In Re the Tax Appeals of Amfac, Inc.

Citations: 654 P.2d 363; 65 Haw. 499; 1982 Haw. LEXIS 245Docket: NO. 6701

Court: Hawaii Supreme Court; November 29, 1982; Hawaii; State Supreme Court

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In the case of AMFAC, Inc. and The Prudential Insurance Company of America v. Director of Taxation, the Supreme Court of Hawaii addressed two primary issues regarding the valuation methods for real property tax assessments under Chapter 246, HRS (1976). The key questions involved whether the state director of taxation has the discretion to use valuation methods beyond the replacement cost approach and whether the director's failure to consider alternative methods justifies adjusting the assessment.

AMFAC, Inc. contested tax assessments for the Waikiki Beachcomber Hotel and Holiday Isle Hotel for the 1975-1976 tax year. The tax appeal court upheld the director’s exclusive use of the replacement cost method, concluding that this method was statutorily mandated. AMFAC argued that the law’s intent was to achieve fair market value assessments, thus allowing for alternative valuation methods.

The court clarified that while the statute requires the director to determine the fair market value of taxable real property, it does not restrict the director to only the replacement cost method for buildings. The court interpreted § 246-10(g) to permit the use of any valuation method contributing to fair market value but also indicated that not considering all available methods does not automatically warrant an adjustment of an assessment. The resolution of these issues ultimately impacts the interpretation of the director's responsibilities and discretion under the relevant tax statutes.

The ultimate goal of valuation in eminent domain and tax proceedings is to establish a fair and realistic property value. Fair market value is defined as the price a willing buyer would pay to a willing seller on the open market. The replacement cost method is generally viewed as the least favorable approach to valuation and has been rejected in some jurisdictions because it often fails to reflect market realities, neglecting factors such as property specifics, construction quality, current condition, location, competition, and neighborhood trends. The director's position limits fair market value to what the replacement cost method yields, aiming for uniform assessments; however, the legislature intended for factors like age, condition, and utility to be considered in the valuation of buildings. The absence of specific guidelines for incorporating these factors suggests that the director is permitted to use various methods that adequately reflect them. Ignoring actual sale prices and income capitalization—both recognized as important valuation methods—would not align with legislative intent for accurate value determination. Thus, the director is authorized to utilize these factors in assessing fair market value according to the relevant regulations.

The director's failure to consider alternative valuation methods does not automatically justify an adjustment in property assessment. Under HRS 232-3(2) (1976), an assessment can only be lowered on appeal if there is evidence of lack of uniformity or inequality due to illegal methods or errors in applying those methods. The taxpayer argues that the director's omission of alternative methods constitutes an 'illegality of methods.' However, while this may be true in some cases, it is not legally guaranteed. HRS 246-10(g) designates the replacement cost method as the primary valuation approach, but the director is also obligated to consider factors such as age, condition, utility, or obsolescence. The legality of solely using the replacement cost method hinges on whether these factors are accurately represented in the valuation. If it can be shown that the current method fails to consider these factors adequately, it may be deemed 'illegal,' contingent on the taxpayer providing evidence of such. The case is reversed and remanded for further proceedings to explore specified issues regarding the director's valuation methods, including the necessity of considering other approaches and the income produced by the property in question. As of July 1, 1981, the assessment powers of the director were transferred to county authorities under Chapter 246A, HRS (1981 Supp.).

The factors for determining land value, excluding agricultural classifications, include selling prices, income, property data, productivity, potential use, and various locational and physical attributes such as accessibility, size, shape, topography, soil quality, water availability, easements, zoning, and expert opinions on land values. The statute emphasizes considering all relevant influences on value. The director claims the statute mandates the exclusive use of the replacement cost method for valuation. However, it is interpreted that the statutory language should be understood in the broader context to align with legislative intent, indicating that the reference to the replacement cost method is directory rather than mandatory. The term "shall" can be considered merely directory when it does not compromise rights or benefits.