Was Navajo Refining entitled to reduce its 2004 New Mexico refinery valuation by $22.2 million for functional obsolescence and $63.8 million for environmental-compliance costs?

View original ruling (PDF)

Plain-English summary

Navajo Refining Co., L.P. failed to prove $86 million in functional and economic obsolescence deductions from the 2004 property-tax value of its Artesia/Lovington refinery. A compromise method accepted for earlier years did not bind the Property Tax Division for 2004, and the evidence did not satisfy accepted appraisal standards.

Navajo operated an integrated oil-refinery complex split between Artesia in Eddy County and Lovington in Lea County. Lovington processed crude oil into intermediate products that traveled by company pipeline to Artesia for upgrading into finished products.

For 2001 and 2002, Navajo and the Property Tax Division, or PTD, negotiated a compromise method for functional and economic obsolescence. PTD accepted the same method on Navajo's 2003 report but refused to put a future-year agreement in writing.

Navajo used that method again for 2004. It claimed $22.2 million of functional obsolescence from the two-site refinery configuration and $63.8 million of economic obsolescence from environmental-compliance investments. PTD disallowed both and issued its valuation without the deductions.

The hearing was a de novo review

Navajo argued that review should be confined to the grounds PTD gave when it first rejected the deductions.

The decision disagreed. The administrative hearing officer reviewed the evidence and legal arguments anew and issued the agency's final decision in the Secretary's name. Judicial-review limits applicable to a final agency decision did not bind the agency's internal review of staff action.

PTD did not have to issue a separate explanation

The Property Tax Code specified what the annual notice of valuation had to contain, and Navajo did not claim the notice omitted those required items. PTD was not required to send a separate written explanation.

Navajo quickly identified the denied deductions, timely protested, met informally with PTD personnel, and received two hearing continuances. It never requested a written explanation, did not serve discovery on PTD, and did not respond to PTD's discovery requests. The procedural record did not show that Navajo lacked a fair opportunity to learn PTD's position or prepare its case.

The evidence also did not prove that PTD applied an unreasoned blanket policy. Testimony showed that obsolescence claims were referred upward for review, and Navajo did not call the supervisors who made the decision. At the hearing, PTD presented substantial evidence supporting denial.

Prior-year treatment did not bind a later valuation

Property is valued each year. The decision held that an agreement or mistake concerning one tax year does not control a later year.

The earlier methodology was an unwritten settlement compromise. PTD had expressly refused Navajo's request to memorialize it for future years, and Navajo's expert never received an assurance that it would continue.

PTD's rejection after Navajo filed its annual report was not impermissibly retroactive. Notices of valuation necessarily follow annual reports, and Navajo could have supplied additional support during the protest. It did not present a different method for 2004.

The functional-obsolescence proof was incomplete

Navajo treated excess operating costs from the 65-mile split between Artesia and Lovington as functional obsolescence.

PTD's expert testified that accepted appraisal practice first required a replacement-cost study comparing the capital cost of a one-location facility with the existing two-site property. Navajo performed no such study.

The decision also found tension between Navajo's claim and its own reasons for retaining Lovington: existing permits, faster capacity expansion and pipeline access, wastewater injection wells, tank storage, and avoided relocation and utility costs. Navajo's witness said those advantages still existed.

The environmental investments were not shown to have zero value

Navajo sought to deduct the full cost of a gas-oil hydrotreater, sulfur plant, amine-plant upgrade, and flue-gas scrubber as economic obsolescence from government regulation.

But its parent company's statements said the upgrades would improve yield, increase production of higher-value products, allow more flexible crude sourcing, expand capacity, and strengthen the refinery's competitive position. The refinery was operating near capacity, selling its output, and had increased sales and operating margin.

The methodology also deducted 100% of gross project cost even though PTD's valuation included completed improvements at depreciated value, and it included an estimated $5.7 million for a scrubber not yet completed. Comparison work with other refineries also failed accepted appraisal standards.

Navajo's own expert acknowledged that none of the negotiated methodology complied with the Uniform Standards of Professional Appraisal Practice. The taxpayer therefore failed to prove or quantify either deduction under Section 7-36-27(D) and Regulation 3.6.5.34 A(2)(c).

Result: protest DENIED. No change was made to PTD's 2004 valuation.

What this means for you

Industrial-property owners claiming obsolescence

Quantify the claimed loss with objective evidence and an accepted appraisal method. A negotiated formula from another year may not satisfy the current-year burden.

Businesses relying on prior-year settlements

Property valuation is annual. Prior acceptance, especially through an unwritten compromise, does not guarantee the same adjustment in a later year.

Companies claiming regulatory costs reduce value

Address every way a mandated investment may improve capacity, yield, product quality, operating flexibility, or market position. Company statements describing those benefits can undermine a claim that the investment has no economic value.

Taxpayers preparing for a valuation hearing

Use discovery and supplement the record with supporting appraisal proof. The taxpayer, not PTD, had the burden to establish the amount of the obsolescence deduction.

Common questions

Q: How much functional obsolescence did Navajo claim?
A: $22.2 million, based on the refinery's split Artesia/Lovington configuration.

Q: How much economic obsolescence did it claim?
A: $63.8 million for environmental-compliance investments.

Q: Why did prior acceptance not control 2004?
A: The earlier method arose from an unwritten settlement for other years, and New Mexico law required a new valuation each year.

Q: Was Navajo's expert disqualified?
A: No. The decision found both sides' experts qualified; Navajo lost because its methodology and proof were inadequate, not because its expert lacked qualifications.

Q: Did the hearing officer substitute a new valuation?
A: No. The decision ordered no change to PTD's 2004 valuation.

Citations and references

Statutes and regulation:

• NMSA 1978, § 7-36-27(D) — valuation of pipelines, tanks, and plants
• NMSA 1978, § 7-38-6 — presumption that property valuation is correct
• NMSA 1978, § 7-38-7 — annual property valuation
• NMSA 1978, § 7-38-8(A) — annual property report deadline
• NMSA 1978, § 7-38-20(B) and (D) — notice of valuation requirements
• NMSA 1978, § 7-38-22 — property valuation protest
• NMSA 1978, § 7-38-23(A), (D), and (E) — property-tax protest procedure and final decision
• Regulation 3.6.5.34 A(2)(c) NMAC — functional and economic obsolescence

Cases cited:

• Jicarilla Apache Nation v. Rodarte, 2004-NMSC-035, 103 P.3d 554
• Anaconda Co. v. Property Tax Department, 94 N.M. 202, 608 P.2d 514 (Ct. App. 1979)
• IMC Kalium Carlsbad, Inc. v. Interior Board of Land Appeals, 206 F.3d 1003 (10th Cir. 2000)
• Protest of Plaza Del Sol Ltd. Partnership v. Assessor for County of Bernalillo, 104 N.M. 154, 717 P.2d 1123 (Ct. App. 1986)
• Property Tax Department v. Molycorp, Inc., 89 N.M. 603, 555 P.2d 903 (1976)
• Taxation and Revenue Department v. Bien Mur Indian Market Center, 108 N.M. 228, 770 P.2d 873 (1989)
• Johnson & Johnson v. Taxation & Revenue Department, 1997-NMCA-030, 936 P.2d 872
• Kilmer v. Goodwin, 2004-NMCA-122, 99 P.3d 690
• Alexander v. Anderson, 1999-NMCA-021, 973 P.2d 884
• Hannahs v. Anderson, 1998-NMCA-152, 966 P.2d 168

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Navajo Refining Co., L.P.
• Decision PDF: D&O 05-08

Original ruling text

BEFORE THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO

IN THE MATTER OF THE PROTEST OF
NAVAJO REFINING CO., L.P. No. 05-08 (CAB)
CAB ID NO. 410.018
TO 2004 NOTICE OF VALUATION

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on January 19, 2005, before

Margaret B. Alcock, Hearing Officer. The Property Tax Division (“PTD”) of the Taxation and

Revenue Department (“Department”) was represented by Bridget A. Jacober, Special Assistant

Attorney General. Navajo Refining Co., L.P. (“Navajo”) was represented by Joel M. Carson, II,

with the law firm Losee, Carson & Haas, P.A. At the end of the hearing, the parties agreed to

allow the hearing officer 45 days after submission of post-hearing briefs to issue a decision in

this matter. The parties’ briefs were submitted on March 14, 2005. Based on the evidence and

arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

The Artesia/Lovington Refinery

1. Navajo, a wholly-owned subsidiary of Holly Corporation, reports properties in

eight counties in New Mexico for property tax purposes, including an oil refinery complex

located in Eddy and Lea Counties. (Prehearing Statement; Exhibit D, Holly’s 2003 Annual

Report, p. 5).

2. Navajo’s refinery in Eddy County is located on a 400-acre site in Artesia and has

fully integrated crude distillation, fluid catalytic cracking, vacuum distillation, alkylation,
hydrodesulfurization, isomerization, sulfur recovery and reforming units, and approximately 1.6

million barrels of feedstock and product tank storage, as well as other supporting units and office

buildings at the site. (Exhibit D, Holly’s 2003 Annual Report, p. 8).

3. Since 1991, the Artesia refinery has been operated in conjunction with integrated

refining facilities located in Lovington, Lea County, New Mexico, approximately 65 miles east

of Artesia. (Exhibit C, Holly’s 1991 Annual Report, pp. 3-4).

4. The Lovington refinery consists of a crude and vacuum distillation unit along with

approximately one million barrels of feedstock and product tank storage. (Exhibit D, Holly’s

2003 Annual Report, p. 8).

5. The Lovington refinery lacks the ability to produce the type of high-value light

products (such as gasoline, diesel fuel and jet fuel) that comprise 90% of Navajo’s output. For

this reason, the Lovington facility is used to process crude oil into intermediate products, which

are then transported by means of a company pipeline to the Artesia facility to be upgraded into

the finished products. (Prehearing Statement; Exhibit D, Holly’s 2003 Annual Report, pp. 7-8).

6. Navajo acquired the Lovington facility (which had been inactive since 1984) in

1989 and began to explore the possibility of using that facility in conjunction with its Artesia

refinery to expand Navajo’s New Mexico refining capacity. (Exhibit C, Holly’s 1989 Annual

Report, p. 3).

7. When it made the decision to reactivate the Lovington refinery and maintain crude

units at two locations, rather than expanding its existing refinery in Artesia, Navajo considered

the following factors (Exhibit C, 9/9/04 letter from Stephen Gardner to Steven Long):

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(a) The Lovington refinery had numerous county, state, and federal operating

permits already in place. Relocation of the crude unit assets from Lovington to Artesia would

have required Navajo to apply for new and additional permits, which would have entailed

additional expense and a prolonged administrative review process.

(b) Reactivating the Lovington refinery allowed Navajo to expand its refining

capacity quickly enough to secure pipeline space to Arizona ahead of its El Paso competition,

which was also in the process of expanding.

(c) The Lovington facility had injection wells to dispose of waste water while

the Artesia facility used evaporation ponds that could not be expanded to handle the additional

capacity that would have occurred had the Lovington operation been moved to Artesia.

(d) The Lovington facility offered a large amount of offsite tankage. The cost

of moving this tankage to Artesia, as well as the additional utility and substation connection

costs, suggested that reactivating the Lovington refinery was a better economic decision than

expanding Navajo’s existing refinery at Artesia.

8. Navajo also considered the community of Lovington’s desire to have the refinery

reopened to provide jobs for its citizens and to increase its tax base. (Testimony of Steven Long

(“SL”)).

9. The factors that Navajo considered in deciding to reactivate the Lovington

refinery, rather than expanding its existing refinery in Artesia, still exist at the present time

(Testimony of SL), i.e.:

(a) It is even more difficult to get permits today than it was in 1989.

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(b) The current competition for pipeline space is comparable to what it was in

1989.

(c) The Artesia waste water system cannot be physically expanded to take on

more capacity without total new capital investment.

(d) It would be more expensive to move the Lovington tankage to Artesia

today than it would have been in 1989.

10. The reactivation of the Lovington refinery, together with improvements to the

Artesia refinery, allowed Navajo to increase its refining capacity from 40,000 barrels per day to

60,000 barrels per day by the end of 1991. (Exhibit C, Holly’s 1991 Annual Report, p. 3).

Environmental Regulations

11. Refineries are subject to various environmental regulations, including the

California Air Resources Board (“CARB”) standards, which were also adopted in Navajo’s

Phoenix market for winter months beginning in late 2000. (Exhibit D, Holly’s 2003 Annual

Report, p. 13).

12. In 2000, the Environmental Protection Agency (“EPA”) enacted new regulations

under the Clean Air Act requiring all gasoline and diesel fuel to be reformulated to reduce sulfur

content. (Exhibit 5, Appendix II, Fitch Ratings, What a Smell of Sulfur; Testimony of SL).

13. The new EPA standards applied nationwide and required refineries to make a

significant investment of capital to meet the new requirements. (Exhibit 5, Appendix II, Fitch

Ratings, What a Smell of Sulfur; Testimony of SL).

14. The principal method for reducing sulfur is through hydrotreating, and new

hydrotreating units represent the bulk of the major investments refiners need to make to meet

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new EPA standards. (Exhibit 5, Appendix II, Fitch Ratings, What a Smell of Sulfur; Testimony

of SL).

15. Some less competitive refiners have decided to shut down their facilities rather

than incur the costs necessary to comply with the new EPA standards. (Exhibit 5, Appendix II,

Fitch Ratings, What a Smell of Sulfur; Testimony of SL).

16. The refiners that remain in business will ultimately benefit from the new

regulations as refined product supply is removed from the market and at least a portion of the

capital costs required to comply with the new standards is passed along to the end consumers.

(Exhibit 5, Appendix II, Fitch Ratings, What a Smell of Sulfur).

Navajo’s Response to New EPA Standards

17. Navajo did not shut down its refinery in response to the new EPA standards, but

elected to make substantial capital improvements designed to comply with those standards and

increase the capacity of its Artesia/Lovington refinery. (Exhibit 3, Appendix II, 1/8/02 press

release; Exhibits C and D, Holly’s Annual Reports).

18. In January 2002, Holly announced that Navajo had received the necessary permits

for the construction of a new gas oil hydrotreating unit at its Artesia refinery, stating that:

The Gas Oil Hydrotreating Unit will enable Navajo to expand substantially
its capabilities to produce higher-valued California grade gasolines
required in its Phoenix market while increasing Navajo’s overall
percentage yield of gasoline. Navajo will also be positioned to meet the
new EPA nationwide low-sulfur clean-burning gasoline standards on all its
gasoline production upon the completion of the Gas Oil Hydrotreater in
late 2003, which would be over four years ahead of the required date for
the Navajo facility.

(Exhibit 3, Appendix II, 1/8/02 press release).

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19. Holly’s January 2002 press release further stated that Navajo was planning to

make additional improvements to expand its New Mexico refining capacity from 60,000 to

70,000 barrels per day. (Exhibit 3, Appendix II, 1/8/02 press release).

20. In its 2003 annual report, Holly informed its stockholders that construction of the

gas oil hydrotreating unit at Navajo’s refinery had been completed, “which will satisfy future

EPA-mandated gasoline specifications while improving the refinery’s yield and production of

higher value products.” (Exhibit D, Holly’s 2003 Annual Report, “Dear Fellow Stockholders”).

21. Additional improvements increased Navajo’s refining capacity from 60,000 to

75,000 barrels per day. (Exhibit D, Holly’s 2003 Annual Report, “Dear Fellow Stockholders”).

22. With the 2003 expansion and upgrade of its refinery, Navajo now has the ability

to process a variety of sour crude oils into high value light products. This, in turn, allows

management to vary the crude supply mix to take advantage of changes in raw material prices

and to respond to fluctuations in the availability of different types of crude oil supplies. (Exhibit

D, Holly’s 2003 Annual Report, p. 7).

23. During 2003, Navajo’s refinery was running at close to full capacity and Navajo

was selling all of the products it produced. Navajo’s net sales and net cash operating margin

increased substantially between 2002 and 2003. (Exhibit D, Holly’s Annual Report, p. 8;

Testimony of SL).

24. The capital improvements made at the Navajo refinery, together with Holly’s

ongoing strategy of targeting high value products in premium locations, has given the company a

strong strategic and geographic advantage over its competitors. (Exhibit D, Holly’s 2003 Annual

Report, “Dear Fellow Stockholders”).

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Navajo’s Claims of Economic and Functional Obsolescence
for the 2001, 2002, and 2003 Tax Years

25. In March 2001, Navajo filed its 2001 annual property report with the Property Tax

Division (“PTD”) of the New Mexico Taxation and Revenue Department. (Exhibit 2).

26. Navajo’s 2001 property report was prepared under the direction of Steven W.

Long, III, managing partner of Industrial Valuation Services, L.L.C, which was hired by Navajo

to evaluate various factors that might affect the taxable value of Navajo’s Artesia/Lovington

refinery. (Exhibit 2; Testimony of SL).

27. Navajo’s 2001 property report included a claim of functional and economic

obsolescence for its Artesia/Lovington refinery. The justification for Navajo’s claim was set out

in Navajo’s March 29, 2001 cover letter to Tom Garcia, Jr., the PTD Director. (Exhibit 2).

28. PTD initially denied Navajo’s obsolescence claim for the 2001 tax year. Navajo

protested PTD’s denial, and the parties began an 18-month period of negotiation concerning the

obsolescence issue. (Testimony of SL).

29. The representatives participating in the negotiations were: Steven Long on behalf

of Navajo; and Richard Martinez, chief of the State Assessed Property Bureau, on behalf of PTD.

After Mr. Martinez’s retirement, Navajo worked with Tom Garcia, Jr., the PTD director.

(Testimony of SL; hearing officer’s 3/23/05 letter to the parties).

30. After protracted negotiations, Navajo and PTD reached a compromise

methodology for calculating a deduction for functional and economic obsolescence in connection

with the Artesia/Lovington refinery. (Testimony of SL).

31. The compromise methodology agreed to by Navajo and PTD did not conform to

the Uniform Standards of Professional Appraisal Practice (“USPAP”). (Testimony of SL).

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32. PTD agreed to allow a deduction for functional obsolescence based on the 65-mile

distance between the Artesia and Lovington facilities and agreed to allow a deduction for

economic obsolescence based on the additional capital investment required to comply with

environmental standards. PTD rejected the other bases for Navajo’s obsolescence claim as set

out in Navajo’s 2001 property report. (Testimony of SL).

33. PTD required Navajo to allocate the entire amount of obsolescence allowed on the

Artesia/Lovington refinery to Eddy County because PTD was concerned that Lea County could

not afford to lose any property tax revenue. (Testimony of SL).

34. The compromise methodology agreed to by the parties was used to value Navajo’s

Artesia/Lovington Refinery for the 2001 and 2002 tax years. (Testimony of SL).

35. In March 2003, Navajo filed its 2003 annual property report using the same

methodology agreed to for the 2001 and 2002 tax years. The 2003 report was accepted as filed.

(Testimony of SL).

36. After reaching agreement on the obsolescence deduction for the 2001 tax year,

Navajo had asked PTD to put the agreement in writing so that it could be used for future years.

PTD refused, stating that PTD regulations do not permit such agreements. (Testimony of SL).

Navajo’s Claims of Economic and Functional Obsolescence
for the 2004 Tax Year

37. On March 29, 2004, Navajo filed its 2004 annual property report, which included

an obsolescence deduction for the Artesia/ Lovington refinery. (Exhibit 5).

38. Navajo’s obsolescence deduction was not based on a complete income, market or

cost approach, but was calculated using the same methodology PTD had orally agreed to in

8
settlement of the 2001 and 2002 tax years and had accepted for the 2003 tax year. (Exhibit 5;

Testimony of SL).

39. On April 28, 2004, PTD mailed Navajo a Notice of Valuation for the 2004 tax

year. (Prehearing Statement; Exhibit B).

40. After reviewing PTD’s Notice of Valuation, Navajo determined that PTD had

disallowed the deduction Navajo claimed for obsolescence on the Artesia/ Lovington refinery.

(Testimony of SL).

41. Steven Long telephoned PTD to inquire as to the reason for the denial. Mr. Long

spoke to Clifford Quintana, a tax compliance specialist, who said that he had been instructed not

to grant any taxpayer requests for obsolescence, but to refer all such requests to his supervisor.

(Testimony of Clifford Quintana).

Protest Proceeding

42. On May 25, 2004, Navajo protested PTD’s 2004 valuation, stating that PTD “has

failed to consider functional and economic obsolescence associated with the Refinery located in

Eddy County” and that PTD’s valuation “is arbitrary, capricious and otherwise contrary to law.” 1

43. On June 10, 2004, PTD mailed its First Set of Interrogatories and Request for

Production to Navajo.

44. Navajo had informal discussions and meetings with PTD personnel concerning

Navajo’s claim to an obsolescence deduction for the 2004 tax year, but never asked for a written

explanation as to why the deduction had been denied. (Testimony of SL).

1
All pleadings and correspondence referred to in this decision are contained in the hearing officer’s file,
which is part of the record of this proceeding.

9

45. On June 23, 2004, the hearing officer sent the parties a Notice of Administrative

Hearing scheduling a hearing on Navajo’s protest for July 19, 2004. At Navajo’s request, the

hearing was continued twice, first to October 7, 2004 and then to January 19, 2005.

46. On September 13, 2004, following Navajo’s second request for continuance, the

hearing officer entered a scheduling order granting the continuance, extending the time for

Navajo to respond to the Department’s discovery requests until October 15, 2004, and setting

December 10, 2004 as the deadline for all additional discovery to be completed.

47. Navajo never responded to PTD’s interrogatories and request for production and

never served any discovery requests on PTD. (Testimony of SL).

ISSUES TO BE DECIDED

I. Whether the standard of review to be applied by the Hearing officer is a record

review of PTD’s valuation or a de novo review of the evidence and legal arguments presented by

the parties at the administrative hearing.

II. Whether PTD acted arbitrarily and capriciously in rejecting Navajo’s 2004 claim

to an obsolescence deduction based on the same methodology accepted by PTD in prior years.

III. Whether Navajo met its statutory burden of proving and quantifying its claim to a

deduction for functional obsolescence based on the split location of its Artesia/Lovington

refinery and to a deduction for economic obsolescence based on the expenditures it incurred to

comply with government regulations.

BURDEN OF PROOF

There is a statutory presumption that PTD’s determination of value for property tax

purposes is correct. NMSA 1978, § 7-38-6; Jicarilla Apache Nation v. Rodarte, 2004 NMSC 35

10
¶ 21, 103 P.3d 554. With regard to deductions from value for obsolescence, the burden is on the

taxpayer to prove the amount of the deduction to which it is entitled. Anaconda Co. v. Property

Tax Department, 94 N.M. 202, 207, 608 P.2d 514, 519 (Ct. App. 1979), cert. denied, 94 N.M.

628, 614 P.2d 545 (1980). Accordingly, it is Navajo’s burden to establish that it is entitled to an

obsolescence deduction for tax year 2004 and that PTD’s denial of the deduction was incorrect.

DISCUSSION

I. Standard of Review. The first issue to be determined concerns the standard of

review the hearing officer should apply to PTD’s decision not to allow Navajo’s obsolescence

deduction. Navajo argues that the hearing officer must limit her review to the grounds stated by

PTD at the time the deduction was denied. (Navajo Brief, pp. 10-12). In support of its position,

Navajo cites several cases that discuss the standard that applies to judicial review of agency

decisions. See, Atlixco Coalition v. County of Bernalillo, 1999 NMCA 88, 127 N.M. 549, 984

P.2d 796, cert. denied, 127 N.M. 389, 981 P.2d 1207 (1999) (judicial review of a zoning decision

made by a board of county commissioners after public hearing); Stone Landing Corp. v. Board of

Appeals, 5 A.D.3d 496, 773 N.Y.S.2d 103 (N.Y. App. Div. 2004) (judicial review of a zoning

decision made by a board of appeals after hearing); AT&T Communications v. Arkansas Public

Service Commission, 40 Ark. App. 126, 843 S.W.2d 855 (1992) (judicial review of a decision of

the Arkansas Public Service Commission after a public hearing conducted by an administrative

hearing officer); Arkansas Department of Human Services v. Haen, 81 Ark. App. 171, 100

S.W.3d 740 (2003) (judicial review of an agency decision made after a hearing conducted by an

administrative law judge).

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Navajo has confused the standard of review that courts apply to final agency decisions

with the standard of review that administrative agencies apply to internal staff decisions. As the

New Mexico Court of Appeals explained in Atlixco Coalition v. Maggiore, 1998 NMCA 134, ¶

20, 125 N.M. 786, 965 P.2d 370, for the judiciary to supply a reasoned basis for an agency’s

action is inconsistent with the doctrine of separation of powers because it "foists upon the court

what is essentially the function of the Executive Branch of government." (quoting McGonigel's,

Inc. v. Pennsylvania Liquor Control Bd., 663 A.2d 890, 893 (Pa. Commw. Ct. 1995)). The court

further noted that “the task of supplying reasons for its actions is a function of the Executive

Branch because it involves matters that are within the Secretary's specialized field of expertise.”

Id. at ¶ 21. Neither the separation of powers doctrine nor the need to defer to agency expertise is

a concern, however, when an administrative hearing officer reviews the decision of agency staff.

This conclusion is confirmed by the Tenth Circuit Court of Appeals’ opinion in IMC

Kalium Carlsbad, Inc. v. Interior Board of Land Appeals, 206 F.3d 1003 (10th Cir. 2000), cited at

page 11 of Navajo’s post-hearing brief. In IMC, the court reviewed a decision by the Interior

Board of Land Appeals (“IBLA”), which reversed a decision of the Bureau of Land Management

(“BLM”). The court noted that:

This case hinges on two important subsidiary questions that affect our application
of the standard of review: (1) when reaching its decision, what weight, if any,
must the IBLA accord the findings and decision of the BLM? and (2) what
weight, if any, must we accord the findings and decision of the BLM when
reviewing the IBLA decision? These questions are pivotal because the district
court focused on whether the decision of the BLM, rather than that of the IBLA,
was supported by the evidence. [footnote omitted] Yates/Pogo contend that such
an analysis impermissibly deferred to the BLM. We agree.

206 F.3d at 1009. The Tenth Circuit found that the IBLA had de novo review authority over

BLM decisions because the IBLA was charged with deciding appeals “as fully and finally as

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might the Secretary.” Id. (citing National Wildlife Fed’n, 145 IBLA 348, 362 (1998)). The court

specifically held that the “decision of a subordinate agency division, such as the BLM, does not

bind the agency.” Id.

The same reasoning applies here. The hearing officer’s decision is not a record review of

PTD’s valuation, but a de novo review of the evidence and legal arguments presented by the

parties at the administrative hearing. The hearing officer’s decision, which is issued in the name

of the secretary of the Taxation and Revenue Department, represents the final decision of the

agency. See, NMSA 1978, § 7-38-23(D) and (E). It is this decision—not the initial decision of

PTD—that is subject to the standard of judicial review discussed in the cases Navajo cites in its

post-hearing brief.

II. Whether PTD’s Denial of Navajo’s Deduction Was Arbitrary and

Capricious. Navajo maintains that PTD’s decision to deny Navajo’s obsolescence deduction

was arbitrary and capricious for the following reasons: Navajo never received a written

explanation of PTD’s reasons for denying the deduction; the denial was not based on a review of

the relevant facts, but on a blanket policy not to grant obsolescence to any taxpayer; PTD was

required to accept the same method of calculating obsolescence that it had accepted in prior tax

years; and PTD’s denial was retroactive and prejudicial to Navajo.

A. Absence of Written Explanation. Navajo maintains that PTD was required to

give Navajo “a written decision and explanation of reasons” for rejecting Navajo’s deduction for

obsolescence. (Navajo Brief, p. 4). The provisions of the Property Tax Code do not support

Navajo’s position. NMSA 1978, § 7-38-20(D) sets out the information PTD is required to

include in its annual notices of valuation, and Navajo has not made any allegation that PTD’s

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2004 notice did not meet these statutory requirements. PTD was not required to send Navajo a

separate, written decision explaining the basis for the valuation. As both parties were well

aware, NMSA 1978, § 7-36-27 sets out the statutory methodology PTD used to value Navajo’s

Artesia/Lovington refinery. Upon receipt of PTD’s April 28, 2004 notice, Navajo quickly

determined that the valuation did not include a deduction for obsolescence and confirmed this

with a telephone call to PTD. On May 25, 2004, Navajo filed a timely protest challenging PTD’s

failure to allow the deduction.

A formal administrative hearing on Navajo’s protest was scheduled for July 19, 2004. At

Navajo’s request, the hearing was continued twice, first to October 7, 2004 and then to January

19, 2005. As justification for its second request for continuance, Navajo stated that “discussions

have been ongoing between TRD and Navajo and the case is not ripe for hearing.” PTD did not

object to the continuance, noting that the “parties have agreed to use the date of October 7th for

another informal conference.” (Emphasis added). Given this interaction between the parties, it

is difficult to accept Navajo’s claim that it has been unable to obtain an explanation of PTD’s

reasons for denying Navajo’s obsolescence deduction. At the administrative hearing, Steven

Long acknowledged that he had met with various PTD employees, including PTD’s director and

attorney, but had never asked for a written explanation of their position on Navajo’s protest.

NMSA 1978, § 7-38-23(A) provides that the Rules of Civil Procedure for the District

Courts govern the course of discovery in administrative property tax hearings. On June 10, 2004,

shortly after Navajo’s protest was filed, PTD served its First Set of Interrogatories and Request

for Production on Navajo. Three months later, on September 9, 2004, Navajo filed a motion

asking for an extension of time to respond to PTD’s interrogatories. The hearing officer

14
subsequently entered a scheduling order extending Navajo’s response time to October 15, 2004

and setting December 10, 2004 as the deadline for all additional discovery to be completed. As

of January 19, 2005, the date of the administrative hearing, Navajo still had not responded to

PTD’s interrogatories,2 nor had Navajo served any discovery requests on PTD.

On January 5, 2005, the parties filed a Joint Prehearing Statement which described the

matter at issue in Navajo’s protest as follows (at page 2):

The single issue in this case is whether Navajo has met its burden in claiming a
deduction in the value of its property attributable to economic or functional
obsolescence. The taxpayer has the burden of requesting, proving and quantifying
its claim for an obsolescence deduction. NMAC, 3.6.5.34A(2)(c).

The prehearing statement also listed the parties’ witnesses and exhibits. Navajo and PTD

separately stated that they would object if the other party attempted to present witnesses or

exhibits not identified in the prehearing statement. The hearing officer’s September 13, 2004

scheduling order had previously advised the parties (at page 2) as follows:

Unless ordered by the Hearing Officer upon good cause shown, no issue shall be
raised, no witness shall be allowed to testify and no exhibit shall be admitted into
evidence unless listed in the prehearing statement. A prehearing conference will
be set upon the request of either party or may be set on the Hearing Officer’s own
motion.

Navajo did not request a prehearing conference or notify the hearing officer that it was having

difficulty obtaining information from PTD. Prior to the administrative hearing, Navajo never

asked the hearing officer for assistance in obtaining access to witnesses or exhibits. Based on

this procedural history, Navajo has no grounds to complain that it was unable to obtain an

explanation of PTD’s position or to prepare for the hearing on its protest.

2
Because PTD chose not to file a motion to compel, Navajo was never directly ordered to respond to
PTD’s discovery requests.

15
B. PTD’s Basis for Denying the Obsolescence Deduction. Navajo contends that

PTD’s denial of Navajo’s obsolescence deduction was based on a blanket policy not to grant

obsolescence, rather than on a factual review of Navajo’s individual circumstances. (Navajo

Brief, pp. 3, 10). Steven Long, Navajo’s expert witness, testified that he called PTD in May

2004 to determine why Navajo’s obsolescence deduction was denied. Mr. Long spoke with

Clifford Quintana, a tax compliance specialist with PTD. Mr. Quintana said that he had been

instructed not to grant obsolescence and advised Mr. Long to speak with Mitch Bonney, Mr.

Quintana’s supervisor. At the hearing, Mr. Quintana confirmed Mr. Long’s recollection of their

conversation as follows:

Mr. Quintana: I noticed that I was told by the bureau chief if there was any asking
or requesting of obsolescence to inform him immediately, and I noticed when I
was going through the rendition that the company was asking for obsolescence.
And I immediately informed my supervisor, or my bureau chief.

Mr. Carson: Okay, what did he tell you to do?

Mr. Quintana: He told me that he was going to, um, that all obsolescence had
been denied, and that for us to continue working on the rendition until he got back
with me as far as letting us know if obsolescence was going to be admitted or not
this year.

Mr. Carson: And he told you this was a policy?

Mr. Quintana: He told me that he was going to…that it was a directive that came
from his, from his boss, which is our director, and I just followed the chain of
command.

(Tape 4B at 121-135).3

Mr. Quintana’s testimony indicates that a review of obsolescence claims was being

conducted at the highest levels within PTD. On cross-examination, Mr. Long acknowledged that

3
The counter numbers are based on a Sanyo tape recorder with approximately 705 counters per side.

16
during subsequent meetings with PTD employees, he was told that every claim for obsolescence

was being personally reviewed by Tim Eichenberg, the PTD director. Mr. Long confirmed that

he had two meetings with Mr. Eichenberg, as well as meetings with Clifford Quintana, Mitch

Bonney, and Bridget Jacober, PTD’s attorney. Nonetheless, the only PTD employee Navajo

called as a witness at the administrative hearing was Mr. Quintana, who testified that he was

acting on the instructions of his supervisor. Without the testimony of Mitch Bonney or Tim

Eichenberg, there is no evidence concerning the basis for those instructions or the procedures

PTD followed when it denied Navajo’s obsolescence deduction. Navajo’s conjecture on this

issue is not evidence and does not establish that there was no reasoned basis for PTD’s decision.

In any event, the resolution of Navajo’s protest rests on the evidence and legal arguments

presented at the administrative hearing, not on Mr. Quintana’s telephone conversation with Mr.

Long (see discussion in Part I, above). Through cross-examination of Navajo’s expert witness

and the testimony of its own expert, PTD provided substantial evidence to support its position

that Navajo failed to establish its right to an obsolescence deduction for tax year 2004. A review

of that evidence is set out in Part III of this decision.

C. Reliance on Methodology Accepted in Prior Years. Navajo argues that it was

entitled to rely on the “well established” and “long-standing TRD approved method” for

determining obsolescence, and that PTD’s rejection of this methodology for the 2004 tax year

was arbitrary and capricious. (Navajo Brief, pp. 3-4, 8). With regard to the first point, the

evidence shows that the methodology Navajo relied on in calculating obsolescence for 2004 was

neither well established nor particularly long standing. Navajo’s combined Artesia/Lovington

refinery has been in operation since 1991. The first year for which Navajo was allowed an

17
obsolescence deduction was 2001. PTD initially denied the deduction for 2001. Navajo

protested this decision, and the parties embarked on an 18-month period of negotiation. When a

settlement was finally reached, PTD agreed to apply the compromise methodology for

determining obsolescence to both the 2001 and 2002 tax years. In March 2003, Navajo filed its

2003 annual property report using the same methodology, and the report was accepted as filed.

One year later, PTD rejected use of the compromise methodology for the 2004 tax year and

denied Navajo’s obsolescence deduction. Navajo protested, and that protest is the subject of this

proceeding.

Navajo contends that PTD “should not be allowed to change accepted procedures and

agreed methodologies for reporting obsolescence retroactively after a return has been timely

filed.” (Navajo Brief, p. 4). In this case, however, there was no “agreed” methodology

applicable to the 2004 tax year. The methodology Navajo used was the product of a negotiated

settlement entered into for a prior tax year. Steven Long, who participated in the negotiations on

behalf of Navajo, testified that he asked PTD to put the settlement in writing so it could be used

in future years. PTD refused to do so, stating that regulations did not allow such an agreement.

This should have put Navajo on notice that it could not rely on PTD’s continued acceptance of

this methodology in the future. New Mexico case law also provides taxpayers with notice that

the state is not bound by a method of valuation used in prior tax years. In Protest of Plaza Del

Sol Ltd. Partnership v. Assessor for County of Bernalillo, 104 N.M. 154, 717 P.2d 1123 (Ct.

App. 1986), the taxpayer raised an argument that is virtually identical to Navajo’s argument in

this protest:

18
Taxpayers argue that during a prior tax protest proceeding involving Plaza del Sol,
Taxpayers and the Board agreed, under a Stipulation of Settlement, to land values
of $163,720 and improvement values of $ 1,500,000 for the 1976 tax year.
Taxpayers also assert that the same assessed values for the three subject parcels of
land were continued by Assessor in 1980, 1981 and 1982 and that it was error not
to use these valuations in 1983 and 1984.

104 N.M. at 158, 717 P.2d at 1127. The Court of Appeals rejected the taxpayers’ contention that

the assessor was bound by his prior agreement or by his acceptance of the settlement values for

three subsequent tax years:

[A]lthough the Stipulation of Settlement was binding for the year 1976, it does
not preclude Assessor or the Board from redetermining the proper tax valuation
for Taxpayers' property in subsequent years. By statute, all property subject to
valuation for property taxation purposes is required to be valued each year.
Section 7-38-7. A stipulation fixing property tax values for a specific year is not
binding for any following tax year; it is res judicata only for the year in question.
Property Tax Department v. Molycorp, Inc., 89 N.M. 603, 555 P.2d 903 (1976).

Id. In the referenced Molycorp case, the New Mexico Supreme Court reversed the Court of

Appeal’s decision that the Department was collaterally estopped from using a valuation method

that deviated from the method agreed to in settlement of a prior year’s protest, stating:

[T]he Department cannot be bound as to a 1975 valuation by an order specifically
pertaining to a 1972 valuation, since each taxable year presents a new
responsibility for placing a value on taxable property.

89 N.M. at 605, 555 P.2d at 905.

Navajo’s argument is one of estoppel. New Mexico case law has consistently held,

however, that estoppel is rarely applied against the state. This is especially true in the area of

taxation. See, e.g., Taxation and Revenue Department v. Bien Mur Indian Market Center, 108

N.M. 228, 770 P.2d 873 (1989); Johnson & Johnson v. Taxation & Revenue Department, 1997

NMCA 30, 123 N.M. 190, 936 P.2d 872, cert. denied, 123 N.M. 168, 936 P.2d 337 (1997);

Kilmer v. Goodwin, 2004 NMCA 122, 99 P.3d 690. In this case, the facts favoring estoppel are

19
even less compelling than the facts in Plaza del Sol, supra and Molycorp, supra. In each of those

cases, the taxpayer was relying on a written order or settlement agreement. There was no written

agreement in this case. When Navajo requested such an agreement in order to memorialize the

compromise methodology for future years, PTD refused. At the administrative hearing, PTD’s

attorney elicited the following testimony from Steven Long:

Ms. Jacober: Did you think this methodology would be applied to Navajo’s
property forever?

Mr. Long: It’s an interesting question. I don’t think I ever gave that any thought.
I mean, forever’s a long time.

Ms. Jacober: Did you ever inquire how long this methodology was applicable?

Mr. Long: Inquire of who?

Ms. Jacober: Of the people in the Property Tax Division.

Mr. Long: No. No, I didn’t.

(Tape 2B at 387-395). Mr. Long stated that after his initial request for a formal agreement was

denied, he never asked PTD for written assurances concerning Navajo’s continued use of the

compromise methodology. Nor did he make any inquiry concerning Navajo’s use of this

methodology before filing Navajo’s 2004 annual report. Based on New Mexico law and the

evidence presented in this case, Navajo has no grounds to argue that it was entitled to base its

2004 property valuation on the unwritten settlement reached in compromise of a prior tax year.

D. Retroactive Effect of PTD’s Denial. In Molycorp, supra, 89 N.M. at 605, 555

P.2d at 905, the New Mexico Supreme Court held that “each taxable year presents a new

responsibility for placing a value on taxable property.” The yearly process of valuation begins

with a taxpayer’s annual property report, which must be filed with PTD by the last day of

20
February. NMSA 1978, § 7-38-8(A). By May 1 of each year, PTD is required to notify the

taxpayer of the net taxable value of its property. NMSA 1978, § 7-38-20(B). A taxpayer who

disagrees with PTD’s determination of value may protest that value by filing a petition of protest

with the PTD director. NMSA 1978, § 7-38-22. In this case, Navajo filed its 2004 property

report on March 29, 2004 (having been granted an extension of the statutory due date). PTD

mailed its notice of valuation to Navajo on April 28, 2004, and Navajo filed its protest on May

25, 2004. The fact that PTD’s decision to deny Navajo’s obsolescence deduction was made after

Navajo filed its 2004 property report does not make that decision retroactive, as Navajos claims.

(Navajo Brief, p. 4). If it did, then all of PTD’s valuations would be retroactive because the

Property Tax Code requires notices of valuation to be issued after taxpayers have filed their

annual property reports.

Navajo’s claim of retroactivity appears to be based on its contention that it was bound by

the methodology set out in its 2004 property report and was precluded from presenting new

information to support its claim to obsolescence. This contention is not supported by the

evidence. In order for an obsolescence claim to be considered timely, Regulation 3.6.5.34 A(2)

(c)(iii) NMAC requires such claims to be submitted, with supporting documentation, at the time

a taxpayer files its annual property report. Provided this requirement is met, there is nothing in

the regulation that precludes the taxpayer from providing supplemental information in the

context of a formal protest. After Navajo protested the denial of its 2001 obsolescence

deduction, the parties entered into protracted negotiations that resulted in PTD’s acceptance of a

methodology that differed substantially from that contained in Navajo’s 2001 property report. In

contrast, there is no evidence that Navajo offered—or that PTD refused to consider—alternative

21
methods of calculating obsolescence in connection with the 2004 tax year. Instead, the evidence

shows that Navajo has continued to base its obsolescence deduction for 2004 on the same

methodology used to settle its 2001 protest. Navajo cannot argue prejudice based on PTD’s

failure to consider alternative methodologies that were never presented for its consideration.

III. Navajo’s 2004 Claim to Economic and Functional Obsolescence. The issue

remaining to be considered is whether the methodology Navajo employed to arrive at its 2004

valuation—standing on its own merits—supports Navajo’s claim of functional and economic

obsolescence. The valuation of Navajo’s Artesia/Lovington refinery (which comes within the

definition of a “plant”) is governed by NMSA 1978, § 7-36-27(D):

D. Pipelines, direct customer distribution pipelines, large industrial sales meters,
tanks and plants shall be valued as follows:

(1) the valuation authority shall first establish the tangible property cost of
each item of property;

(2) from such tangible property cost shall be deducted the related
accumulated provision for depreciation and any other justifiable factors which
further affect the tangible property value of each item of property; and

(3) notwithstanding the foregoing determination of value for property
taxation purposes, the value for property taxation purposes of each item of
property valued under this subsection shall not be less than twenty percent of the
tangible property cost of each item of property.

Pursuant to Regulation 3.6.5.34 A(2)(c) NMAC, the term “other justifiable factors” referenced in

§ 7-36-27(D)(2) includes functional and economic obsolescence, which are defined in the

regulation as follows:

(i) Functional obsolescence is the loss in value due to functional inadequacies or
deficiencies caused by factors within the property.

(ii) Economic obsolescence is the loss in value caused by unfavorable economic
influences or factors outside the property.

22
See also, Anaconda Co. v. Property Tax Department, 94 N.M. 202, 207, 608 P.2d 514, 519 (Ct.

App. 1979), cert. denied, 94 N.M. 628, 614 P.2d 545 (1980) (obsolescence is generally

understood to be the process “whereby property, because of causes other than physical

deterioration, loses its economic usefulness to the taxpayer,” citing 4 Mertens, Law of Federal

Income Taxation § 23.104 (1973)). A taxpayer claiming a deduction for functional or economic

obsolescence is required to support its claim with the following information:

An economic or functional obsolescence factor must be provided together with
documentation to support and demonstrate how the factor was arrived at. Such
documentation shall consist of objective evidence demonstrating functional or
economic obsolescence such as comparisons to a documented industry standard,
to a close competitor or to an engineer’s or appraiser’s valuation, or any other
comparable objective evidence of functional or economic obsolescence. Failure
to provide documentation or proof satisfactory to the director will result in denial
of an obsolescence adjustment.

3.6.5.34 A(2)(c)(iii) NMAC.

In this case, Navajo’s 2004 claim to an obsolescence deduction is based on two factors: a

claim of functional obsolescence resulting from the split configuration of the Artesia/Lovington

refinery; and a claim of economic obsolescence resulting from the substantial capital investment

Navajo has made to comply with governmentally-imposed environmental standards.

A. Expert Witnesses. At the administrative hearing, both parties presented the

testimony of expert witnesses. Although each party disparaged the qualifications of the other’s

expert, both witnesses were qualified to testify.

(1) Navajo’s Expert. Navajo called Steven Long as its expert. Mr. Long is

the managing partner of Industrial Valuation Services, LLC. He has a background in engineering

and was previously employed as a valuation engineer with Pritchard and Abbott Engineering

23
Corporation, an engineering appraisal company specializing in the valuation of oil and gas, as

well as complex industrial and utility system properties on behalf of taxing jurisdictions. Mr.

Long also worked as a tax specialist with General Motors Corporation and as a tax representative

on the corporate financial staff of Shell Oil Corporation. In both of these positions, Mr. Long’s

responsibilities included the valuation, negotiation, and appeal of ad valorem tax matters. He

also provided state legislative analysis, support, and testimony regarding property tax issues. Mr.

Long is a registered senior property tax consultant for the State of Texas and a registered

appraiser in the State of Colorado.

PTD objected to Mr. Long’s qualification as an expert, arguing that he is not a licensed

appraiser. New Mexico law is clear, however, that “an expert witness may be qualified on

foundations other than licensure." Banks v. IMC Kalium Carlsbad Potash Co., 2003 NMSC 26,

¶12, 134 N.M. 421, 77 P.3d 1014 (quoting Madrid v. University of California, 105 N.M. 715,

717, 737 P.2d 74, 76 (1987)). Mr. Long’s engineering background and practical experience with

the valuation of industrial complexes and oil and gas property for ad valorem tax purposes

provided a sufficient background to allow him to testify as an expert in this case.

The weakness in Mr. Long’s testimony on behalf of Navajo was not attributable to a lack

of qualifications, but to the fact that he was asked to testify in support of an appraisal

methodology based on negotiation and compromise. Mr. Long candidly acknowledged that

“nothing” in that compromise methodology complied with the Uniform Standards of

Professional Appraisal Practice. (SL, Tape 3A at 225-228; 288-289). He carefully avoided

giving an opinion as to whether the methodology complied with PTD’s regulations, saying only

that former PTD employees represented that the methodology complied with the regulations.

24
(SL, Tape 2A, 317-330). Mr. Long also described some of his reservations concerning the

compromises made in crafting the methodology. For example, PTD refused to allow

obsolescence based on the age and current utility of Navajo’s plant and equipment, although Mr.

Long believed this was a justifiable basis for Navajo’s claim to obsolescence (SL, Tape 2A at

640-652). Instead, PTD required Navajo to perform comparisons with other refineries as a

“reality check.” Mr. Long disagreed with this approach because it resulted in comparing a going

business concern with pieces of property. (SL, Tape 1B at 652-680). PTD also required Navajo

to perform these comparisons using an adjustment factor that Mr. Long believed was less

accurate than the factor Navajo would otherwise have used (SL, Tape 2A at 219-228). Finally,

Mr. Long conceded that the decision to apportion 100 percent of the obsolescence deduction to

Eddy County was not based on standard appraisal techniques, but on PTD’s concern that Lea

County could not afford the loss of any property tax revenue attributable to the Lovington portion

of the refinery. (SL, Tape 2A at 53-70; Tape 3B at 5-12).

In his testimony, Mr. Long succeeded in explaining the process and reasoning behind the

compromise methodology Navajo and PTD used to settle Navajo’s 2001 obsolescence claim. He

did not succeed in establishing that this methodology complies with generally accepted appraisal

techniques or that it should be accepted as a basis for granting Navajo’s 2004 obsolescence

claim.

(2) PTD’s Expert. PTD’s expert witness was Brent Eyre. Mr. Eyre is an

Accredited Senior Appraiser (ASA), American Society of Appraisers, Dual Designation—

Machinery & Tech Specialties (Public Utilities), Appraisal Review & Management. He is also a

Certified General Appraiser, Utah State Division of Real Estate. Mr. Eyre was employed by the

25
Utah State Tax Commission from 1973 through 2000. The positions he held with the tax

commission included field auditor, supervising auditor, information analyst and assistant director

of the operations division. From 1987 through 2000, Mr. Eyre worked as the assistant director of

the Property Tax Division and was responsible for the appraisal of all centrally assessed

companies in the State of Utah. Mr. Eyre has also served as a member of many professional

organizations and has both taken and taught numerous appraisal courses (see, PTD Exhibit A).

Navajo objected to Mr. Eyre’s qualification as an expert, arguing that he had not

personally visited Navajo’s refinery and was not an expert in valuing refineries. The purpose of

Mr. Eyre’s testimony, however, was not to provide an alternative valuation of Navajo’s refinery.

Mr. Eyre explained that he had been hired to review Navajo’s 2004 property report and other

pertinent documents to determine whether the methodology Navajo used to calculate

obsolescence met generally accepted appraisal practice. Mr. Eyre has a general knowledge of

refineries and the refinery business in New Mexico and West Texas. He testified that accepted

appraisal standards are applicable to refineries as well as to other industrial complexes, and

Navajo presented no evidence to the contrary. In preparation for his testimony, Mr. Eyre

reviewed Navajo’s 2004 property report, as well as the annual reports and SEC filings of

Navajo’s parent company. The fact that Mr. Eyre had not personally visited Navajo’s refinery

does not disqualify him from testifying in this case.

Given Mr. Eyre’s professional accreditations and experience, he was well qualified to

give an opinion as to whether the methodology Navajo used to calculate its obsolescence

deduction was based on accepted appraisal practice. Mr. Eyre testified that the methodology did

26
not meet this standard and did not establish Navajo’s claim to an obsolescence deduction. The

basis for this opinion is set out in more detail Parts III B and C, below.

B. Claim to Functional Obsolescence. Navajo’s 2004 annual property report

claimed a $22.2 million deduction for functional obsolescence resulting from the split

configuration of its the Artesia/Loving refinery. Navajo maintains that the cost of operating a

refinery split between two locations exceeds the cost of operating a refinery in one location and

that this difference represents obsolescence. Brent Eyre testified that according to standard

appraisal practice, excess operating costs cannot be used to establish functional obsolescence

without a preliminary determination of excess capital costs. The first step in Navajo’s analysis

should have been a replacement cost study to determine what it would cost to build a one-

location facility. That information would then be used to determine the existence of excess

capital costs attributable to Navajo’s two-location facility. Because an excess capital cost study

was not performed in this case, Mr. Eyre concluded that Navajo’s analysis is incomplete and

does not establish its claim to functional obsolescence. (Testimony of Brent Eyre (“BE”), Tape

4B at 412-429).

Mr. Eyre noted that Navajo did perform a capital cost analysis when it first acquired the

Lovington facility in 1989 and began exploring the possibility of using that facility to expand

Navajo’s New Mexico refining capacity. When it made the decision to reactivate the Lovington

refinery and maintain crude units at two locations, rather than expanding its existing refinery in

Artesia, Navajo considered the following factors (set out in more detail under Finding of Fact

No. 7, above): (1) the Lovington refinery already had county, state, and federal operating permits

in place; (2) reactivating the Lovington refinery allowed Navajo to expand its refining capacity

27
more quickly and secure pipeline space ahead of its competition; (3) the Lovington facility had

injection wells available for waste water disposal while the Artesia facility’s ability to handle

additional waste water was limited; and (4) the Lovington facility offered a large amount of

offsite tankage that would be expensive to move. At the administrative hearing, Steven Long

testified that the economic considerations that originally led Navajo to reactivate the Lovington

refinery still exist today. This evidence conflicts with Navajo’s current claim that the split

location of its refinery creates excess operating costs over the cost of maintaining a single

refinery in Artesia.

C. Claim to Economic Obsolescence. Navajo’s 2004 annual property report

claimed a $63.8 million deduction for economic obsolescence resulting from the environmental

improvements mandated by new EPA regulations. Navajo seeks to deduct the total cost of the

gas oil hydrotreater unit, sulfur plant, amine plant upgrade, and flue gas scrubber it is required to

install at its Lovington/Artesia refinery. The justification for the deduction is Navajo’s assertion

that these capital investments have no economic value, but “are solely for the purpose of

governmental compliance and will not directly result in an increase in capacity or profit.”

(Exhibit 5, p. 3).

Navajo’s claim that its environmental expenditures add no value to its refinery conflicts

with representations made by Holly Corporation, Navajo’s parent company. In January 2002,

Holly announced that Navajo had received permits for the construction of the new gas oil

hydrotreating unit and noted that the unit “will enable Navajo to expand substantially its

capabilities to produce higher-valued California grade gasolines required in its Phoenix market

while increasing Navajo’s overall percentage yield of gasoline.” (Exhibit 3, Appendix II). In its

28
2003 annual report, Holly informed its stockholders that the gas oil hydrotreating unit “will

satisfy future EPA-mandated gasoline specifications while improving the refinery’s yield and

production of higher value products.” (Exhibit D, Holly’s 2003 Annual Report). Holly further

noted that with the 2003 expansion and upgrade of its refinery, Navajo acquired the ability to

process a variety of sour crude oils into high value light products. This, in turn, allowed

management to vary the crude supply mix to take advantage of changes in raw material prices

and to respond to fluctuations in the availability of different types of crude oil supplies. (Exhibit

D, Holly’s 2003 Annual Report). These statements contradict Navajo’s current claim that the

improvements made to comply with environmental regulations added no value to the

Artesia/Lovington refinery.

In his review of Navajo’s claim, Brent Eyre pointed out that federally-mandated standards

are not unique to the refinery business. Many industries are subject to environmental and safety

standards that require an investment of capital, and at least part of that cost is ultimately passed

on to consumers in the form of increased product prices. As an example, Mr. Eyre pointed to the

auto industry, which has been required to install airbags and catalytic converters in their

automobiles. When these requirements went into effect, the price of automobiles went up. The

same can be expected as a result of the new environmental standards imposed on refineries.

While a company may not recover all of the costs of complying with government regulations, it

is illogical to assume that none of those costs can be recovered. (BE, Tape 4B at 632-705).

Mr. Eyre’s conclusions are consistent with the analysis contained in a special report

issued by Fitch Ratings and included in Appendix II to Navajo’s 2004 annual property report

29
(Exhibit 5).4 In a July 1, 2003 report entitled What a Smell of Sulfur, Fitch made the following

analysis of the effect of environmental regulations on refineries:

In spite of the significant capital costs and strain on free cash flows, Fitch expects
U.S. refiners to ultimately benefit from the increasingly stringent regulations as
refined product supply is removed from the market. Although refiners and
manufacturers will have to tighten their belts, a significant portion of these costs
may ultimately be passed along to the end consumers through higher prices and
margins. Some less competitive refiners, however, will still be unable to meet the
new regulations and will shut down their facilities.

Navajo has not been one of the refineries forced to close, but has actually expanded its

production. The table on page 8 of Holly’s 2003 annual report shows that during 2003, Navajo’s

refinery was running at close to full capacity and Navajo was selling all of the products it

produced. Navajo’s net sales and net cash operating margin also increased substantially between

2002 and 2003. Brent Eyre testified that in his experience, properties operating at close to 100%

capacity do not experience obsolescence in the range of 40%. (Tape 5A at 210-234).

Mr. Eyre pointed out several other areas where Navajo’s valuation did not meet generally

accepted appraisal techniques. He noted that while PTD’s valuation of Navajo’s refinery

included the environmental improvements at their depreciated value, Navajo deducted 100

percent of the gross cost of those improvements. Navajo also deducted $5.7 million for a flue

gas scrubber that has yet to be completed. (Tape 5A at 572-587; see also, Exhibit 5, p. 3,

projecting the “estimated cost” of the scrubber at $5.7 million). Finally, Mr. Eyre testified at

some length concerning Navajo’s attempt to validate its obsolescence claim based on a

comparison of the Artesia/Lovington refinery with the Woods Cross refinery in Utah and the Big

4
Although the industry data in Appendix II was included at the request of PTD and was not an integral
part of Navajo’s valuation, Steven Long testified that he had no reason to believe that the information
contained in the Fitch report was not credible. (Tape 3B at 394-401).

30
Spring refinery in Texas. Mr. Eyre concluded that neither of these comparisons met accepted

appraisal standards and gave detailed testimony in support of his conclusion. (Tape 5A at 255-

374).

D. Summary. The evidence presented in this case establishes that the methodology

Navajo used to compute its obsolescence deduction does not meet accepted appraisal practice.

Navajo argues that PTD’s acceptance of this flawed methodology for tax years 2001, 2002, and

2003 requires PTD to accept the same methodology for tax year 2004. New Mexico case law

holds otherwise and makes it clear that PTD is not bound by the errors of previous years.

Alexander v. Anderson, 1999 NMCA 21, ¶ 20, 126 N.M. 632, 973 P.2d 884 (an agency is not

precluded from correcting its mistakes). See, also, Property Tax Department v. Molycorp, Inc.,

89 N.M. 603, 555 P.2d 903 (1976).

Much of the information PTD used to evaluate Navajo’s 2004 obsolescence deduction

was not available at the time the compromise methodology was originally negotiated in 2001. As

discussed in Part III C, above, Navajo’s claim to economic obsolescence is based on its assertion

that the capital expenditures made to comply with environmental standards have no economic

value and will not result in an increase in capacity or profit. When Navajo first made this

assertion in 2001, none of the environmental upgrades had been made to the Artesia/Lovington

refinery. By the time Navajo’s 2004 annual property report was filed, construction of the gas oil

hydrotreating unit, which represents the bulk of the required investment, had been completed. In

its 2003 annual report, Navajo’s parent company informed its shareholders that the hydrotreating

unit would enable Navajo to improve its yield and production of higher value products and had

given Navajo “a strong strategic and geographic advantage over its competitors.” (Exhibit D,

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Holly’s 2003 Annual Report, “Dear Fellow Stockholders”). This information directly contradicts

the premise upon which PTD originally allowed Navajo’s claim to economic obsolescence.

Navajo’s argument that PTD must continue to accept a methodology based on outdated

information and negotiated in settlement of a different tax year is without merit.

Also without merit is Navajo’s complaint that PTD’s expert witness did not provide an

alternative valuation of Navajo’s refinery or provide guidance on how Navajo should calculate

obsolescence. (Navajo Brief at 15). In Anaconda, supra, 94 N.M. at 207, 608 P.2d at 519, the

New Mexico Court of Appeals addressed a similar argument as follows:

The statute does not require the Department to establish a deduction for
Anaconda. It is the taxpayer who must establish the right to a deduction. Reed,
supra. Law in other states and federal law concerning the concept of
obsolescence confirms our position that the burden is on the taxpayer to prove the
amount of the deduction for obsolescence to which it is entitled.

In Hannahs v. Anderson, 1998 NMCA 152, ¶ 31, 126 N.M. 1, 966 P.2d 168, cert. denied, 126

N.M. 532, 972 P.2d 351 (1998), the court confirmed that it is the taxpayer’s responsibility to

present credible evidence to support its valuation:

Taxpayers presented no evidence that their appraisal method was generally
acceptable. Taxpayers attempt to shift this burden by arguing that the Assessor
did not present evidence that Taxpayers' technique was invalid. However, it is not
Assessor's responsibility to establish the invalidity of Taxpayers' appraisal
technique. If Taxpayers want the Board, or this Court, to accord substantial
weight to their valuation method, it is their responsibility to present some
testimony or evidence which sets forth that method as a generally accepted
appraisal technique.

Navajo has failed to meet its burden in this case.

CONCLUSIONS OF LAW

A. The Taxpayer filed a timely, written protest to the Department’s April 28, 2004

Notice of Valuation, and jurisdiction lies over the parties and the subject matter of this protest.

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B. PTD’s denial of Navajo’s 2004 claim to an obsolescence deduction was made in

accordance with PTD’s statutory authority and was not arbitrary or capricious.

C. Navajo failed to meet its burden of establishing its claim to a deduction for

functional and economic obsolescence.

For the foregoing reasons, the protest of Navajo Refining Co., LLP is denied.

IT IS THEREFORE ORDERED that no change shall be made to the Property Tax

Division’s 2004 valuation of Navajo’s property.

This decision is issued in the name of the Secretary of the New Mexico Taxation and

Revenue Department on April 25, 2005.

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