 1113, 1115, 42 St.Rep. 1642, 1643-44.      his
standard applies to all the findings and conclusions reviewed
in this appeal.
                          Issue I.
     The District Court concluded that the Department abused
its discretion by failing to integrate the value of CWIP into
the three unit value indicators, and that the Board's
approval of separate treatment for CWIP was clearly
erroneous. We reverse.
     First, the District Court failed to apply the
controlling rule in reviewing the Board's decision. In this
regard, the lower court quoted as controlling an early
version of ARM      42.22.111, the rule which defines the
traditional indicators in the unit method of valuation, as
follows:
          "(1) the unit method of valuation will be used
     to appraise centrally assessed companies whenever
     appropriate.    When applying this method, the
     department will use commonly accepted methods and
     techniques of appraisal to determine market value.
     The application--of- -
                      - the unit method may include a
     cost indicator. ca~italizedincome indicator, - -
                                                   anda
     market indicat'or &(stock and debt) of value when
     sufficient information is available.        - -
                                                 If the
     department determines an indicator -- reflect
                                        does not
     - company's market v ~ l u ~ f o r m a t i o- -
     a                                           is not
                                                  n
     available, - may s u b s t i t u t ~ n e ~ l u e ,
                 it                                  net
     salvage, or other accepted indicators - value.
                                              of
                     .
     (Emphasis added) "

See ARM S 42.22.111 (1980) .   The lower court then noted in
footnote 6 of its memorandum that:
      In 1984 the last sentence of 42.22.111(1) was
     amended to read as follows: 'If the department
     determines that an individual indicator, the unit
     method of valuation or other method of valuation
     does not reflect a company's market value or that
     information is unavailable, it may adopt a
     different method or methods of valuation, including
     but not limited to net scrap,         net salvage,
     corridor value in the case of railrods, or any
     combination of methods - valuation which reflects
                             of
     the company's market value. '     (Emphasis added)
     Thus, the department now has explicit authorization
     to combine the unit and summation methods of
     valuation if, in its discretion, it determines that
     it is necessary to determine the correct market
     value of a company.


     A review of the history of this rule reveals that the
amendment referred to by the lower court was adopted in 1982,
not 1984. Notice of the proposed amendment was published at
pages 87-90 of the 1982 Montana Adminstrative Register, issue
no. 2, and notice of the actual amendment of the rule appears
on page 705 of the 1982 Montana Adminstrative Register, issue
no. 7.    After the amendments were made the new rule was
published in the 1982 edition of the Adminstrative Rules of
Montana, and subsection (3) of the amended version reads as
follows:
          (3)   This rule shall be effective for all
     reporting years ending December 31, 1981, and
     therefter.
See ARM 5 42.22.111 (3) (1982).     Thus, the District Court
erred by not applying ARM 5 42.22.111 as it existed after the
amendments made in 1982.       The amended rule gives the
Department the discretion to combine other methods of
valuation with the unit method of valuation, and the Board's
decision cannot be clearly erroneous because of the
Department's interpretation of this rule.
     The District Court decision also rests on its conclusion
that the Board must be reversed because the Department failed
to demonstrate that the unit method was inappropriate to the
appraisal made in this case. The Board approved treatment of
CWIP outside the unit method's three indicators because
credible   testimony   by   an   appraiser   indicated   that
capitalization of CWIP was too speculative to render an
accurate figure for use in the income indicator.        Puget
offered testimony by another appraiser to the effect that
inclusion of CWIP in the income indicator was practical and
appropriate. However, the Board is the expert and the fact
finder on valuations, and the issue before the Board depended
on the weight to be given to conflicting testimony. We hold
that even though Puget presented opinion evidence that it was
proper to value CWIP in the income indicator, such evidence
is not enough to demonstrate that the Board decision on this
issue is clearly erroneous. The opinion of the Department's
appraiser provided substantial evidence that valuation
outside the three indicators was a better way to approximate
market value. Thus, the District Court erred in holding that
the Department failed to demonstrate that the unit method was
inappropriate.
     The statutory mandate that the Department value
according to market value is couched in general terms. The
Department's rule primarily prescribes the unit method for
finding market value, but this adoption should not be
construed so strictly that the Board is unable to adjust the
method when credible evidence demonstrates that the
adjustment would better reflect market value.    This is the
purpose of the last sentence of the regulation.      Thus, we
reverse on this issue.
                          Issue 11.
     The District Court reversed the Board on two findings of
fact and one conclusion of law in regard to inclusion of tax
deferrals in the stock and debt indicator. We reverse.
     The Board found that the tax deferral account was a true
liability.   The District Court reversal was based on its
finding that the account was merely an accounting device
which reflected value owed on the books but did not
constitute an actual liability.     The relevant evidence on
this issue is from the parties' appraisal experts.
     The Department's expert testified that deferral reserves
were "tax free loans from the government and that they're an
obligation reflected in some manner in the assets of the
company". On the other hand, Puget's expert stated that the
deferral account:
      should be included in the stock and debt at its
     fair market value, and that fair market value is
     zero because deferred taxes do not trade in open
     market. There is not a market for that. There is
     a market for stocks. There is a market for debt.
     Things like that do trade on the open market. You
     can measure them, but there is no market for
     Deferred   Federal   income  tax   or   unamortized
     investment tax credit. It's strictly an accounting
     convention to record for the differences in timing
     of various intricacies of the Federal income tax
     development and its not something that changes. ...
     If there is any effect in the stock and debt
     approach, if there is any effect in it, it is
     captured most likely right up in the stock price
     because prudent investors are out there and they
     know what's going on, too.


     In regard to this issue, the parties agree to the
following: the reserve account results from "normalized"
accounting in Puget's books. The records are normalized in
the sense that the difference in value between the
accelerated depreciation deductions Puget actually took, and
the lower straight line depreciation deductions Puget could
have taken, is recorded in the reserve account as tax
deferrals.
     The tax deferrals are not presently counted as income to
Puget when rates are set.      Conversely, in the future if
Puget's exhaustion of its depreciation deductions results in
greater tax liability, depletion of the reserve account
occurs and the loss is not counted as a reduction in income
when rates are set. Thus, rates are not reduced to reflect
the added income when the deductions are taken, and they are
not increased to reflect the loss of income when the
deductions are used up.
     The District Court's Memorandum agrees with the analysis
set out above, and on the basis of this analysis the District
Court concluded:
     The deferred tax account is merely an accounting
     device used to normalize income for book purposes.
     It does not represent a true liability.
Also important to the District Court's resolution of this
issue was its finding that "the amount of the deferred tax
account is never considered in determining the amount of
taxes an entity owes".
     The cases cited in the briefs on appeal generally
concern double-counting the value of deferrals in the
indicator at issue.   See In the Matter of Southern Railway
(N.C. 1985), 328 S.E.2d 235, Burlington Northern R. Co. v.
Bair (S.D. Iowa 1986), 648 F.Supp. 91; pacific Power & ~ i g h t
Co. V. Department of Revenue (Ore. 1979), 596 ~ . 2 d912. In
Southern Railway, the North Carolina Supreme Court disallowed
the taxing authority's inclusion of capitalized deferral
income in the income indicator reasoning that the agency had
already capitalized income from assets purchased with
deferral income.   Southern Railway, 328 S.E.2d at 247.    In
Bair, the taxing authority included the deferrals in the
stock and debt indicator. The U.S. District Court reversed
because the value of the deferrals was already reflected in
the market value of Burlington Northern's common equity as
derived from the use of a price-earnings ratio. Bair, 648
F.Supp. at 101.     In Pacific Power, the Court disallowed
valuation of deferred taxes in the income indicator because
the value of the deferrals would already be recognized in a
buyer's perception of the property's value as a result of the
company's use of normalization accounting.    Pacific Power,
596 P.2d at 927-28.
     The current case is similar to the cases cited above in
that Puget's expert stated that if the reserve account had
any value, it was already reflected in the price of Puget's
stock.   However, the Department's expert held the opinion
that the reserve account did represent value, and that this
value was properly included in the stock and debt indicator
by adding the dollar amount held in the reserve account as a
liability. Thus, the expert testimony is conflicting as to
whether the reserve account has any value outside of its
effect on the price of the stock.
     We reverse because the parties agree that the account
represents value to Puget derived from deductions which
increase income without reducing Puget's rate of return. The
theory that the value is already reflected in Puget's stock
because the reserve increases the value of Puget's stock is
plausible.   But equally plausible is the theory that the
value is not reflected in the stock, or actually reduces the
value of the stock, because the reserve must serve to
mitigate the loss of deductions in the event that Puget has a
lack of new equipment to depreciate due to inadequate
continuous reinvestment, or because of a static capital base.
Thus, the District Court incorrectly substituted its own
judgment for that of the Board on a question of fact.
Section 2-4-704, MCA.
     The District Court's decision on this issue is also
based on its finding that the reserve account was not a true
liability under ARM § 42.22.113 (1982).  The rule defines the
components of the stock and debt indicator, and the relevant
part reads:
         A market value or stock and debt indicator of
    value   shall be    derived   from the   company's
    outstanding liabilities.     The department shall
    consider the market value of the company's
    preferred and common stocks, outstanding debt, and
    the net of current assets and current liabilities.
    The sum of these items represent an indicator of
    market value for all the company's property. When
    the sum represents both operating and nonoperating
    property, the department will deduct the market
    value of the nonoperating property.


ARM $ 42.22.113 (1982). The District Court concluded that
the reserve account could not be included in this regulation
because it was neither an instrument traded on the financial
market nor a true liability as required by the regulation.
We disagree.
     Substantial credible evidence supports the Board's
decision approving treatment of the account as a liability.
First, as stated in regard to issue I, the District Court
should not interpret the Department's regulations so narrowly
that the statute's mandate for finding market value is
frustrated. Second, the use of the word "outstanding debt"
in the regulation is sufficiently comprehensive to include an
account which must serve to offset the loss of depreciation
deductions Puget may experience in the future. Puget argues
that use of the reserve to offset future liability is a
contingency which may never occur because tax laws may change
or reinvestment will allow Puget to maintain accelerated
deductions.   However, lack of such an account has lead to
problems in the past when accelerated deductions turned out
to be unavailable. See Memphis Light, Gas, & Water Division
v. Federal Power Commission (D.C. Cir. 1974), 500 F.2d 798
(company allowed to switch from flow through accounting to
normalization accounting in rate making because evidence
showed tax savings on expansion property would not be
available to offset declining depreciation on older
properties).   Thus, we hold that the Board ruling that the
Department may treat the account as a liability is not
clearly erroneous, and reverse the District Court on this
issue.
                         Issue 111.
     The District Court found that the Department arbitrarily
and capriciously valued townsite property. The value used by
the Department and approved by the Board was the value of the
property as assessed by the Department's local Rosebud County
appraiser for taxes.
     Puget's position, which the District Court adopted, is
that the local assessment undervalued the townsite property
because the property originally cost Puget $6,385,395, and
the county appraised the property at $1,629,146.        Puget
pointed out that the cost of the property is included in the
cost indicator, and argued that it should be taken out at the
same value less average depreciation at which it was put in.
On appeal, the Department argues that the townsite
non-operating property must be valued according to statutes
governing local assessment of property, and that Puget's
contentions on the value included in the cost indicator
ignore the fact that the cost indicator, as a weighted
component, constitutes only a portion of the data used to
determine the unit value of Puget.
     The following finding by the Board was reversed by the
District Court:
         The Board finds that the townsite is a
    nonoperating property and as such, its value must
    not be apportioned to the counties nor should it be
    considered as a portion of the Montana value.
    Evidence revealed that the townsite property is
    real estate. Real estate cannot be valued pursuant
    to a mechanical apportionment formula. Instead, it
    must be appraised according to accepted real estate
    valuation   principles.     Puget   introduced   no
    evidence, based upon proper valuation principles,
    which overcame the Department's valuation of
    1,629,146 for the townsite.

     In reviewing the contentions on this issue, we are in
agreement that it would seem unfair to value townsite
property at a higher value for inclusion in the cost
indicator, and then take it out of the total unit value at a
lower value. However, Puget bears the burden of showing that
this is what was done.      Furthermore, there are various
amounts of depreciation, arrived at by different methods,
taken on property included in the cost indicator, and the
cost indicator is included in the total valuation at a weight
of only 50%. Thus, we hold that the Board did not clearly
abuse its discretion by accepting the locally assessed value.
     Another aspect of this argument also persuades us to
reverse this issue. The Department argues that 55 15-7-111
to- 114, MCA, provide the exclusive methods for valuing
residential property, and that $1,629,146 was the figure
arrived at under these procedures.    Thus, according to the
Department, no further inquiry into the townsite value should
be allowed.
     Under the facts of this case, we agree with the
Department.   Puget's local taxes were assessed based on a
townsite value of $1,629,146.     If the Department were to
follow the District Court's mandate on remand Puget would pay
local taxes on property valued using the low figure, and
would have the high figure deducted from the value of the
centrally assessed property for state wide taxation purposes.
In other words, Puget would have the best of both worlds
because the company would not pay any taxes on the difference
between the high and low figures. Under these circumstances,
the Board did not abuse its discretion by approving use of
the local appraisal.
                     Cross-appeal Issue
     The District Court affirmed the Board's conclusion that
the stock and debt indicator should not be adjusted to
reflect the amount of CWIP not expected to go into service.
Puget concedes that the Department removed the value of
deductible assets from the stock and debt indicator, but
contends that the indicator retained value of CWIP not
expected to go into service because the Board and the
District Court erroneously refused to remove the cost of CWIP
not expected to go into service from the liability side of
the balance sheet.
     The District Court affirmed the Board because evidence
disclosed that the reduction in the value of CWIP as a result
of CWIP not expected to go into service was already reflected
in the market value of Puget's stock and debt. The District
Court also found that the Department's regulations require
that CWIP be included at its market value rather than at its
cost value. See ARM S 4 2 . 2 2 . 1 1 3 (1982). Puget's proposal on
this issue, according to the District Court, would deduct the
value of CWIP not expected to go into service at its cost
rather than its market value.
     We affirm the District Court on this issue because
substantial evidence reveals that a reduction equaling the
cost of the CWIP would overstate the loss of the property's
value for Puget.    We also agree with the District Court's
conclusion that the stock and debt indicator should include
property at its market value rather than at its cost value.

     In summary, we reverse the District Court's opinion and
order on the appellant's issues 1 - 3       and remand for
reinstatement of the Board's order on these issues.      The
issue on cross-appeal is affirmed.




We concur:
    &"
Justic
