Texas Eastern Trans. Corp. v. Bor. of Carteret

Citations: 280 A.2d 833; 116 N.J. Super. 9

Court: New Jersey Superior Court; October 15, 1970; New Jersey; State Appellate Court

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Petitioner Texas Eastern Transmission Corporation appeals final judgments from the State Division of Tax Appeals, which upheld the 1967 assessed valuations determined by municipal authorities in Carteret, Edison, Piscataway, and Woodbridge for its pipelines. These pipelines, used primarily for transmitting natural gas to the New York metropolitan area, included both active and idle lines. The local assessors applied a standardized valuation method known as the "Middlesex County Formula," which was endorsed by the Middlesex County Assessors Association. This method involved appraising the pipelines based on their historical construction costs, with a 15% depreciation applied to account for non-recurring depreciation, and a 20% depreciation for a specific 20-inch pipeline.

The resulting valuations per foot were as follows: the 36-inch line was valued at $39.10, the 24-inch at $22.95, the 20-inch at $12.80, the 12-inch at $8.50, the 10-inch at $6.80, and the 8-inch at $5.10. Idle pipelines were valued at 50% of the active lines' values, with the idle 12-inch line at $4.20, the idle 10-inch at $3.40, and the idle 8-inch at $2.55. The idle pipelines, originally constructed for oil transport during World War II, ceased to be useful as Texas Eastern no longer had customers for oil and shifted to natural gas transmission. The appeal focuses on the correctness of the formula's application by local assessors.

Local assessors in Middlesex County calculated the "true value" of pipelines for tax purposes by multiplying the per foot valuation of each pipeline type by its footage in the municipality. Following a County Board directive, municipalities assessed these pipelines at 50% of the "true value." Texas Eastern paid these taxes based on this assessment. However, during a hearing in 1969, Judge Gotshalk noted a lack of evidence regarding the pipelines' costs to make a definitive valuation, leading him to affirm the County Board's determinations. The legal principle established is that assessments by the proper authority are presumed correct, placing the burden on the taxpayer to provide competent evidence for a different valuation. Texas Eastern’s appeals were dismissed due to insufficient evidence of the pipelines' costs, despite the historical costs being part of the valuation formula.

The assessors applied a depreciation rate of 15% for most pipelines and 20% for 20-inch lines, utilizing the "Middlesex County Formula," while the New Jersey Assessors Association recommended a 45% depreciation standard statewide. The crux of the dispute lay in the depreciation percentage applied rather than the cost itself. Evidence presented by Texas Eastern, including witness testimonies and tax documentation, supported the calculation methods used by local assessors, confirming the accuracy of the "cost" figures and footage in determining the assessments.

The Federal Power Commission (FPC) has restricted the annual depreciation deduction for interstate natural gas transmission companies to 3%, in contrast to the 15% and 45% figures proposed by county and state associations. In prior appeals involving Transcontinental Gas Pipe Line Corporation, the FPC's 3% depreciation was a critical factor in determining valuations, with judgments rendered in these cases prior to the current Texas Eastern case judgments. The municipalities, the pipeline companies, and the State Division concur that the conventional valuation method based on a "willing buyer and willing seller" approach is inappropriate for pipeline segments that span multiple states. Judge Gotshalk advocated for state taxation of pipelines rather than local assessments, suggesting that revenues should be allocated to municipalities similarly to other utility taxes.

The reasonable approach to determining "true value" involves using "historical cost" minus depreciation, as mandated by FPC regulations. The historical cost serves as a basis for the companies’ income calculations, while the 3% depreciation cap limits the book value adjustments. The State Division applied this depreciation factor in the Transcontinental appeal, which the current case will mirror, albeit with a limitation on the depreciation period. The assessment of idle pipeline segments at 50% of the value of active lines is deemed reasonable; the taxpayer’s request for a nominal valuation is rejected, as the non-use of property does not exempt it from taxation. The assertion that the State Division’s previous 25% appreciation adjustment due to rising economic conditions is inappropriate is supported by the fact that utility companies are bound by federal regulations to a fixed income rate based on historical cost, with depreciation not reflecting any appreciation in value.

Adding a 25% appreciation factor to tax assessments is deemed inconsistent and unfair. The 15% and 45% depreciation constants recommended by the Middlesex County Assessors Association and the State Association, respectively, are valid as they provide a stable value over time without necessitating annual adjustments for increasing depreciation and obsolescence. Current pipelines will likely become obsolete due to technical advancements, necessitating their replacement with more durable options. The 3% federal depreciation rate is based on an estimated 30-year lifespan, but a more appropriate depreciation of 40% to 50% should be applied upfront, balancing under- and over-depreciation throughout the lifespan.

The Division's use of the 3% annual depreciation is considered reasonable and reflective of business practices. The taxpayer's discrimination claim was addressed, revealing disparities in assessed ratios among municipalities, with Piscataway and Carteret adhering to a 50% ratio, Edison at 41%, and Woodbridge at 37%. The judge found that without applying the appropriate ratios, Texas Eastern faced discrimination. Fairness requires that Texas Eastern's ratio not exceed those applied to other taxpayers.

Concerns arose regarding the potential for the 3% method to render the pipelines worthless over time, as seen in Transcontinental’s depreciation reaching 48% over 16 years. The court refrains from determining when depreciation should cease but agrees that legislative action is needed to establish a statewide valuation formula. The conclusion reverses the State Division's affirmance of the County Board's judgments; Texas Eastern’s pipelines will be assessed based on historical cost, deducting 3% annually up to 48%, and applying the municipal ratio used for other properties. Idle pipelines will be valued at 50% of active pipelines, and the 25% appreciation factor will not be included. The case is remanded for recalculation of the 1967 assessments in line with these findings.