Level 3 Communications LLC III v. Dept. of Rev.

440 October 25, 2019 No. 21

IN THE OREGON TAX COURT

REGULAR DIVISION

LEVEL 3 COMMUNICATIONS, LLC,

Plaintiff,

v.

DEPARTMENT OF REVENUE,

State of Oregon,

Defendant.

(TC 5236)

Plaintiff (taxpayer) sought a reduction in the real market value of its cen-

trally assessed property. In its analysis under the income approach, taxpayer

asserted that Defendant Department of Revenue (the department) overestimated

future cash flows by including expected income from equipment that had not

been acquired as of the assessment date. Taxpayer argued that the potential to

acquire additional income-generating property was not “property” belonging to

the company, but rather one of a dozen “investment attributes” inseparable from

the company’s stock and thus belonging to the company’s shareholders. The court

examined the text, context, and legislative history of the relevant statutes, which

date in large part to 1909, and concluded that the legislature intended its defini-

tion of “property” to include even intangibles that could not be separated from the

stock, such as a corporation’s right to exist or a nontransferable franchise. After

reviewing relevant cases, the court concluded that the legislature intended the

potential for future revenue growth to be considered under the income approach,

whether that potential derives from an assemblage of equipment, real property,

customer relationships, and workforce in place; or from the ability of the com-

pany to attract merger partners and additional capital investment; or from a

combination of those factors. Each party performed an analysis of value using

the cost approach. The court rejected as unreliable the department’s inclusion

of amounts shown as “accounting goodwill” on taxpayer’s financial statements,

as those amounts reflect only residual values recorded upon acquisition of other

entities and bear no necessary relation to the current value of any intangible

property. The court assigned no weight to any cost approach. Only the depart-

ment used the market approach, applying the stock and debt method as a proxy.

Taxpayer rejected the stock and debt method based on its view that that method

counts the value of stock attributes that are not “property”; taxpayer did not

offer alternative computations. The court concluded that the values provided by

the department’s expert were valid. Taxpayer also challenged the department’s

change in the geographic scope of the “unit” of property—from taxpayer’s prop-

erty in North America to taxpayer’s property worldwide. The court concluded

that taxpayer did not show any abuse of the department’s statutory discretion

to choose the geographic area of the unit, and the court rejected taxpayer’s other

arguments against the change in unit based on statutory interpretation.

Trial was held April 4, 5, and 9 through 13, 2018.

Cynthia M. Fraser, Garvey Schubert Barer, PC, Portland,

argued the cause for Plaintiff.

Cite as 23 OTR 440 (2019) 441

Marilyn J. Harbur, Senior Assistant Attorney General,

Department of Justice, Salem, argued the cause for

Defendant Department of Revenue.

Decision rendered October 25, 2019.

ROBERT T. MANICKE, Judge.

I. INTRODUCTION

These consolidated property tax cases require

the court to determine the real market value of centrally

assessed property1 for tax years 2014-15, 2015-16, and 2016-17.

There are substantial legal issues of general application

involving the definition of “property” subject to valuation

and assessment, as well as complex factual issues partic-

ular to Plaintiff’s business. The court held an eight-day

trial that included fact and expert testimony, followed by

extensive post-trial briefing. This opinion first states nec-

essary background, then organizes its main legal and fac-

tual analysis around the three approaches to value on which

the parties based their valuation materials. The court con-

cludes with analysis of a related issue specific to tax year

2014-15 involving the scope of the unit of property subject

to valuation.

II. BACKGROUND

During all of the tax years at issue, Plaintiff Level 3

Communications, LLC was a telecommunications company

and internet service provider headquartered in Broomfield,

Colorado, with property throughout North America, includ-

ing Oregon. Plaintiff was a wholly owned subsidiary of

Level 3 Communications, Inc., a publicly traded company

with property in multiple countries.2 Plaintiff and its cor-

1

For general background on Oregon’s central assessment of communication

companies and other businesses, see Comcast Corp. v. Dept. of Rev., 356 Or 282,

289-93, 337 P3d 768 (2014).

2

The court notes two points for ease of reference. First, although the opinion

describes Plaintiff’s ownership structure as background, the structure raises no

significant issues for purposes of this case. Accordingly, this opinion at times

uses the terms “corporation” and “company” interchangeably, consistent with the

broad definition in ORS 308.505(8) of a person maintaining a centrally assessed

business. Second, unless otherwise indicated, references to the Oregon Revised

Statutes (ORS) are to the 2013 edition.

442 Level 3 Communications LLC III v. Dept. of Rev.

porate parent are hereafter referred to collectively as “tax-

payer.” Taxpayer does not contest that it was subject to

central assessment as a company engaged in the “communi-

cation” business for purposes of ORS 308.515(1)(h) and ORS

308.505(3).

Taxpayer was a “facilities-based provider,” which is

a provider that generally owns or leases a substantial por-

tion of the plant, property, and equipment necessary to pro-

vide its services. Taxpayer operated an optical fiber network

and provided services such as local switching, local data

transport, and carrier common line services for medium to

large internet carriers in North America, Latin America,

Europe, the Middle East, and Africa. Taxpayer also provided

private line, transoceanic, and dark fiber services, as well as

related professional services. These services included data

transport through taxpayer’s transatlantic cable system,

that connects North America, Europe, and Latin America,

as well as leased “bulk” capacity on other transoceanic cable

systems. In addition, taxpayer offered local and enterprise

voice services using Voice over Internet Protocol and tradi-

tional circuit switch-based technologies. Taxpayer’s custom-

ers were primarily large businesses listed as Fortune 100

or Fortune 500 companies, government entities, and other

telecommunication carriers. “Enterprise” customers used

taxpayer’s services for specific data transmission needs,

while “wholesale” customers used taxpayer’s services to sup-

port the telecommunications services they offered to their

own customers. The court will cite additional facts below as

needed.

Taxpayer argues for a reduction in the real market

value (RMV) for each tax year at issue. In this court, a party

bears the burden of proof to the extent that the party seeks

“affirmative relief.” See ORS 305.427. For both parties in this

case, the benchmark to determine the extent of affirmative

relief each party seeks is the RMV shown on the property

tax roll. As the table below shows, not only does taxpayer

seek a reduction compared to the roll RMVs, Defendant

Department of Revenue (the department) seeks an increase

compared to the roll RMVs, whether measured by the rela-

tively modest increases derived by the department’s expert

Cite as 23 OTR 440 (2019) 443

witness or by the very substantial increases alleged in the

department’s amended answers. Each party thus bears

some burden of proof in comparison to the roll values. See,

e.g., Ellison v. Clackamas County Assessor, 22 OTR 201, 206

(2015) (each party bore burden of proving any favorable devi-

ation from value shown on roll—in that case, as amended by

order of county board of property tax appeals). See Table 1

on page 444.

For all three tax years, taxpayer contends that the

department seeks an incorrectly high RMV by attempting

to include in the “unit” for valuation purposes certain items

that are not “property” within the meaning of the central

assessment statutes. In addition, for the 2014-15 tax year

only, taxpayer objects to the fact that the department in its

original assessment defined the “unit” of property for val-

uation purposes as confined to North America, but at trial

relied on an appraisal report that defined the unit as tax-

payer’s worldwide property. For the 2015-16 and 2016-17 tax

years, the department consistently defined the unit as tax-

payer’s worldwide property both for purposes of its original

assessment and at trial, and taxpayer did not object.

III. ISSUES

(1) May the department and this court consider the value

of taxpayer’s centrally assessed business to be the value

of taxpayer’s property, barring a showing of specific fac-

tual differences?

(2) For tax year 2014-15, may the department at trial rely

on an appraisal that values a unit of property different

from the unit the department valued when preparing

the tax roll?

(3) What was the real market value of taxpayer’s property

assessable in Oregon for tax years 2014-15, 2015-16,

and 2016-17?

IV. ANALYSIS

Taxpayer summarizes the main issue in this case

as follows: “The overriding error in each of the Department’s

valuations is that the Department’s expert did not proffer

444

Table 1

______________

3

The term “system” value commonly refers to the value of the overall unit of property. The Oregon RMV is derived by

multiplying the “system” or unit value by the Oregon allocation factor. See OAR 150-308-0610. The parties do not disagree

about the allocation factor.

Level 3 Communications LLC III v. Dept. of Rev.

Cite as 23 OTR 440 (2019) 445

and present evidence of value of the property of [taxpayer]

valuations is that the department’s expert did not proffer

and present evidence of value of the property of [taxpayer]

but instead performed a business enterprise valuation

of the company.” Taxpayer’s arguments are based on the

premise that taxpayer as a centrally assessed company is

something distinct from the property it owns, holds or uses.

Therefore, according to taxpayer, the department may not

include in its determination of value any items that are

attributes of taxpayer as a company. Because it claims the

department has done just that, taxpayer asks the court to

reject the department’s valuations and accept taxpayer’s

conclusions of value. Except for the issue of the scope of the

valuation unit for tax year 2014-15, the parties’ disagree-

ment is an all-or-nothing dispute over whether elements of

value that taxpayer attributes to itself as a company may

be treated as part of the value of the unit of property, an

allocable portion of which is assessable and taxable by

Oregon.

In the abstract, taxpayer’s premise is logical. The

ordinary meaning of “property” is “something that is or

may be owned or possessed,”4 which implies that the person

owning or possessing the property can be identified sepa-

rately and may have its own attributes or characteristics

that make its value different from that of the property it

holds. Taxpayer’s argument, however, requires the court

to probe specifically what the Oregon legislature intended

in its definition and use of “property” in the central assess-

ment statutes. The court organizes its analysis by follow-

ing the three customary “approaches” to value: the income

approach, the cost approach, and the market approach, as

presented by the parties in their experts’ written anal-

yses and at trial. Within the discussion of each valuation

approach, the court first analyzes whether and to what

extent taxpayer’s premise applies as a matter of Oregon

law. The court then considers whether, as a fact matter, the

department should have excluded the value of those items

that taxpayer has identified as attributes of taxpayer as a

company.

4

Quoting Webster’s Third New Int’l Dictionary at 1818 (unabridged ed 2002).

446 Level 3 Communications LLC III v. Dept. of Rev.

A. Income Approach (Discounted Cash Flow)

The court starts with the income approach, on which

both parties presented substantial evidence. “Generally

speaking, the income approach measures the present value

of the anticipated future stream of income attributable to

the company’s operating property, by discounting the com-

pany’s anticipated cash flows to present value using a cap-

italization rate that reflects the company’s costs of invest-

ment.” Delta Air Lines, Inc. v. Dept. of Rev., 328 Or 596, 603,

984 P2d 836 (1999). “Income approach theory assumes that

an income-producing property is worth the present value

of its future income stream. Mathematically under this

approach, the value of a company is derived by use of the

accounting formula, V = I/R. The ‘I’ in the formula is an

estimated future income figure for the company. The ‘R’ is a

capitalization rate that is divided into the income figure to

obtain the value, ‘V.’ ” PP&L v. Dept. of Rev., 308 Or 49, 58,

775 P2d 303 (1989). Taxpayer relies on its income approach

exclusively, except that taxpayer presented a cost approach

to determine a “high benchmark” against which to check its

income approach. The department relies most heavily on its

income approach, places “significant” reliance on its market

approach, and places the least reliance on its cost approach.

Within the income approach, the parties employ dif-

ferent methods. Taxpayer exclusively determines its value

based on its computation of the discounted cash flow (DCF)

that its property generated. The department uses the DCF

method as well, but with assumptions and inputs that dif-

fer from those of taxpayer.5 Because the DCF method is the

only method that both parties use, the court begins with

each party’s analysis based on that method and the dis-

agreements between them. The table below shows each par-

ty’s asserted “system” value and “Oregon” value under the

DCF method (with the overall roll values included for ready

comparison). Because the parties do not disagree about

the allocation formula, the court focuses on the system

value.

5

The department also uses the “constant growth yield capitalization”

method and computes a value based on a “direct capitalization” method. The

court addresses disputes about these methods below.

Cite as 23 OTR 440 (2019) 447

Discounted Cash Flow (DCF) Method

(System Value)

Taxpayer’s Trial Expert

2014-15 $3,400,000,000

2015-16 $8,000,000,000

2016-17 $8,600,000,000

Department’s Trial Expert

2014-15 $11,187,000,000

2015-16 $14,534,000,000

2016-17 $17,546,000,000

As is apparent, the difference between the parties’

results under the DCF method is nearly 100 percent for tax

years 2015-16 and 2016-17. For the 2014-15 tax year, the

difference in the unit presumably contributes to the much

greater overall value difference. The court addresses that

difference at the end of this opinion. The court focuses first

on the following differences that are common to each year

and do not appear to be tied to selection of the unit.

The DCF method starts by estimating future cash

flows after all expenses, investment in working capital,

and capital expenditures are made. The cash flows are dis-

counted at a rate that reflects the return an investor would

expect, given the level of risk inherent in the investment.

1. Projected growth in revenues

The major differences between the parties’ conclu-

sions of value based on the DCF method start with the forecast

of cash flows. Taxpayer’s principal expert, Dr. Hal Heaton,

generally predicted that gross revenue would decline signifi-

cantly each year, while the department’s expert, Brent Eyre,

predicted steady revenue growth.6 Taxpayer does not neces-

sarily disagree with the department’s projected growth

rate for the company as a whole, but taxpayer argues that

its forecast is premised on valuing only the property in

existence on the assessment date for each tax year, and

6

The court omits here discussion of the experts’ qualifications, which was

the subject of the court’s order on evidentiary objections, Level 3 Communications,

LLC v. Dept. of Rev., 23 OTR 87 (2018).

448 Level 3 Communications LLC III v. Dept. of Rev.

taxpayer claims that the department’s forecast erroneously

inflates revenue by including revenue from property that

taxpayer would have had to acquire after the assessment

date. Underlying taxpayer’s forecast is its factual position

that customer demand for increased broadband capacity

increased dramatically in each tax year, forcing taxpayer to

buy and install large amounts of new, additional equipment

each year, or to acquire other telecommunications compa-

nies that have additional equipment. Meanwhile, taxpayer

asserts that constant technological advancements allowed

equipment to furnish ever-greater capacity at an ever-lower

cost per unit of capacity, rapidly rendering the equipment

in place on any assessment date obsolete. An item installed

and operating on January 1, 2014, might have a fraction

of the capacity of an item that taxpayer could buy some

months later for the same price, and taxpayer would be com-

pelled to make that subsequent purchase in order to meet

the substantial increase in customer demand that would

occur during those same months. Taxpayer’s fact witnesses

provided thorough and well-organized testimony supporting

all of these contentions; the court finds the testimony and

related documentary evidence highly persuasive.

Just as taxpayer does not seriously dispute the

department’s growth predictions for taxpayer as a com-

pany, the department does not refute taxpayer’s factual

evidence showing that taxpayer’s equipment declines rap-

idly in value. The department nevertheless contends that

growth in revenue is properly attributable to the property

in place on the assessment date, citing this court’s opinion

in United Telephone Co. v. Dept. of Rev., 10 OTR 333, 340-41

(1986), modified, 307 Or 428, 770 P2d 43 (1989). The court

regards this disagreement as raising a legal issue, the first

in a series that reduce to the question whether Oregon law

allows the value of a centrally assessed company’s property

to be determined by reference to the value of the company

itself.

2. Taxpayer’s contention regarding investment attributes

Taxpayer’s expert Heaton testified that the depart-

ment overestimated future cash flows by counting reve-

nues that the department expects taxpayer will generate

Cite as 23 OTR 440 (2019) 449

from property it has not yet acquired as of the assessment

date. Taxpayer’s expert witness in rebuttal, Robert Reilly,

described the potential to acquire additional income-

generating property as one of a dozen “investment attributes,”

i.e., attributes inhering in the stock or other ownership inter-

ests of taxpayer as a legal entity. Taxpayer contends that

these investment attributes are not “property” that a com-

pany can use or hold, but instead are inseparable from the

company’s stock or other ownership interests. Because they

cannot be separately identified apart from the company, valu-

ing these attributes, according to taxpayer, would amount to

valuing the company itself and not its property. Reilly listed

these investment attributes in the following table:7

Relationship of Unit Value and Business Value

(from Plaintiff’s Exhibit 48)

Unit Value + Investment Attributes = Business Value

Working Capital Future Tangible Property Value of Debt

Securities

Tangible Property Future Intangible Property Value of Equity

Securities

Intangible Present Value of Growth

Property Opportunities

Potential Mergers and

Acquisitions

Stock Liquidity

Investor Limited Liability

No Reinvestment

Requirement

No Investor Bankruptcy

Risk

Expected Appreciation (not

Depreciation)

Small Dollar Amount

Investments

Investment Diversification

Favorable Income Tax

Treatment

7

The table essentially replicates Plaintiff’s Exhibit 48, offered to show the

department’s alleged error.

450 Level 3 Communications LLC III v. Dept. of Rev.

For purposes of its legal analysis, the court (1) denom-

inates taxpayer’s list of twelve “investment attributes” as

the “Attributes” and (2) initially assumes that the Attributes

are, in fact, attributes of the stock or other ownership inter-

ests in the company. Based on that assumption, the court

now analyzes whether Oregon law allows the department

and this court to determine the RMV of taxpayer’s property

by reference to the value of taxpayer as a company, includ-

ing the Attributes.

3. Statutory analysis

The court looks to the legislature’s statutory instruc-

tions to the department regarding how to determine the val-

ues to record on the central assessment roll. Key statutes,

reprinted below, prescribe the department’s duty to “make

an annual assessment of any property that has a situs in

this state” (ORS 308.515(1)); the definition of “property” that

the department can value and assess (ORS 308.505(9)); data

that centrally assessed companies are required to report to

the department (ORS 308.520 to 308.525); and the instruc-

tions for determining the value of the relevant “unit” of prop-

erty (ORS 308.545 to 308.555). Although most of the rele-

vant statutory language has been in place since 1909,8 the

court has found no Oregon case that has squarely addressed

the issue taxpayer raises. The court applies the approach

prescribed in State v. Gaines, 346 Or 160, 171-72, 206 P3d

1042 (2009), and considers the text, context, and legislative

history of these statutes.9

8

See below; see generally Comcast, 356 Or at 289-94.

9

Only limited “legislative history” of the early central assessment laws

exists, at least in the strict sense of the “record of a bill’s progress from intro-

duction to enactment,” legislator statements, and materials demonstrably before

legislators during the session, presumably due to the capitol building fire of 1935.

Jack L. Landau, Oregon Statutory Construction, 97 Or L Rev 583, 697 (2019). The

information preserved in the House Journals of 1909 and 1913, consisting mainly

of amendments to the bill text and records of referrals to committees and votes,

is of little use in this case. The court finds it significant, however, that the 1909

act creating the central assessment system adopted nearly verbatim the relevant

text of bill proposals contained in a report that the legislature commissioned in

1905 and that was completed in 1906. See Report of the Board of Commissioners

Appointed Under the Provisions of Chapter 90, Laws of 1905, for the Purpose

of Examining and Reporting on Matters of Assessment and Taxation, etc.

(June 30, 1905), available at https://archive.org/details/reportboardcomm00mulk-

goog/page/n5 (accessed Oct 25, 2019) (“1906 Oregon Report”). The 1906 Oregon

Report includes extensive analysis of the problems of Oregon’s tax system and a

Cite as 23 OTR 440 (2019) 451

a. Text

The court begins with an analysis of the relevant

text:

“308.505 Definitions for ORS 308.505 to 308.665. As used

in ORS 308.505 to 308.665:

“* * * * *

“(8) ‘Person,’ ‘company,’ ‘corporation’ or ‘association’

means any person, group of persons, whether organized or

unorganized, firm, joint stock company, association, coop-

erative or mutual organization, people’s utility district,

joint operating agency as defined in ORS 262.005, syndi-

cate, entity formed to partner or combine public and private

interests, partnership or corporation engaged in perform-

ing or maintaining any business or service or in selling any

commodity as set forth in ORS 308.515, whether or not the

activity is pursuant to any franchise and whether or not

the person or other entity or combination of entities pos-

sesses characteristics of limited or unlimited liability.

“(9) ‘Property’:

“(a) Means all property of any kind, whether real,

personal, tangible or intangible, that is used or held by a

company as owner, occupant, lessee or otherwise, for the

performance or maintenance of a business or service or for

the sale of a commodity, as described in ORS 308.515;

“(b) Includes, but is not limited to, the lands and build-

ings, rights of way, roadbed, water powers, vehicles, cars,

rolling stock, tracks, office furniture, telephone and trans-

mission lines, poles, wires, conduits, switchboards, machin-

ery, appliances, appurtenances, docks, watercraft irrespec-

tive of the place of registry or enrollment, merchandise,

inventories, tools, equipment, machinery, franchises and

special franchises, work in progress and all other goods or

chattels; and

“(c) Does not include items of intangible property that

represent:

discussion of how the bill proposals seek to address them. Whether categorized

as legislative history or as context, the court views the 1906 Report as a valuable

resource to shed light on the 1909 law. The Oregon State Archives houses origi-

nal prints of the 1906 Report as part of its “Messages and Documents” compila-

tion of materials from the 1909 legislative session, side by side with the chapter

laws for that session.

452 Level 3 Communications LLC III v. Dept. of Rev.

“(A) Claims on other property, including money at

interest, bonds, notes, claims, demands or any other evi-

dence of indebtedness, secured or unsecured; or

“(B) Any shares of stock in corporations, joint stock

companies or associations.

“(10) ‘Property having situs in this state’ means all

property, real and personal, of a company, owned, leased,

used, operated or occupied by it and situated wholly

within this state, and, as determined under ORS 308.550

and 308.640, the proportion of the movable, transitory or

migratory personal property owned, leased, used, oper-

ated or occupied by a company, including but not limited

to watercraft, aircraft, rolling stock, vehicles and construc-

tion equipment, as is used partly within and partly outside

of this state.

“* * * * *

“308.515 Department to make annual assessment of des-

ignated utilities and companies.

“(1) The Department of Revenue shall make an annual

assessment of any property that has a situs in this state and

that, except as provided in subsection (3) of this section, is

used or held for future use by any company in performing

or maintaining any of the following businesses or services

or in selling any of the following commodities, whether in

domestic or interstate commerce or in any combination of

domestic and interstate commerce, and whether mutually

or for hire, sale or consumption by other persons:

“(a) Railroad transportation;

“(b) Railroad switching and terminal;

“(c) Electric rail transportation;

“(d) Private railcar transportation;

“(e) Air transportation;

“(f) Water transportation upon inland water of the

State of Oregon;

“(g) Air or railway express;

“(h) Communication;

“(i) Heating;

Cite as 23 OTR 440 (2019) 453

“(j) Gas;

“(k) Electricity;

“(L) Pipeline;

“(m) Toll bridge; or

“(n) Private railcars of all companies not otherwise

listed in this subsection, if the private railcars are rented,

leased or used in railroad transportation for hire.

“* * * * *

“308.520 Companies to file statements.

“(1) Each company shall make and file with the

Department of Revenue, on or before February 1 of each

year, in such form as the department may provide, a state-

ment, under oath, made by the president, secretary, trea-

surer, superintendent or chief officer of the company, cov-

ering a period of at least one year, as may be required by

the department; except that Class I railroads, Class A elec-

tric companies, communication companies, gas companies,

large water transportation companies, pipeline companies,

air transportation companies and private railcar compa-

nies shall file such statement on or before March 15 of each

year.

“* * * * *

“308.525 Contents of statement. Each statement required

by ORS 308.520 shall contain the following facts about the

company:

“(1) The name of the company, the nature of the busi-

ness conducted by the company and the state or country

under whose laws the company is organized.

“(2) The location of the company’s principal office.

“(3) The name and address of the chief officer or man-

aging agent or attorney in fact in Oregon.

“(4) The number of shares of its capital stock autho-

rized and issued.

“(5) The par value and market value, or actual value

if there is no market value, of each issued share of stock on

January 1 at 1:00 a.m. of the year in which the report is

made.

454 Level 3 Communications LLC III v. Dept. of Rev.

“(6) The bonds and other corporate obligations owing

by the company.

“(7) The par value and market value, or actual value if

there is no market value, of the bonds or other obligations

owing by the company on January 1 at 1:00 a.m. of the year

in which the report is made.

“(8) A detailed statement of the real property owned

by the company in Oregon on January 1 at 1:00 a.m. of the

year in which the report is made, where situated, and the

cost thereof.

“(9) A detailed statement of the personal property

owned by the company in Oregon on January 1 at 1:00 a.m.

of the year in which the report is made, where situated, and

the cost thereof.

“(10) A statement showing the historical or original

cost of all of the real property owned by the company as

of January 1 at 1:00 a.m. of the year in which the report is

made, whether situated within or without the state.

“(11) A statement showing the historical or original

cost of all of the personal property of the company as of

January 1 at 1:00 a.m. of the year in which the report is

made, whether situated within or without the state.

“(12) A full and complete statement of the historical

or original cost and book value of all buildings of every

description owned by the company within the state.

“(13) The total length of the company’s lines or oper-

ational routes, the length of its lines or operational routes

within the State of Oregon, and also the length of its lines

or operational routes without the State of Oregon, includ-

ing those which the company controls or uses as owner, les-

see or otherwise.

“(14) A statement of the number of wire, pipe, pole

or operational miles, and miles of main and branch rail-

road lines, double track, spurs, yard tracks and sidetracks,

owned or leased by the company in each county in this state,

and each municipal subdivision thereof, stated separately.

“(15) A statement in detail of the entire gross receipts

and net earnings of the company from all sources, stated

separately, for the fiscal year next preceding the date of the

report.

Cite as 23 OTR 440 (2019) 455

“(16) Any other facts or information the Department of

Revenue requires in the form of return prescribed by it.

“* * * * *

“308.545 Mode of valuing property.

For the purpose of arriving at the amount and charac-

ter and assessed value of the property belonging to a com-

pany, the Department of Revenue personally may inspect

the property, and may take into consideration the state-

ments filed under ORS 308.505 to 308.665, the reports,

statements or returns of the company filed in the office of

any board, office or commission of this state, or any county

thereof, the earning power of the company, the franchises

and special franchises owned or used by the company, and

such other evidence of any kind that is obtainable bearing

thereon. However, no report, statement or return shall be

conclusive upon the department in arriving at the amount

and character and assessed value of the property belonging

to the company.

“308.550 Valuing property of company operating both

within and without state.

“(1) When a company owns, leases, operates over or

uses rail, wire, pipe or pole lines, operational routes or

property within and without this state, if the department

values the entire property within and without this state as

a unit, it may ascertain the property subject to taxation in

Oregon by the proportion which the number of miles of rail,

wire, pipe or pole lines or operational routes in Oregon, con-

trolled or used by the company, as owner, lessee, or other-

wise, bears to the entire mileage of rail, wire, pipe or pole

lines or operational routes controlled or used by the com-

pany, as owner, lessee, or otherwise.

“(2) If the value of any property having a situs in this

state, of a company operating both within and without

the state, cannot fairly be determined in the manner pre-

scribed in subsection (1) of this section, the Department of

Revenue may use any other reasonable method to deter-

mine the proper proportion of the entire property assess-

able for taxation in this state.

“* * * * *

“308.555 Unit valuation of property.

“The Department of Revenue, for the purpose of arriv-

ing at the assessed value of the property assessable by

456 Level 3 Communications LLC III v. Dept. of Rev.

it, may value the entire property, both within and with-

out the State of Oregon, as a unit. If it values the entire

property as a unit, either within or without the State

of Oregon, or both, the department shall make deduc-

tions of the property of the company situated outside

the state, and not connected directly with the business

thereof, as may be just, to the end that the fair propor-

tion of the property of the company in this state may be

ascertained. If the department values the entire property

within the State of Oregon as a unit, it shall make deduc-

tions of the property of the company situated in Oregon,

and assessed by the county assessors, to an amount that

shall be just. For that purpose the county assessors shall,

if the department so requests, certify to the department

the assessed value of the property of the companies assess-

able by them, but such certification of assessed value is

intended to be advisory only and is not conclusive upon the

department.”

The court does not see within the text a clear answer

to whether any of the Attributes are part of the “property”

that the department is allowed to value as a unit. None of

the Attributes is specifically named in the statutory defi-

nition of “property,” but neither do the statutes expressly

exclude them or prescribe whether the value of the valua-

tion unit is equivalent to the value of the legal entity that

owns the property. The legislature left undefined the key

term “intangible property,” as well as other terms, in partic-

ular, “franchise.” See ORS 308.505(9)(c)(A) - (B). The items of

intangible property that the statute excludes from the defi-

nition of “property” are specific (items representing claims

on other property and shares of stock), and taxpayer has not

raised any issue regarding the treatment of any such items.

See id. The plain meaning of “intangible property” is unen-

lightening. Black’s Law Dictionary as published close in time

to the 1909 and 1913 acts10 defined the phrase “intangible

property” as follows: “Used chiefly in the law of taxation,

this term means such property as has no intrinsic and mar-

ketable value, but is merely the representative or evidence of

value, such as certificates of stock, bonds, promissory notes,

10

See Comcast, 356 Or at 296 n 7 (stressing importance of consulting dictio-

nary definitions contemporaneous with enactment of the statute).

Cite as 23 OTR 440 (2019) 457

and franchises.” Black’s Law Dictionary 643 (2d ed 1910).11

From the statutory definition of “property,” the court con-

cludes that the legislature viewed a “franchise” as one type of

intangible property, but the broad definition otherwise does

not aid in determining whether the legislature considered

any of the Attributes intangible property. A general dictio-

nary definition from 1907 defined the word “franchise” as:

“A particular privilege conferred by grant from a sovereign

or a government, and vested in individuals; an immunity

or exemption from ordinary jurisdiction; a constitutional or

statutory right or privilege, esp. the right to vote.” Webster’s

Int’l Dictionary of the English Language 592 (1907). Black’s,

however, distinguished two types of franchise: “The charter

of a corporation is its ‘general’ franchise, while a ‘special’

franchise consists in any rights granted by the public to use

property for a public use but with private profit.” See Black’s

Law Dictionary 532 (2d ed 1910). The United States Supreme

Court used the term “franchise to be” to refer to a “general”

franchise, and “franchise to do” to refer to a “special” fran-

chise. See Adams Exp. Co. v. Ohio State Auditor, 166 US 185,

224-25, 17 S Ct 604, 41 L Ed 965 (1897); see also Portland v.

Portland Gas & Coke Co., 80 Or 194, 201, 156 P 1070 (1916).

Like the definition of “intangible property,” however, the

plain meanings of “franchise” and “special franchise” alone

do not help the court determine whether the department can

include the intangible attributes of shares of corporate stock

when valuing the unit of property of the company.

Turning to the specific text of the unit valuation

statutes, the court observes that ORS 308.545 expressly

allows the department to consider the value of the compa-

ny’s stock and the amount of the company’s income when

valuing the company’s property. The statute does this in

two ways: by allowing the department to “take into con-

sideration” the company’s annual statement, which must

report stock value, company income and other items (ORS

11

Today’s most commonly cited dictionary similarly defines “intangible prop-

erty” without referring specifically to any of the attributes taxpayer describes

(except goodwill): “property having no physical substance apparent to the senses

: incorporeal property (as choses in action) often evidenced by documents (as

stocks, bonds, notes, judgments, franchises) having no intrinsic value or by

rights of action, easements, goodwill, trade secrets.” Webster’s Third New Int’l

Dictionary 1173 (unabridged ed 2002).

458 Level 3 Communications LLC III v. Dept. of Rev.

308.525), and by expressly stating that the department may

consider “the earning power of the company” as well as the

“franchises and special franchises” owned or used by the

company (ORS 308.545). The court views this authority

to consider the stock value, the income, and the “earning

power” of the company as strong factors tending to indicate

that the legislature viewed the ability of the company as an

entity to earn revenue as relevant to the value of the unit

of company property. This text is not conclusive because

the phrase “take into consideration” does not specify what

weight the department may assign to the stock value and

earning power of the company, and the text does not rule out

the possibility of equating the two.

b. Context and legislative history

The court turns to the statutory context. As an ini-

tial matter, the court returns to the key terms “franchises

and special franchises,”12 which are the subject of much early

case law, reflecting the central role that special franchises

granted to private businesses played in the development of

infrastructure in Oregon and other states.13 Importantly

for this case, contemporaneous court decisions show that

both types of franchise generally were thought of as per-

sonal rights that were not transferable—or, in the case of

special franchises, transferable only with the consent of the

public body franchisor. One year before the legislature used

the word “franchise” in its definition of “property” for cen-

tral assessment purposes, the Oregon Supreme Court held

12

Nontax statutes as of 1909 confirm that the legislature had an under-

standing of the term “franchise” that was consistent with its plain meaning. See,

e.g., Lord’s Oregon Laws, title XLIII, ch I, § 6525 (1910) (“The use of the water of

the lakes and running streams of the state of Oregon, for general rental, sale or

distribution, for purposes of irrigation, and supplying water for household and

domestic consumption, and watering live stock upon dry lands of the state, is a

public use, and the right to collect rates or compensation for such use, of said water

is a franchise.” (Emphasis added.)).

13

For a critical discussion of the numerous special railroad, streetcar, elec-

trical and gas franchises in early twentieth-century Portland, see E. Kimbark

MacColl, The Shaping of a City: Business and Politics in Portland, Oregon 1885-

1915 (1976). That work states that Portland granted 191 franchises from 1887 to

1914, 50 percent of which went to major railroads, and 43 percent of which went to

the Portland Railway Light & Power Company, predecessor to Portland General

Electric Company. Id. at 10; see also Behnke-Walker v. Multnomah County, 173

Or 510, 513, 146 P2d 614 (1944) (describing role of corporations formed by early

“special” legislative grants).

Cite as 23 OTR 440 (2019) 459

that a state franchise to charge tolls for operating a canal

and locks at Willamette Falls was not assignable, based on

the terms of the original grant of rights. Oregon v. Portland

Gen. Elec. Co., 52 Or 502, 516, 521, 95 P 722, reh’g den, 52

Or 530, 98 P 160 (1908) (“But the construction and operation

of a canal and locks as part of a navigable river, and the

taking of tolls thereon are franchises that cannot be exer-

cised without permission from the State. * * * Again, as to

the power of the first company to transfer its franchises, the

grant was made to the first company with no power to trans-

fer.”). Similarly, an earlier United States Supreme Court

decision applying Oregon law declined to find any “general

power to sell or lease * * * property or franchises” held by

a railroad corporation to which the state had granted the

right to operate within the city of Portland. Oregon Ry. &

Nav. Co. v. Oregonian Ry. Co., 130 US 1, 30-31, 9 S Ct 409, 32

L Ed 837 (1889). In each case, the respective court concluded

that the legislature had not chosen to confer a right of trans-

fer in the franchise act itself, and a doctrine of strict con-

struction against the franchisee prevented the court from

imputing a right of transfer. See Portland Gen. Elec., 52 Or

at 517; Oregon Ry. & Nav. Co., 130 US at 26; cf. Eldredge v.

Mill Ditch Co., 90 Or 590, 594, 177 P 939 (1919) (citing “the

franchise of corporations” as example of “Interests Which

Cannot Be Transferred”). From this context, coupled with

the dictionary definitions above, the court concludes that

the 1909 Legislative Assembly understood a “franchise” as

intangible property consisting of a set of rights that were,

by default, not transferable. As will be seen, the legislature’s

choice to identify as taxable property an item that could not

be separated from its corporate owner cuts against taxpay-

er’s arguments regarding the Attributes.

Although integrated with the general property

tax system of laws, the features of the central assessment

laws relevant to this case are largely self-contained.14 The

14

Critically, the central assessment statutes use an independent definition

of “property.” See ORS 308.505(9); cf. ORS 307.020(1) (defining “personal prop-

erty,” “tangible personal property,” and “intangible personal property”); ORS

307.020(2) (foregoing definitions do not apply to centrally assessed property); ORS

307.030 (excluding intangible personal property from regular, local, assessment

but not from central assessment); see also Southern Pacific Trans. Co. v. Dept. of

Rev., 295 Or 47, 52, 664 P2d 401 (1983) (describing central assessment statutes

460 Level 3 Communications LLC III v. Dept. of Rev.

court therefore looks for further indications of legislative

intent by examining the statutory development and his-

torical context of the statutes reprinted above. The legisla-

ture created today’s system of central assessment in 1909,

by establishing the department’s predecessor, the Board of

State Tax Commissioners, and by delegating to it the task of

determining the value of property used or held by railroad

companies, telephone companies, and water, gas and elec-

tric companies, among others. Or Laws 1909, ch 218; Lord’s

Oregon Laws, title XXVII, ch VI, §§ 3614, 3617(15) (1910);

see generally Comcast, 356 Or at 289-94. The 1909 law per-

mitted the board to value the entire “unit” of property, and

to then assign a portion of that overall unit value to the

property located in Oregon and its local taxing jurisdictions,

superseding the regular property tax laws that required

each local assessor to attempt to determine the value of the

particular length of track, wire or other property in that

county. See Lord’s Oregon Laws, title XXVII, ch VI, §§ 3622,

3623, 3626. However, as summarized in Comcast, central

assessment did more than prevent a distortive amalgam of

locally determined values:

“Central assessment also allowed assessors to capture

additional value inherent in certain property. In particu-

lar, central assessment made possible ‘assessments which

would reach those large intangible values, called franchise

value or good will, which could not be effectively taxed by

local assessors.’ ”

356 Or at 290 (quoting James C. Bonbright, 2 The Valuation

of Property, 637 (1937)).

Oregon did not blaze the trail of central assess-

ment. From 1854 until shortly before the 1909 enactment

of central assessment, Oregon property tax law, though

broadly written, did not expressly identify whether or how

franchises and other intangible property could be assessed

or valued. Oregon v. Pacific States Tel. & Tel. Co., 53 Or

162, 166, 99 P 427 (1909) (As of 1906 “there was no law

specifically requiring the franchise of a corporation to be

as a “complete and comprehensive * * * scheme of assessment for taxation”); but

see, e.g., Northwest Natural Gas Co. v. Dept. of Rev., 347 Or 536, 226 P3d 28 (2010)

(certain exemptions apply to locally and centrally assessed property).

Cite as 23 OTR 440 (2019) 461

assessed, nor providing the manner of estimating the value

thereof[.]”), appeal dismissed, 223 US 118, 32 S Ct 224, 56

L Ed 377 (1912). Meanwhile, other states responded to the

growth of railroad, telegraph, telephone, and other increas-

ingly large and far-flung enterprises by adopting various

forms of unitary valuation, typically combined with central-

ized assessment by a single statewide body. A wave of litiga-

tion followed nationwide. Some of the laws, or judicial deci-

sions interpreting them, addressed whether the value of the

unit was equivalent to that of the company. See Bonbright,

1 Valuation of Property at 522-34 (surveying early New York

cases starting in 1834).

The United States Supreme Court’s 1875 opinion

known as the State Railroad Tax Cases was groundbreak-

ing at the federal level. See Taylor v. Secor, 92 US 575, 2 Otto

575, 23 L Ed 663 (1875). Those consolidated cases involved

Illinois’ 1872 act that expressly listed “[t]he capital stock of

companies and associations incorporated under the laws

of this state,” along with real property and other personal

property, as property to be assessed and taxed. See An act

for the assessment of property, and for the levy and collec-

tion of taxes, approved 30 March 1872[,] In force 1 July 1872,

ch 89, § 436, compiled in E.L. & W.L. Gross, The Statutes of

Illinois: An Analytical Digest of All the General Laws of the

State in Force at the Present Time: Official and Standard, by

Act of the Legislature: 1818 to 1872, Vol. II, 336 (Springfield:

E.L. & W.L. Gross, 1872). The same act also created a state

board to determine the value of “[t]he capital stock of all

companies * * * including the franchise, over and above the

assessed value of the tangible property of such company or

association.” Id. §§ 438-39. To implement the law, the state

board adopted a rule prescribing the method to determine

the value of the “capital stock”:15

15

As will be seen, the Illinois statute, like others at the time, generally used

the phrase “capital stock” to mean money or property contributed to the cor-

poration by its shareholders, including any property that the corporation had

acquired using that money or property. By contrast, “shares of stock” or “shares

of capital stock” referred to the shares held by the shareholders. Compare id.

§ 436(2) (“shares of stock” taxable to resident individuals), with § 443 (“capital

stock” and franchises taxed to corporation at locality of corporation’s principal

office or location where corporation does business). See Henderson Bridge Co. v.

Kentucky, 31 SW 486, 17 Ky L Rptr 389 (1895), aff’d, 166 US 150, 17 S Ct 532, 41

L Ed 953 (1897) (discussed below).

462 Level 3 Communications LLC III v. Dept. of Rev.

“‘The market or fair cash value of the shares of capital stock,

and the market or fair cash value of the debt (excluding

from such debt the indebtedness for current expenses),

shall be combined or added together; and the aggregate

amount so ascertained shall be taken and held to be the

fair cash value of the capital stock, including the franchise,

respectively, of such companies and associations.’ ”

Taylor, 92 US at 604 (quoting board of equalization rule

(emphases added)). The rule then required the value of tan-

gible property to be deducted from the aggregate value of

the shares and the debt, and the resulting difference “shall

be taken and held to be the fair cash value of the capital

stock, including the franchise * * *.” Id. The Court summa-

rized this residual approach, stating plainly that the start-

ing point is the value of the company’s shares in the hands

of its shareholders, plus debt:

“It is therefore obvious, that, when you have ascertained

the current cash value of the whole funded debt, and the

current cash value of the entire number of shares, you

have, by the action of those who above all others can best

estimate it, ascertained the true value of the [rail]road, all

its property, its capital stock, and its franchises; for these

are all represented by the value of its bonded debt and of

the shares of its capital stock.”

Id. at 605. Like taxpayer in this case, the taxpayers in the

State Railroad Tax Cases argued that the Illinois law inval-

idly valued rights inherent in the stock. The Court summa-

rized the taxpayers’ argument as follows:

“that the capital stock and capital of a corporation are dis-

tinct and different; that the capital stock belongs to the

stockholders, and cannot be assessed against the corpora-

tion, but said act requires not only the capital of corpora-

tions to be assessed, but their capital stock to be assessed

to the corporation in addition thereto * * *.”

Id. at 589. The Court briefly acknowledged the distinction,

see id. at 602-03, but upheld the tax despite this and many

other objections, rejecting the taxpayers’ attempt to distin-

guish the value of the total shares held by shareholders, plus

corporate debt, from the value of the unit of property that the

corporation holds, including such intangible property as the

corporation’s “capital stock” and the corporate “franchise.”

Cite as 23 OTR 440 (2019) 463

Twenty years later, a similar argument arose in

what became known as the Adams Express cases, involv-

ing Ohio’s central assessment of express, telephone and

telegraph companies. Adams Exp. Co. v. Ohio State Auditor,

166 US 185, 17 S Ct 604, 41 L Ed 965 (1897). An 1893 act

directed the state central assessing authority to “be guided

by” the value of the “entire capital stock” when determin-

ing the value of an express company’s property in the state.

An Act to Amend and Supplement Sections 2777, 2778,

2779, and 2780 of the Revised Statutes of Ohio, 1893 vol.

90 at 330, 332.16 In a state-court mandamus action lead-

ing up to the United States Supreme Court’s opinion, the

central assessment authority sued a local county auditor to

compel him to assess and collect property tax on the cen-

trally determined value. The county auditor refused, argu-

ing that the act invalidly inflated the value of an express

company’s tangible personal property by attributing to the

property value that is properly attributable to the company

itself:

“But it is contended in behalf of the defendant that not

only was the property of the National Express Company val-

ued by a special board, after a special method, but that

its property was not assessed at its true value in money,

because the value of the capital stock was taken as a guide,

thereby, in contravention of the constitution, adding to the

intrinsic value of the tangible property in this state a value

inherent in the capital stock, and due to the franchise, good

will, and business of the company, and the value of its prop-

erty in other states.

“* * * * *

“It is contended that when the value of the shares of

the capital stock of a corporation is augmented through

the franchise, good will, and successful management of the

business of the concern, such value should not avail to add

to the true value in money of the tangible property of the

corporation for the purpose of taxation.”

16

The Ohio act defined an express company as any person “engaged in the

business of conveying to, from or through this state, or any part thereof, money,

packages, gold, silver, plate or other article, by express, not including the ordi-

nary lines of transportation of merchandise and property in this state * * *.”

Id. at 330.

464 Level 3 Communications LLC III v. Dept. of Rev.

State ex rel. Poe v. Jones, 51 Ohio St. 492, 509-511, 37 NE

945 (1894) (emphases added). The Ohio Supreme Court

rejected these arguments, and the United States Supreme

Court quoted the Ohio opinion extensively in its own opinion

upholding the Ohio law on Commerce Clause grounds:

“‘The market value of property is what it will bring when

sold as such property is ordinarily sold in the community

where it is situated; and the fact that it is its market value

cannot be questioned because attributed somewhat to good

will, franchise, skillful management of the property, or any

other legitimate agency.’ ”

Sanford v. Poe, 165 US 194, 224-25, 17 S Ct 305, 41 L Ed 683

(1897) (quoting 51 Ohio St. at 512).17

At the same time as the Ohio Adams Express cases,

a unit valuation case arising in Kentucky prompted the

Kentucky appellate court to discuss in depth the conceptual

basis for using the value of the total shares to determine

the value of a corporation’s franchise. Henderson Bridge Co.

v. Kentucky, 31 SW 486, 17 Ky L Rptr 389 (1895), aff’d, 166

US 150, 17 S Ct 532, 41 L Ed 953 (1897). The case involved

property tax as applied to the operator of a railroad bridge

spanning the Ohio river between Kentucky and Indiana. Id.

Kentucky had imposed a tax of 42.5 cents per $100 of value

on all real and personal property, later adding a specific pro-

vision imposing the tax on any franchise of a corporation or

other person engaged in a specified business (railroad, elec-

tric power, telephone, etc.). Former Ky. Gen. Stat. §§ 4019

(rate and general imposition), 4022 (definition of assessable

property), 4077 (extending the tax to the franchise of any

corporation holding one), 4082 (treating franchises held by

persons other than corporations similarly). Although the

statute was framed as a tax on property of the corporation,

the statutory method for valuing the franchise first required

17

Six weeks after issuing its decision entitled Sanford v. Poe, the United

States Supreme Court issued its opinion entitled Adams Exp. Co. v. Ohio State

Auditor, 166 US 185, 17 S Ct 604, 41 L Ed 965 (1897), in response both to a peti-

tion for rehearing in Sanford v. Poe and in a case involving Indiana law. The

Adams Express opinion does not change the result in Sanford v. Poe but discusses

more specifically states’ power to include the value of franchises and other intan-

gible property in the value of other property for property taxation purposes. In

Adams Express the Court also commented on its opinion in Henderson Bridge Co.

v. Kentucky, as discussed below.

Cite as 23 OTR 440 (2019) 465

the taxing authority to “fix the value of the capital stock of

the corporation,” and then to “deduct the assessed value of

all tangible property * * *.” Former Ky. Gen. Stat. §§ 4079.

Similar to the Illinois railroad tax, the Kentucky statute

thus determined the value of the franchise as a residual

amount: the difference between the value of the “capital

stock” and the value of the real and tangible personal prop-

erty. Id. at 489 (“The remainder thus found shall be the value

of its corporate franchise subject to taxation as aforesaid.”).

The Henderson Bridge court discussed at length

the meaning of the phrase “capital stock of the corporation,”

positing that it might refer either to (a) only what might be

called today the cash constituting the paid-in capital con-

tributed by investors; or (b) all of the tangible and intangible

property of the corporation, including the paid-in capital, the

corporation’s “surplus,” and its franchise. 31 SW at 489-91.

The court accepted the broader definition, drawing on a line

of earlier New York cases. In doing so, the Kentucky court

equated the broader definition (b) to the shares of stock in

the hands of the shareholders. Id. at 489 (“ ‘The share of

stock covers, embraces, and represents all three [paid-in

capital, surplus, and franchise] in their totality, for it is a

business photograph of all the corporate possessions and

possibilities. * * * [W]hile th[e New York] court describes

the shares of stock owned by the several individual mem-

bers of the corporation as representing in interest and value

all these things, yet the same things all combined consti-

tute and are the property of the corporation or company.’ ”

(Quoting People v. Coleman, 27 NE 818, 126 NY 433 (1891).));

cf. Revenue Cabinet v. Comcast Cablevision of the South, 147

SW 3d 743, 745-46 (Ky 2003) (applying Henderson Bridge in

concluding that the proper starting point to determine the

value of the taxable franchise was the “business enterprise

value,” i.e., “the price at which a willing buyer and a willing

seller would buy an entire business as of the date,” including

“future values associated with future investment and future

property acquisition”).

On review, the United States Supreme Court opin-

ion laid out this valuation procedure with little comment and

otherwise concerned itself with the taxpayer’s Commerce

Clause claim, which the Court rejected on narrow factual

466 Level 3 Communications LLC III v. Dept. of Rev.

grounds—the Court concluded that the taxpayer did not

conduct interstate business; only the persons crossing the

bridge and paying tolls did so. Henderson Bridge, 166 US

at 153-54.18 In the Adams Express reconsideration opinion,

however, the Court referred to the facts of Henderson

Bridge, apparently accepting that the value of the share-

holders’ stock equaled the value of the entire property of the

corporation. See Adams Express, 166 US at 220 (describing

Henderson Bridge facts as “The owners, therefore, of that

stock, had property which, for purposes of income and pur-

poses of sale, was worth $2,900,000. What gives this excess

of value? Obviously, the franchises, the privileges the com-

pany possesses, its intangible property.”); see also id. at

221-23 (positing generally that “the corporate property”

of an express company is worth the same amount as the

aggregate shares of stock in the hands of the shareholders,

except to the extent the company shows it holds property

not used in the business, such as shares of stock in other

corporations).

By the turn of the twentieth century, therefore, a

robust public record was in place consisting of statutes of

other states that purported to value on a unitary basis such

intangible items as the “franchise,” or the “capital stock,” in

addition to the real property and other personal property, of

railroad, telephone, and other companies; as well as opin-

ions of the United States Supreme Court and the courts of

other states on how to determine the value of such intangible

items. Prominent court opinions acknowledged the distinc-

tion between the unit of property belonging to a corporation

and the shares in that corporation belonging to the share-

holders. Yet the courts approved valuing the franchise or

capital stock by a residual method that used as the starting

point the value of the total shares held by the shareholders

and that then subtracted the separately determined value

of tangible personal property and real property, ultimately

18

In a 1981 opinion dissenting from denial of certiorari, Justice Byron White

stated that, although Henderson Bridge remained good law, it would likely be

upheld under modern theories of apportionment, rather than on the basis that

the taxpayer’s activity did not constitute interstate commerce. Newell Bridge &

Railway Co. v. Dailey, 451 US 942, 944-45, 101 S Ct 2026, 68 L Ed 2d 331 (1981)

(White, J., dissenting).

Cite as 23 OTR 440 (2019) 467

treating the value of the company and the value of the com-

pany’s total property as one and the same.

Against this backdrop of reported cases from other

states, the court now reexamines for further context the

relevant developments in Oregon in the years leading up

to 1909. By the late 1800s, Oregon assessors had begun to

incorporate elements of the unit valuation concept, includ-

ing reference to the value of the shares of company stock,

into the valuation of railroad and telephone companies.

Although Oregon property tax law did not refer specifically

to franchises until 1907, the definition of “real property”

expansively included land, structures, and fixtures, as well

as “all rights and privileges belonging or in any wise apper-

taining thereto,” and “personal property” was defined to

include “goods” and “chattels,” as well as “moneys,” debts,

shares in corporations, and “such portion of the capital of

incorporated companies liable to taxation on their capital

as shall not be invested in real estate.” General Laws of

Oregon, Civ Code, ch LIII, title I, §§ 2-3, p 893-94 (Deady

1845-1864); The Codes and Statutes of Oregon, title XXX,

ch I, § 3038, and ch III, § 3057 (Bellinger & Cotton 1901). In

at least one instance, a local assessor sought to include the

value of a railroad’s franchise in the value of its “roadbed.”

See O. & C. R. R. Co. v. Jackson County, 38 Or 589, 605, 65

P 307, modified on recons, 38 Or 589, 65 P 369 (1901) (O. & C.

Railroad).19 On appeal, the Oregon Supreme Court rejected

the assessor’s value as arbitrary, in part because the asses-

sor had relied heavily on per-mile values that the California

state board of equalization had determined for the por-

tion of the company’s roadbeds located across the border in

California. Id. at 615. The court noted that California law

prescribed a substantially different method of assessment,

including an express requirement to assess the franchise,

as well as a rule that assigned higher values to portions of

the track nearer to population centers. Id. at 615-16. Having

concluded that the assessor’s valuation was not grounded in

fact, the court determined what appears to be a unit value,

19

The assessor purported to assess the company’s “roadbed and franchise.”

O. & C. Railroad, 38 Or at 611. Although the local board of equalization ordered

all reference to the franchise to be stricken from the roll, the board made no

change to the value that the assessor had determined. Id. at 613.

468 Level 3 Communications LLC III v. Dept. of Rev.

apportioned by mile, based on trial evidence, relying pri-

marily on the “net earnings” per mile of road and testing the

result against the replacement cost and the “market value of

the bonds and stock of the company.” Id. at 621-22. As to the

market value of the stock and bonds, the court noted:

“So, too, the value of stocks and bonds may furnish an ele-

ment by which to determine the worth of such property.

The conditions which may unite to influence the market

must be borne in mind, as they may be unnatural, and out

of the usual course; but the criterion is one that may be legit-

imately resorted to in determining the value of the property

which they represent.”

Id. at 608 (emphasis added);20 see also Pacific States Tel. &

Tel. Co., 53 Or at 166 (discussed below) (telephone company

contended that the value of its franchise had been included

for property tax purposes). This court concludes that, even

before the legislature made franchises or other intangible

rights expressly taxable, the Oregon Supreme Court implic-

itly included their value when measuring the value of other

property and, more importantly for this case, looked to the

value of shares of stock and bonds of the corporation as an

indicator of the property’s value.

Between the 1901 O. & C. Railroad case and the 1909

enactment of central assessment, four significant Oregon

law changes occurred that affected the taxation of intangi-

ble items. First, in 1903, the legislature imposed an annual

fee on all corporations for the privilege of doing business in

Oregon, ranging from $10 to $200, depending on the “amount

of its authorized capital stock.” Or Laws 1903 at 39, 43-44

(HB 2). Variously described as a tax or as a fee, this charge

burdened a corporation’s right to exist as a legal entity—the

“general” franchise or “franchise to be.” The “franchise to

be” a corporation obviously is a nontransferable right per-

sonal to each corporation; the court concludes that in that

20

This favorable reference to use of the value of stocks and bonds is notable

because the court cited as support two federal circuit court opinions that sharply

criticized reference to the value of the corporation’s shares as liable to be inac-

curate because the share value includes goodwill. O. & C. Railroad, 38 Or at 608

(citing Railroad & Telephone Companies v. Board of Equalizers of Tennessee, 85 F

302, 313-14 (1897); Cotting v. Kansas City Stock-Yards Co., 82 F 850 (C.C.D. Kan.

1897), rev’d sub nom, Cotting v. Godard, 183 US 79, 22 S Ct 30, 46 L Ed 92 (1901).

Cite as 23 OTR 440 (2019) 469

respect it is analogous to an intangible Attribute described

by taxpayer in this case. Further discussion of this 1903

annual registration charge appears below.

Second, in 1905, the legislature, apparently respond-

ing to longstanding complaints of “unequal taxation” and

failure to capture the taxable value of railroad franchises,

express company goodwill, and patent rights, among other

items,21 directed the formation of a one-year bipartisan com-

mission “for the purpose of examining and reporting upon

the matters of assessment and taxation of property in this

State, the collection of revenue in taxes, and the framing of

laws upon that subject, to be submitted to the Legislative

Assembly of this State at its next regular session.” Or Laws

1905, ch 90, § 1. The duty of the commissioners included

“mak[ing] a tax code for the State of Oregon * * * includ[ing]

a complete system of the just and equitable assessment and

taxation of all forms of property, both tangible and intan-

gible * * *.” Id. § 4. The 1905 act required the Governor and

Secretary of State to print 5,000 copies of the report and

the commission’s proposed laws and to distribute them to all

legislators and newspapers, and to county clerks. Id. § 11.

On June 30, 1906, the three lawyers appointed to

the commission delivered their 300-page report, recom-

mendations, and draft bills. The 1906 Oregon Report cov-

ered a great deal of ground,22 but the treatment of fran-

chises and other intangible property was a major point

of detailed discussion. Throughout the report, including

a 10-page appendix, the commission expressed its views

about how the value of a franchise should be determined.

21

See “Assessor C.P. Strain on ‘Invisible Values,’ ” East Oregonian pp 3-4

(Dec 3, 1904) (reprinting circular letter from Umatilla County assessor to the

legislature complaining that the state loses “$200,000 per annum by a failure

to reach the franchise of railroads and express companies” and proposing a tem-

porary commission to provide guidance to assessors); see also James Wilkinson

Chapman, State Tax Commissions in the United States, 522-24 (Johns Hopkins,

1897) (describing earlier Oregon commissions of 1885 and 1890 that publicly

raised similar concerns), available at https://books.google.com.nf/books?id=

ZOAYAAAAYAAJ&printsec=copyright#v=onepage&q&f=false (accessed Sept 9,

2019).

22

Topics included Oregon’s restrictive Uniformity Clauses and longstanding

statutes that made state finances ostensibly dependent on ad valorem property

taxes but pitted counties against each other, leading to widely acknowledged

undervaluation by elected local assessors.

470 Level 3 Communications LLC III v. Dept. of Rev.

These portions included original research but also drew

heavily from two sources: the Oregon Supreme Court’s 1901

opinion in O. & C. Railroad, and a nationwide analysis, as

of 1904, of railroad valuation conducted by the US Census

Bureau, later published in a bulletin of the US Department

of Commerce and Labor. See Department of Commerce

& Labor, Bureau of the Census, Commercial Valuation

of Railway Operating Property in the United States: 1904,

Bulletin 21 (1906), available at https://books.google.com/

b o ok s?id=Xp 5WOM Z O 0M kC&pg=PA7&lpg=PA7&d-

q= Commercial+Valuation+of+Railway+Operating+Prop-

erty+in+the+United+States:+1904&source=bl&ots=Yh-

QEG6jk5i&sig=ACf U3U1hvI8X3QairYzKv1DguHilCngy-

bQ&hl=en&sa=X&ved=2ahUKEwjWwvbo6sTkAhWUtZ-

4KHfGwBf IQ6AEwA3oECAMQAQ#v= onepage&q= Com-

mercial%20Valuation%20of%20Railway%20Operating%20

Property%20in%20the%20United%20States%3A%20

1904&f=false (last accessed Sept 19, 2019) (“1904 Census

Bureau Report”).

The Oregon commission and its sources gener-

ally agreed on the extent to which the value of the shares

of stock of a railroad company is useful as an indicator of

the value of the company’s property. As quoted above, the

Oregon Supreme Court viewed the value of the shares as a

legitimate source of information. O. & C. Railroad, 38 Or at

608. The main problems identified are that (1) railroad com-

panies tend to invest in what now is called “non-operating

property,” property used in unrelated lines of business, such

as hotels, mines, etc. (or in shares of stock in companies that

operate nonrailroad businesses);23 and (2) the sale of all of

the shares of stock in a railroad company is rare, and the

sources expressed uncertainty about reliance on the prices

of a few shares sold in thin trading, or on the price for only

a controlling interest.24 Those problems are not at issue in

23

See 1904 Census Bureau Report at 9, 17 (discussing inadequacy of a pure

“stock and debt” method in separating income from nonrailroad properties such

as hotels, as well as income from other railroad companies that already are

assessed in their own right), cited in 1906 Oregon Report at 193.

24

1906 Oregon Report at 194 (“To the extent that the purchase of railway

securities is not the purchase of the whole property, but merely of an undivided

interest therein, and that the price paid for an undivided interest is not a sure

criterion of what the price would have been for the purchase of the property as a

Cite as 23 OTR 440 (2019) 471

this case, and nothing in the 1906 Oregon Report raises the

concerns that taxpayer raises here, that using the aggre-

gate value of the shares as a proxy for the value of the tan-

gible and intangible property that the company owns might

incorrectly incorporate Attributes that reside in the shares

but not in the company’s property. The portions of the 1909

law that are relevant to this case incorporate nearly verba-

tim the draft bills in the 1906 Oregon Report.

The third major legislative development preceding

the 1909 act occurred several weeks before the Oregon com-

mission completed the 1906 Oregon Report, on June 4, 1906,

when the voters used the newly adopted right of the citizens’

initiative to pass two short-lived laws imposing “license”

charges on telephone companies and companies operating

certain other of the types of businesses that would later be

centrally assessed. Or Laws 1907, chs 1 - 2; see Official Voters’

Pamphlets, General Election, June 4, 1906.25 The two 1906

“license” laws imposed a tax of either two percent or three

percent on the company’s annual “gross receipts” or “gross

earnings,” depending on the type of business. A company was

subject to the telephone company tax “when engaged” in the

subject business. Or Laws 1907, ch 1, § 3. Except for basic

identifying information, the gross receipts were the only data

that the company was required to supply under either tax.

The Pacific States Telephone and Telegraph

Company immediately, but unsuccessfully, challenged the

1906 gross receipts tax on a number of grounds, including

“double taxation,” on the theory that the company’s fran-

chise was already subject to tax under the 1903 general reg-

istration charge act and under the property tax laws. Pacific

States Tel. & Tel. Co., 53 Or at 166. The Oregon Supreme

unit, the values ascertained in the report, by the second method, are too high.”);

but see 1904 Census Bureau Report at 19 (“The method of valuing railway prop-

erties on the basis of the market quotations of their stocks and bonds is regarded

by many as the most defensible of all methods, for the reason that the price of

railway securities established on the stock exchanges is the resultant of a combi-

nation of the greatest possible number of judgments.”).

25

The Voters’ Pamphlets were titled, “To Propose An Act Requiring Sleeping

Car Companies, Refrigerator Car Companies, And Oil Companies to Pay An

Annual License Upon Gross Earnings”; and “To Propose An Act Requiring

Express Companies, Telegraph Companies, And Telephone Companies to Pay An

Annual License Upon Gross Earnings.” Id.

472 Level 3 Communications LLC III v. Dept. of Rev.

Court26 rejected the company’s argument as to the 1903

general registration charge, describing the 1903 charge

as imposed “on the right to be or exercise the powers of a

corporation,” i.e., a general right to exist, while the 1906

gross receipts tax was “a tax on the business or franchise

which the corporation, when organized, may exercise,” i.e., a

franchise “to do” or “special” franchise. Id. at 164-65. As to

the company’s claim that its property tax assessment had

“include[ed] the value of its franchise,” the court declared

that no law as of 1906 specifically required the franchise of a

corporation to be assessed, noting that “clearly a law on the

subject [of franchise taxation] regularly enacted could not

be rendered nugatory or invalid by local assessors including

in the value of corporate property their estimate of the value

of the franchise.” Id. at 166. In other words, the court again

acknowledged that pre-1907 law may have allowed local

assessors to include the value of a corporate franchise when

assessing other property, but the court saw no impermis-

sible “double taxation” in also allowing the state to impose

a gross receipts tax on a percentage of the entire earnings

from operation of a telephone business. Id.

Finally, while the state and federal appeals of the

1906 “license” laws were pending in Pacific States Telephone,

the 1907 Oregon legislature enacted another property tax

law change, which Wells Fargo and other companies argued

impliedly repealed the 1906 gross receipts tax laws. See State

of Oregon v. Wells, Fargo & Co., 64 Or 421, 126 P 611 (1913)

(Wells Fargo). The 1907 law added “franchise” to the items

listed in the definition of “land, real estate and real prop-

erty” for property tax purposes, thus expanding the property

tax base to include franchises “to do.” Or Laws 1907, ch 268,

§ 2.27 But this law expressly excluded from the definition of

real property “the right to be a corporation,” avoiding the

26

The United States Supreme Court’s subsequent review of Pacific States

Tel. & Tel. was limited to whether the initiative provisions violated the United

States Constitution’s guarantee of a republican form of government. See US

Const Art IV, § 4. The Court dismissed the appeal on the ground that the issue

was nonjusticiable. See Kiernan v. City of Portland, 223 US 151, 32 S Ct 151, 56 L

Ed 380 (1912).

27

For noncentrally assessed property, the term “franchise” continued to be

listed as one item in the definition of “land,” “real estate,” and “real property”

until 1935. Compare OCA § 69-102 with Or Laws 1935, ch 274, § 2.

Cite as 23 OTR 440 (2019) 473

possibility that the new definition would impose a “double

tax” on the franchise “to be.” Wells Fargo also argued that

the 1909 central assessment law itself, which left the 1907

definition of real property unchanged for property that was

locally assessed, impliedly repealed the 1906 gross receipts

taxes by adding both “franchise” and “special franchise” to

the definition of “property” for centrally assessed taxpay-

ers.28 See Wells Fargo, 64 Or at 424; see generally Portland v.

Portland Ry., L. & P. Co., 80 Or 271, 293, 156 P 1058 (1916)

(noting this difference).

The Oregon Supreme Court agreed with Wells

Fargo that the 1909 central assessment provisions impliedly

repealed the 1906 gross receipts taxes because the 1909 and

1906 tax laws covered the same ground. See Wells Fargo, 64

Or at 432 (“[T]he act of 1909 * * * covers the whole field of

taxation embraced in the [gross receipts tax] act of 1906 * * *.

It covers the same ground, deals with the same subject, and

was, no doubt, intended to be a complete and comprehensive

scheme of taxation, * * * taking the place of previous laws for

the assessment and taxation of express, telephone, and tele-

graph companies; and therefore repeals such previous stat-

utes by implication.”)29 Turning to the instant case, an argu-

ment could be made that, because the gross receipts taxes

were imposed on the entire income of the subject companies

(at least to the extent of their engagement in the subject busi-

ness), the implied replacement of those taxes with a prop-

erty tax base that includes the value of a general and special

franchise suggests legislative approval of valuing the entire

28

The 1909 law ambiguously included “franchises” and “special franchises”

in the definition of “property” subject to assessment while also providing that, for

purposes of valuing the unit,

“said franchises and special franchises [are] not to be directly assessed, but

[are] to be taken into consideration in determining the value of the other

property * * *.”

Or Laws 1909, ch 218, §§ 5, 9; see Portland v. Portland Ry., L. & P. Co., 80 Or 271,

294-95, 156 P 1058 (1916) (“if it can be said that the franchise is assessed at all”).

In 1941, the legislature resolved this ambiguity as to whether franchises could

be assessed vs. merely used as a valuation tool, deleting the quoted phrase from

what is now ORS 308.545 while retaining the reference to franchises and spe-

cial franchises in the definition of “property” in what is now ORS 308.505(14)(b)

(2017). See Or Laws 1941, ch 440, § 14.

29

The court declined to reach whether the 1907 change to the definition

of real property, which remained in place for noncentrally assessed taxpayers,

impliedly repealed the 1906 gross receipts taxes. See id. at 432.

474 Level 3 Communications LLC III v. Dept. of Rev.

subject enterprise for property tax purposes. This court does

not reach that argument, as the opinion in Wells Fargo is

brief and says nothing about whether the 1909 legislature

intended to value the property of a company engaged in a

centrally assessed business by the value of the business and

the company as a whole, or whether it intended to limit the

valuation of intangible property to only defined items belong-

ing to the corporation as a separate entity. This court draws

no particular conclusion from the implied repeal of the 1906

gross receipts taxes by the 1909 central assessment statutes.

Keeping in mind these Oregon developments that

closely preceded the 1909 act, the court now reviews the

1909 central assessment provisions anew. The court finds

the 1909 definition of “property” remarkable for its emphatic

breadth, using the phrase “all property,” or variants thereof,

a total of three times. The definition immediately declares

that “property” includes “all property, real and personal,”

belonging to or held by the company. The definition goes on

to list a number of specific items, but again adds “and all

other property of a like or different kind” used in the busi-

ness, as well as “all other real and personal property,” finally

adding “and all franchises and special franchises” before

concluding with the proviso that excludes certain property

not used in the centrally assessed business. Or Laws 1909,

ch 218, § 5.30 Based on this repeated intention to include “all”

property, the court concludes that the legislature intended

“property” and its constituent terms, such as “franchise,” to

be interpreted expansively. As to the specific issue taxpayer

has raised, the legislature is considered to have known, from

the opinions in State Railroad Tax Cases, Adams Express,

Henderson Bridge, and others noted above, that the United

30

The full definition, less the proviso, read:

“The term ‘property,’ as used in this act, shall be deemed to include all

property, real and personal, subject to assessment for taxation under this act

belonging to the corporation, or held by it as occupant, lessee, or otherwise,

and shall include the rights of way, roadbed, cars, rolling-stock, tracks, wag-

ons, horses, office furniture, telegraph, telephone and transmission poles,

wires, conduits, switchboards, machinery, appliances, appurtenances, and

all other property of a like or different kind, used in the carrying on of the

business of said corporation, and owned, leased, or operated by them respec-

tively, and all other real and personal property, and all franchises and special

franchises * * *.”

Or Laws 1909, ch 218, § 5 (emphases added).

Cite as 23 OTR 440 (2019) 475

States Constitution would allow Oregon to treat the value

of all shares in a company as equivalent to the value of the

entirety of a corporation’s tangible and intangible property.

The legislature would have been aware that the Oregon

Supreme Court eight years previously had endorsed a val-

uation method that primarily used the net earnings of the

company, and also commented favorably on using the value

of shares of company stock and debt, assuming that an ade-

quate market existed for the shares of stock and that prop-

erty not used in the unit could be excluded. The legislature’s

own commission had issued a similar endorsement in an

extensive report from June 1906 that urged the legislature

to adopt specific bill language to enable a new, permanent

state board of tax commissioners to consider corporate share

prices and corporate earnings. The 1909 legislature enacted

the commission’s proposed language nearly verbatim. The

1909 act expressly allowed the new board of tax commission-

ers to take into account not only the value of any “special”

franchise but also the corporation’s very right to exist (the

“general” franchise). The former was generally considered

an intangible right inseparable from the company itself, and

the latter clearly was. On the basis of this context, the court

concludes that, despite the important differences for many

purposes between the property held or used by the corpora-

tion and shares held by the shareholders, the legislature in

1909 intended to authorize the department’s predecessor to

treat the value of the total shares as equivalent to the value

of the unit of corporate property for property tax purposes,

at least absent some factual reason not to do so.31

c. Post-1909 statutory development

The court now reviews whether the legislature

intended any of its later amendments to the 1909 law to

31

This conclusion assumes away certain potential factual complexities, such

as a single corporation operating more than one type of business or owning prop-

erty that is not used or held for purposes of any business whose property is cen-

trally assessed. The conclusion posits a corporation that is solely engaged in a

business listed in the central assessment statutes, all of whose properties are

used or held for use in that business. The cases discussed above appear to involve

facts consistent with those assumptions. The court views this assumption as fair

for this case, given that nearly all of taxpayer’s property is used or held for future

use in its communication business and that the amount of other, “non-operating,”

property is small and uncontested.

476 Level 3 Communications LLC III v. Dept. of Rev.

change the way centrally assessed property could be val-

ued. The first amendments, in 1913, most notably added the

phrase “tangible and intangible” to the definition of “prop-

erty.” Or Laws 1913, ch 193, § 5. The court views this change

as either a clarification32 or as a further broadening of the

definition, presumably to encompass businesses operating

without a formal franchise. See Adams Express, 166 US at 218

(“The statutes grant no privilege of doing an express business,

charge nothing for doing such a business, and contemplate

only the assessment and levy of taxes upon the property of

the express companies situated within the respective states

* * *.”).33 The 1941 Legislative Assembly added a provision

that closely identifies centrally assessed companies with their

property by making all property tax a personal debt of the

centrally assessed taxpayer. By contrast, for a locally assessed

taxpayer, only the tax debt on personal property is a personal

obligation; the tax imposed on real property applies only in

rem. Compare ORS 311.655 (centrally assessed taxpayers)

and ORS 311.455 (personal property of locally assessed tax-

payers) with ORS 312.010 (tax on locally assessed real prop-

erty is collected by foreclosure). Or Laws 1941, ch 12, § 1. As

noted earlier, the 1941 legislature also eliminated ambiguous

limiting language that seemed to prevent the direct assess-

ment of franchises. See Or Laws 1941, ch 440, § 14. The court

has found no statutory history, context, or legislative history

on this change, but the court sees no reason to conclude that

the 1941 change limited the department’s authority to use the

value of corporate stock as the basis for the value of corporate

property. Following other changes in the 1940s not relevant to

this case, in 1951 the legislature repealed the central assess-

ment laws and reenacted without substantive change all of

the content relevant to this case. See Or Laws 1951, ch 586;

Memorandum from Legal Department, State Tax Commission

32

The 1909 definition already encompassed “all property”; the 1905

Legislative Assembly had directed the commission to draft bill proposals to tax

“all forms of property, both tangible and intangible”; and the commissioners’

1906 Oregon Report indicated that they thought their bill proposals did that. See

Or Laws 1905, ch 90, §§ 1, 4; 1906 Oregon Report at 16-17, 22, 26.

33

Other noteworthy changes enacted in 1913 included changing the name

of the central assessment authority from “Board of State Tax Commissioners”

to “State Tax Commission,” and broadening the commission’s authority to deter-

mine how to allocate the overall unit value to Oregon. See Or Laws 1913, ch 193,

§§ 1, 9.

Cite as 23 OTR 440 (2019) 477

to Subcommittee of House Committee on Taxation (Mar 26,

1951), available from Oregon State Archives; see also Comcast,

356 Or at 292. Since 1953, when the legislature recodified

the central assessment laws as part of the creation of the

Oregon Revised Statutes, the relevant language has been

materially changed only twice: first, in 1977 the legislature

added a specific exclusion from the definition of “property” for

certain intangible property representing shares of stock or

claims on other property (bonds and other debt instruments).

See Or Laws 1977, ch 602, now codified at ORS 308.505(14)(c)

(2017). However, the department’s representative testified to

the Senate Revenue and School Finance Committee that the

exclusion merely codified the department’s appraisal practices

“almost from year one” of the central assessment law, and the

committee immediately voted to approve the language as an

amendment to the bill. Tape Recording, Senate Committee on

Revenue and School Finance, SB 113, June 7, 1977, Tape 31,

Side 2 (statement of Assistant Attorney General Ira Jones).34

Second, in 2015, the legislature adopted an exemption for a

portion of the real market value of a centrally assessed com-

pany’s property; the exemption generally applies to the extent

that the aggregate value of the real property, tangible per-

sonal property and intangible property exceeds 130 percent of

the historical or original cost of the real property and tangible

personal property that is included in the unit. Or Laws 2015,

ch 23, § 3; ORS 308.674. The court sees nothing in this exemp-

tion that changes the approach to valuing the unit of proper-

ty.35 Overall, the court concludes that later statutory changes

have not changed the legislature’s original intention in 1909,

as clarified in 1913 and 1941, that the value of the property

34

The 1977 amendment of the definition of “property” in ORS 308.505

occurred as an amendment of a larger bill, the main purpose of which was to

affect the treatment of noncentrally assessed property, particularly “title plants”

and other business records stored on electronic or other media. See Northwest

Natural Gas. Co. v. Dept. of Rev., 347 Or 536, 550-51, 226 P3d 28 (2010) (back-

ground on 1977 law).

35

The department argues that statements in the legislative history of the

2015 amendment showing that the legislature intended the exemption as a cap

on the taxation of “goodwill” imply that the legislature always intended that

goodwill be subject to tax. The court rejects any such implication because the

laws defining the scope of valuation and taxation predate the 2015 statements by

more than a century. See, e.g., DeFazio v. WPPSS, 296 Or 550, 561, 679 P2d 1316

(1984) (“The views legislators have of existing law may shed light on a new enact-

ment, but it is of no weight in interpreting a law enacted by their predecessors.”).

478 Level 3 Communications LLC III v. Dept. of Rev.

held by a centrally assessed company may be determined by

the value of the company itself, absent a demonstrable factual

difference.

d. Cases cited by the parties

The court now tests its understanding of the stat-

utes against the cases the parties have cited. Taxpayer

cites two cases in which the Oregon Supreme Court has

commented on the difference between the value of the firm

or business and the value of the property subject to assess-

ment. Taxpayer cites Delta Airlines, Inc. v. Dept. of Rev., 328

Or 596, 616, 984 P2d 836 (1999) (“Under Oregon law, tax-

able property must be assessed as of a particular assess-

ment date. * * * Thus, the department’s task in this case was

to value Delta’s taxable property, as a unit, as of the assess-

ment date at issue. * * * [T]he department’s task was to

determine the value of Delta’s assets, not the value of Delta

as a firm.”), and Comcast, 356 Or at 294 (“It bears emphasiz-

ing * * * that only the property used in the business, service,

or commodity is assessed (and thus taxed). The value of the

business, service, or commodity itself is not subject to cen-

tral assessment.” (Emphasis in original.)).

Delta was the last of a long series of property tax

valuation cases in which the Supreme Court sat as a trier

of fact, reviewing Tax Court cases under the former de novo-

on-the-record standard in place until a 1995 law change

became operative. See Delta, 328 Or at 600-03 (discussing

former standard); United Telephone Co. v. Dept. of Rev., 307

Or 428, 432, 770 P2d 43 (1989) (same); cf. Powell Street I v.

Multnomah County Assessor, 365 Or 245, 445 P3d 297 (2019)

(applying current “substantial evidence” standard in ORS

305.445). In Delta, the main issue was the treatment of a

substantial portion of the taxpayer’s aircraft fleet, of which

the taxpayer was the lessee under “operating leases,” that

the court characterized as “more traditional” leases. Delta,

328 Or at 599 n 2.36 The taxpayer presented an income

approach based on a “perpetuity” model, which asked the

court to assume that the taxpayer would enter into new air-

craft leases, continually and into the indefinite future, as

36

By contrast, both parties treated aircraft financed pursuant to “capital

leases” as owned by the taxpayer. See Delta, 13 OTR at 374-75.

Cite as 23 OTR 440 (2019) 479

the current ones expired. Based on this assumption, the tax-

payer’s approach assumed that the proper starting point to

estimate future income was the net stream of revenue that

the taxpayer earned from each aircraft, ignoring the gross

earning potential of each aircraft. As the Supreme Court

stated: “The effect of that calculation was to remove lease

payments to Delta’s lessors from the income stream subject

to capitalization.” 328 Or at 604. The department presented

an opposing, “limited-life” approach that started with the

gross earning potential of each aircraft, with deductions for

financing costs and depreciation over the term of the prop-

erty’s useful life. Id.

The court rejected the taxpayer’s perpetuity model

and adopted the department’s limited-life model, relying in

part on the 1989 edition of the Western States Association of

Tax Administrator’s (WSATA) Handbook, which the depart-

ment at that time had adopted by reference as an Oregon

administrative rule. See former OAR 150-308.655 (1999).37

It was in the course of rejecting the taxpayer’s proffered

perpetuity approach—and with it the taxpayer’s net income

starting point—that the court made its statement that the

department’s task was to value Delta’s property, not the firm:

“The handbook * * * answers the question whether use of

the limited-life or perpetuity model was appropriate in

this case. The handbook provides that, when the taxation

requirement is to value assets that exist on the assessment

date, it is proper to forecast the expected income ‘over the

remaining economic life of the existing assets,’ i.e., to fol-

low a limited-life model. * * * In contrast, the handbook

provides that ‘[f]orecasting income into perpetuity is proper

when the corporate entity is being valued.’ * * *

“* * * [T]he perpetuity model would not have been appro-

priate here, because the department’s task was to deter-

mine the value of Delta’s assets, not the value of Delta as

a firm. Accordingly, we reject Delta’s contention that the

department erroneously applied the limited-life model in

its income approach.”

Delta, 328 Or at 615-16 (emphasis added).

37

Today’s Oregon rule adopts the 2009 edition of the WSATA Handbook. See

OAR 150-308-0690.

480 Level 3 Communications LLC III v. Dept. of Rev.

Since the Supreme Court’s opinion in Delta, the

WSATA Handbook has been revised “substantially.” See

WSATA Handbook at I-1 (2009 ed). It is not clear that

the Supreme Court would interpret the current discus-

sion of perpetual vs. limited-life approaches in the same

way it viewed the discussion in the then-current 1989 edi-

tion. In contrast to the passage that the Supreme Court

quoted above, the 2009 edition of the Handbook provides:

“Forecasting income into perpetuity is proper when a going

concern is being valued.” Id. at III-7 (emphasis added). A

footnote on the preceding page offers the following discus-

sion: “ ‘Going concern’ as used here is not synonymous with

enterprise value. Enterprise value is a broader term which

encompasses the value of a corporate entity including all of

its tangible and intangible assets; it is a valuation of the

present owner’s total business in contrast to the exchange

valuation of operating assets as a going concern.” Id. at III-6

n 36 (emphases added). The current WSATA Handbook dis-

cussion thus seems to imply that the perpetuity approach

may be appropriate even when the subject of the valuation

is limited to the operating property and is not the corporate

entity. Without expressing any view about the correctness

of the current WSATA Handbook, the court concludes that

the difference compared to the prior edition’s discussion of

this topic reduces any precedential value that Delta other-

wise might have. In any event, in Delta as in many prior

cases under the former de novo-on-the-record standard,

the Supreme Court frequently cautioned litigants against

assigning precedential weight to the court’s choice of one

or another valuation method. See Delta, 328 Or at 615 n 11

(referring to the court’s “repeatedly” made statements that

its “earlier valuation cases provide no precedential value”).38

For all of these reasons, this court interprets the language

in Delta on which taxpayer relies as primarily directed at

rejecting Delta’s attempt to discount the projected revenue

38

In addition, more recent decisions suggest that the Supreme Court today

might reach the same ultimate conclusion on the facts in Delta based on a differ-

ent analysis, by focusing on Delta’s full “use” of the aircraft rather than on Delta’s

interest as owner vs. as lessee. See PacifiCorp Power Marketing v. Dept. of Rev.,

340 Or 204, 210, 131 P3d 725 (2006) (finding that taxpayer’s contracts demon-

strated that it “used” property constituting the Intertie within the meaning of

ORS 308.515(1)).

Cite as 23 OTR 440 (2019) 481

stream based on Delta’s choice to lease its income-producing

property instead of owning it. The court declines to assign

any weight to the Supreme Court’s statement as it relates

to using the value of Delta as a company to determine the

value of Delta’s property.

Turning to taxpayer’s second case, in Comcast, 356

Or at 282, the comment that taxpayer cites appeared as part

of the Supreme Court’s introduction to the concepts of cen-

tral assessment and was the only statement in the 53-page

opinion that mentioned a distinction between the property

and the business. The Supreme Court never reached the

issue of valuation; it focused on the antecedent question of

whether Comcast was engaged in the “communication” busi-

ness within the meaning of ORS 308.515(1). Rather than

rely on that comment, this court turns to the most recent

opinion on which the parties supplied supplemental briefing

shortly after its issuance, namely, DISH Network Corp. v.

Dept. of Rev., 364 Or 254, 434 P3d 379 (2019). There, the

Supreme Court stated that unit valuation as permitted by

ORS 308.555 “actually values the company as a going con-

cern: It considers a company’s market value as a whole and

does not, either in practice or in theory, purport to assess

the various component parts that go into that whole.” 364

Or at 292. In DISH Network, in contrast to Comcast, the

court’s statement was in response to the taxpayer’s argu-

ment on a point actually at issue in the case: whether the

centrally assessed unit of property could be added to the

roll without offset for any tangible personal property that

county assessors already had subjected to local assessment.

The taxpayer argued that the addition would subject the

company’s tangible personal property and real property in

Oregon to double taxation, relying on a description of the

unit valuation approach that the court concluded ignored

Oregon’s express statutory inclusion of intangible property

in the definition of “property.” See id. at 291. The quoted pas-

sage in DISH Network is consistent with the view of courts

dating as far back as the State Railroad Tax Cases that the

value of the company as a whole is a permissible indicator of

the value of all of its tangible and intangible property.

Overall, regarding taxpayer’s legal question, the

court concludes that Oregon’s central assessment law does

482 Level 3 Communications LLC III v. Dept. of Rev.

not dictate a specific valuation method, but it certainly does

not stand for the proposition that use of the value of the com-

pany or its shares of stock as an indicator of, or proxy for,

value is invalid as a matter of law. The court sees no indica-

tion in the statutory text or context that the legislature has

imposed any legal requirement to distinguish between the

value of the company to its shareholders and the value of all

of the company’s tangible and intangible property. Indeed,

the legislature has blurred the line between a centrally

assessed company and the property it uses, most notably

by incorporating into the definition of “property” a corpora-

tion’s inalienable right to exist.

e. Taxpayer’s no-growth argument (investment

Attributes 1 through 4)

The court now returns to taxpayer’s argument that

the court must reject the only factors that could generate

growth in gross revenue because those factors are intangi-

ble Attributes of the shares of taxpayer stock and are not

property that taxpayer owns. The court considers taxpayer’s

description of each such Attribute, starting with future tan-

gible and intangible property, as well as the present value

of future growth opportunities and potential mergers and

acquisitions (numbered in the table above as Attributes 1

through 4). As recited above, taxpayer presented compre-

hensive, and largely unrefuted, evidence that the equipment

in place on any assessment date was not capable of generat-

ing growth in revenue because it quickly became obsolete,

even as customer demand for capacity constantly increased.

The court agrees with taxpayer, and finds as a fact, that

the only way taxpayer could satisfy customers’ increasing

demand and increase taxpayer’s own revenue was by con-

stantly acquiring new equipment by direct purchase or by

acquiring or merging with other companies that had the

needed equipment. However, from that factual premise tax-

payer argues that the court should not consider the value of

equipment resulting from future direct purchases or future

mergers or company acquisitions because each of those pur-

chases or other transactions depends on an investor’s will-

ingness to invest in taxpayer’s shares of stock, as opposed

to the value of property that taxpayer had in use on the

assessment date. Taxpayer does not argue that the company

Cite as 23 OTR 440 (2019) 483

had no prospects for growth. Therefore, the court views tax-

payer’s argument regarding Attributes 1 through 4 as pri-

marily a legal argument that the court should ignore the

value of these Attributes because they inhere in taxpayer’s

shares of stock and are not property that taxpayer itself

owns.

The department cites one case on point with respect

to taxpayer’s no-growth argument. United Telephone Co. v.

Dept. of Rev., 10 OTR 333, 340-41 (1986), modified, 307 Or

428, 770 P2d 43 (1989). The department relies in particular

on the following statement of this court:

“[The taxpayer’s expert] reasons that ‘we’re valuing just the

assets in the asset pool today. We cannot consider future

growth in plant because it’s not legal to assess plant not in

existence.’ * * *

“In this regard, [the taxpayer’s expert] makes a funda-

mental error. It is true that the tax laws tax only the exist-

ing assets. However, the ad valorem tax is levied on the

present value of the assets. That value includes all benefits

expected to be received in the future from those assets. If

any growth is expected, the present value of those expecta-

tions must be reflected in the fair market value of the prop-

erty. Growth must come from something. If any growth

is expected, it is the taxable assets which will produce it.

Hence, the value of existing assets includes their poten-

tial for growth, just as the value of a thoroughbred horse

includes the potential for future offspring. While the state

cannot tax that future offspring because it is not in exis-

tence, the potential of the thoroughbred horse to produce

offspring is an element of value which can be and must be

taxed. Utilizing a market rate of return which includes

expectations of future growth but projecting income with-

out growth results in an undervaluation of the assets.”

10 OTR at 340-41. Taxpayer does not respond in briefing,

but during trial taxpayer pointed out that the Supreme

Court modified this court’s opinion on appeal and countered

that taxpayer’s property, unlike the racehorse in the court’s

analogy, was equipment that could not reproduce. In review-

ing both opinions, it is clear that the taxpayer in United

Telephone squarely presented the question whether the value

of today’s centrally assessed property can be determined by

484 Level 3 Communications LLC III v. Dept. of Rev.

an income approach that looks to the income to be gener-

ated by property that will be acquired after the assessment

date. However, the ultimate answer to that question from

this court and the Supreme Court is less clear. This court

squarely answered “yes” in the passage quoted above. Under

the de novo-on-the-record standard of review in place at the

time, however, the Supreme Court did not reach this court’s

legal conclusion that future growth in revenue is necessar-

ily attributable to the property presently in place, because

the Supreme Court agreed with the taxpayer as a factual

matter that no growth in revenue was likely to occur. United

Telephone, 307 Or at 441-42.39 The Supreme Court’s conclu-

sion of value using the income approach assumed no growth

in revenue, and no growth in the rate of investor return;

in addition, the Supreme Court adopted a projected income

amount slightly different from that apparently used by this

court. Id. at 434-35, 442.

The Supreme Court’s modification of this court’s

judgment in United Telephone leaves the precedential effect

of this court’s statement about attributing future revenue

growth to existing property open to question. This is par-

ticularly true because, as the Supreme Court pointed out,

this court did not fully explain the source of its conclusion of

value under the income approach. See id. at 441. The court

now declines the department’s invitation to rely on this

court’s statement in United Telephone.40

39

The Supreme Court apparently accepted that the taxpayer would do no

more than reinvest recovered depreciation on company property continuously,

thus assuring a future income stream, but not creating growth. See United

Telephone, 307 Or at 435.

40

Similarly, while the Supreme Court appeal in United Telephone was pend-

ing, this court also decided PP&L v. Dept. of Rev., 10 OTR 417 (1987), modified,

308 Or 49, 775 P2d 303 (1989), in which the parties relied on the same set of

valuation expert witnesses as in United Telephone. As in United Telephone, the

taxpayer’s expert presented an income approach that assumed no growth in

future revenues, stating his understanding that the state “ ‘cannot tax assets

not in existence.’ ” PP&L, 10 OTR at 429. This court, citing its opinion in United

Telephone before modification, rejected the expert’s position on the ground that

the law does not tax future property but assigns value to the current property

based on the an “anticipation of future benefits” inherent in the current property.

PP&L, 10 OTR at 431. The Supreme Court likewise rejected the taxpayer’s “no

growth” position, but it did so on the factual ground that the company’s own

projections indicated that it anticipated growth, and without commenting on this

court’s rationale on that point. 308 Or at 58-59.

Cite as 23 OTR 440 (2019) 485

The court finds more apposite the Supreme Court’s

reasoning in Union Pacific Railroad Co. v. Dept. of Rev.,

315 Or 11, 843 P2d 864 (1992). There, the court, applying

the same former de novo-on-the-record review standard,

expressed no concern about looking to the revenues from

property to be acquired in the future, although the court also

ultimately accepted the taxpayer’s “no-growth” argument as

a factual matter. The court stated as a general proposition:

“Growth in net cash flows will arise either because the

present asset base generates additional income or because

additions to the asset base produce income beyond the cost

of the additions themselves, including the costs of operat-

ing them. The latter source of growth will be possible only

if an investor is prepared to forego some immediate return

on investment (i.e., an amount equal to the cost of the new

income-producing assets) in order to experience more satis-

factory returns in the long run. If the net cash flows gener-

ated by increases in the asset base do not exceed the cost

of the additional asset base and the costs of their opera-

tion, then there has been no ‘growth’ from an investor’s

standpoint.”

315 Or at 22 (emphases added). The Supreme Court’s com-

ments reflect an apparent conclusion that Oregon law allows

the department to consider future additions to the asset base

in estimating future cash flows, even though those additions

will occur only if investors—shareholders or lenders—invest

more money in the company itself. Although the case is not

precedential as to how to determine the value of a centrally

assessed unit of property,41 it is an indicator that Oregon

recognizes no legal barrier to considering the cash flows to

be generated by future properties, and it indirectly supports

the conclusion that an Attribute that attracts outside invest-

ment in the company may be included in the value of the

unit of property.

This court cannot accept taxpayer’s no-growth

argument. The court is of the view that the potential for

revenue growth may derive from an attribute of the unit of

41

As noted above, while the de novo-on-the-record standard of review was

in place, the Supreme Court repeatedly cautioned parties that its own opinions

carried no precedential weight, to the extent the court engaged in the factual

determination of the value of property. See Delta, 328 Or at 615 n 11.

486 Level 3 Communications LLC III v. Dept. of Rev.

assembled equipment, real property, customer relationships

and workforce in place, or from the ability of the company to

attract merger partners and additional capital investment

as taxpayer argues, or from a combination of these factors.

It is not necessary to pinpoint the source of the growth

potential in this case, however, because the court concludes

that the legislature fully intended any or all such factors

to “count” in the valuation of the unit of real, tangible and

intangible property in place on any given assessment date.

Taxpayer’s sole objection regarding these Attributes is based

on its legal position that the potential for any such growth

derives from Attributes inherent in taxpayer as a company.

Taxpayer has not sought to contest the department’s pro-

jections, supported by the department’s appraisal evidence,

that taxpayer as a company will experience growth in reve-

nue of three percent as of January 1, 2014, or two percent as

of January 1 of 2015 and 2016.

f. Investment Attributes 5 through 12

The court next considers the remaining Attributes

Nos. 5 through 12: stock liquidity; investor limited liability;

the absence of a requirement to reinvest; protection from

the risk of personal bankruptcy; the prospect that taxpayer

stock will appreciate in value instead of depreciating; the

ability to make small-dollar-amount investments and thus

to create a diversified investment portfolio, and the prospect

of favorable income tax treatment upon the sale of appre-

ciated stock (presumably referring to benefits such as a

reduced federal income tax rate for gain from disposition of

stock held as a capital asset; and the absence of depreciation

recapture upon the disposition of stock). Taxpayer essen-

tially argues that these Attributes have value, and that

value belongs to taxpayer’s shareholders, not to taxpayer as

a company.

The court is skeptical that some of the Attributes

actually created value for taxpayer’s shareholders as a

factual matter. Taxpayer has not attempted to quantify

the specific increment of value associated with any one

Attribute, nor has taxpayer presented evidence from which

the court could determine an incremental value. The value

of some Attributes seems uncertain, or potentially illusory,

Cite as 23 OTR 440 (2019) 487

when the task is to consider the value of all shares of stock

together. The court questions whether liquidity, i.e., the abil-

ity to make small and limited investments and to diversify

(Attributes 7, 10, and 11) actually is different for the holder

or holders of all shares of company stock considered together

than for the company as holder of all company property. Even

the Attributes of limited liability and protection from the

risk of bankruptcy or creditor claims (Nos. 6 and 8) are dif-

ficult to assign cleanly to the shares in the corporate entity

when all tangible and intangible property is at issue. An

arm’s-length transaction to acquire all of the property can

burden the buyer with substantial liabilities attributable to

the seller’s conduct. See Howard L. Shecter, Selected Risk

Issues in Merger and Acquisition Transactions, 51 U Miami

L Rev 719, 740-44 (1997) (discussing asset purchaser’s risk

of successor liability under product liability, environmental,

employee benefit, and labor and employment law); Jerome

R. Hellerstein, Walter Hellerstein & John A. Swain, State

Taxation ¶ 19.11 (3d ed updated 2019) (discussing potential

liability of purchaser of substantially all assets for delin-

quent sales taxes of seller). An informed buyer of assets

may require the seller to agree to indemnify the buyer,

provide other personal guarantees, or accept a lower pur-

chase price in order to offset those risks. See Lou R. Kling,

Eileen Nugent Simon, and Michael Goldman, Summary

of Acquisition Agreements, 51 U Miami L Rev 779, 804-08

(1997) (indemnification provisions). Ultimately, the choice

whether to “structure” a substantial transaction as a sale of

all the shares of stock or as a sale of all the corporate prop-

erty may require a sophisticated analysis of competing con-

siderations in which the benefits of liability limitation and

protection from creditors may be unclear or minimal. As to

the prospect of favorable income tax treatment (Attribute

12), the court finds that Attribute of only speculative value

given the possibility of law changes and the prospect that

any particular seller of stock may be factually unable to

take advantage of any particular income tax law. See Boris

Bittker & Lawrence Lokken, Federal Taxation of Income,

Estates and Gifts, ¶ 49.1 (2d ed updated 2019) (“Gain or loss

on a sale or exchange of a capital asset is long-term capital

gain or loss only if the property was held for more than one

488 Level 3 Communications LLC III v. Dept. of Rev.

year; it is short-term capital gain or loss if the property was

held for one year or less.”); see also Joseph Hydro Associates,

Ltd. v. Dept. of Rev., 10 OTR 277, 280-85 (1986) (questioning

value to assign to state energy and federal investment tax

credits).

Finally, because virtually all of the subject property

in taxpayer’s case is used in the same centrally assessed

business of communications, the court need not, and does

not, reach a decision as to whether any of the Attributes

inhere in the corporation or in its property: they are prop-

erly taken into account regardless. Because taxpayer does

not disagree with the department’s factual conclusion as to

their value, and does not present a factual case on the spe-

cific effect of any one Attribute on the value of the property,

the court accepts the department’s revenue growth rates of

three percent for tax year 2014-15 and two percent for tax

years 2015-16 and 2016-17.

B. Cost Approach

Each party performed an analysis of value using

the cost approach. “The cost approach to value is based

upon the principle of substitution, that is, it assumes that

property is worth its cost or the cost of a satisfactory sub-

stitute with equal utility. Thus, the cost approach seeks to

determine the cost of the unit that is being valued.” Delta,

328 Or at 605. The department’s expert gave “the least reli-

ance” to the cost approach, compared to the income and

market approaches. Taxpayer uses the cost approach only

as a “high benchmark” of value but assigns it no weight in

taxpayer’s overall conclusion of value. Taxpayer’s main crit-

icism is that the department erred by treating “accounting

goodwill” as property with a value that can be counted as

part of the value of the overall unit for central assessment

purposes.42 The Accounting Goodwill to which taxpayer

refers is reflected in an entry appearing on each of taxpay-

er’s annual financial statements as filed with the Securities

and Exchange Commission (SEC) as follows:

42

For convenience, the court adopts taxpayer’s term “Accounting Goodwill”

to refer to the amounts that the department included and that taxpayer contends

should be excluded or ignored. The court intends its usage to be synonymous with

the definition in ASC 805-30-20 as discussed below.

Cite as 23 OTR 440 (2019) 489

Cal- “Accounting

endar Goodwill”

Year Amount Citations Notes

2013 $2,577,000,000 Def’s Ex A at 63

Def’s Ex Q at 107,

125

2014 $7,689,000,000 Def’s Ex B at 63 Form 10K states that

Def’s Ex R at 109, $5,124,000,000 of total good-

126 will is “Goodwill acquired in

tw telecom acquisition”

2015 $7,749,000,000 Def’s Ex C at 63 Form 10K states that

Def’s Ex S at 116, $5,124,000,000 of total good-

122 will is “Goodwill acquired in

tw telecom acquisition”

The department’s expert Eyre included the Account-

ing Goodwill as a line item for “goodwill” in his list of items

that add up to his overall conclusion for each tax year under

the cost approach. He described this type of goodwill as

“operating property.” To illustrate, the chart below repro-

duces the contents of an exhibit showing Eyre’s conclusions

for tax year 2016-17:

2016-17 Tax Year

Defendant’s Historical Cost Less Depreciation

Indicator of Value

(Def’s Ex C at 63)

Land $ 180,000,000

Land Improvements $ 76,000,000

Facility & Leasehold Improvements $ 2,582,000,000

Network Infrastructure $ 8,979,000,000

Operating Equipment $ 7,988,000,000

Furniture, Fixtures and Office Equipment $ 242,000,000

Other $ 28,000,000

Total Property, Plant & Equipment $ 20,075,000,000

Less: Accumulated Depreciation $ (10,365,000,000)

Net Property, Plant & Equipment $ 9,710,000,000

Construction Work in Progress $ 168,000,000

Goodwill $ 7,749,000,000

Other Intangible Property, net $ 1,127,000,000

Historical Cost Less Depreciation Indicator of Value $ 18,754,000,000

490 Level 3 Communications LLC III v. Dept. of Rev.

For tax years 2015-16 and 2016-17, the entry for

Accounting Goodwill constitutes approximately 41 percent

of overall value; for tax year 2014-15, it is approximately 23

percent. Taxpayer notes that simply removing the depart-

ment’s entry for Accounting Goodwill from the department’s

overall cost indicator of value for each year would bring the

department’s indicator much closer to the value taxpayer

asserts.

Taxpayer’s rebuttal expert Reilly testified at length

about the origin and use of the amounts shown as Account-

ing Goodwill on taxpayer’s filings with the SEC. As a pub-

licly traded company, taxpayer calculated and reported

the amounts in order to comply with the SEC’s require-

ment to prepare and disclose reports in accordance with

“generally accepted accounting principles” (GAAP). See 17

CFR §§ 210.4-01. GAAP includes the Financial Accounting

Standards Board’s rules set forth in the Accounting

Standards Codification (ASC), among them ASC 805-30,

which prescribes when and how a company must record an

entry for goodwill after a business combination such as an

acquisition. The ASC defines goodwill as “[a]n asset rep-

resenting the future economic benefits arising from other

assets acquired in a business combination * * * that are not

individually and separately recognized.” ASC 805-30-20.

Reilly, whose extensive credentials include a CPA license,

licensure as a certified general appraiser in Oregon, and an

MBA from Columbia University, testified essentially that

Accounting Goodwill, as thus reported, is simply a residual

amount that represents the positive difference between the

fair value of the identifiable assets and the actual amount

paid.43

Based on the premise that the amount that tax-

payer reported to the SEC as Accounting Goodwill is a

residual amount, as opposed to an amount determined

by valuing an identifiable asset, taxpayer argues that

Accounting Goodwill is not “property” within the meaning

of Oregon law. Taxpayer distinguishes the terms “assets”

43

Reilly offered examples of “identifiable” intangibles that must be sepa-

rately valued, as well as items that fit within the overall label of “goodwill” for

purposes of the ASC.

Cite as 23 OTR 440 (2019) 491

and “property”: assets include identifiable items whose

value can be determined separately, as well as the noniden-

tifiable asset goodwill, the amount of which value is mea-

sured arithmetically as a residuum. According to taxpayer,

“property” is a subset of “assets,” consisting of only the iden-

tifiable items. Because Accounting Goodwill as defined by

ASC 805-30-20 is not identifiable, it cannot be property, and

the department should exclude it when applying the cost

approach. Reilly prepared a report that shows the effect of

eliminating Accounting Goodwill from the department’s cost

approach.44

The court accepts elements of taxpayer’s argument,

but the court sees no basis in Oregon law to adopt taxpayer’s

definition of “property” in relation to the accounting term

“assets,” nor can the court accept a legal conclusion that good-

will can never be valued as “property” under ORS 308.555. To

start with, the court is persuaded that the amounts that the

SEC required taxpayer to report as Accounting Goodwill are

merely residual and thus are not the result of any attempt to

separately determine the value of an item of property that is

positively identified as “goodwill” in the ordinary meaning

of that word. But this alone is not a reason to disregard or

exclude the amount in determining the value of the unit of

property for central assessment purposes. The definition in

ASC 805-30-20 itself makes clear why: the amount reported

as Accounting Goodwill “represent[s] the future economic

benefits arising from other assets * * *.” Similar to the pros-

pects for future income growth as discussed above, the court

understands this definition to describe either an attribute of

the assemblage of real property and tangible and intangi-

ble personal property held by the company, or an attribute

inherent in the stock or other ownership interests held by

the owners of the company. To the extent that taxpayer’s

argument is a legal one regarding the definition of “prop-

erty,” the court already has resolved it above by concluding

that nothing in Oregon law prevents the court from treating

the amount properly assigned to those kinds of attributes

44

Reilly’s report notes that the amount derived by the mere removal of

Accounting Goodwill as a line item does not represent his opinion of taxpayer’s

market value.

492 Level 3 Communications LLC III v. Dept. of Rev.

as a component of the value of the company or its property

under ORS 308.555.

Factually, however, the way that the amount of

Accounting Goodwill is derived initially, and then preserved

in years after the business combination occurs, causes the

court to question the usefulness of the concept of Accounting

Goodwill for property tax valuation purposes. Reilly’s testi-

mony and exhibits indicate that the ASC requires an acquir-

ing company to initially report the amount of Accounting

Goodwill on the first financial statement the company files

after a combination. Accordingly, ASC 805-30-20 applies

only to acquired goodwill, and the amount reported does

not purport to be or include the value of the company’s own,

self-created goodwill, assuming that any exists. By contrast,

the plain meaning of “goodwill” may include relationships

and other intangible items that the company has created

over years of doing business.45 Moreover, for later reporting

years the ASC does not necessarily require the company

to report changes in the amount of Accounting Goodwill.

Rather, the company must annually “test” its Accounting

Goodwill for potential “impairment,” which essentially

requires determining the current business enterprise

value, then subtracting the current value of the tangible

assets and identifiable intangible assets. If the resulting

residual amount equals or exceeds the existing amount

45

The parties’ arguments about goodwill focus solely on the Accounting

Goodwill amounts that taxpayer reported pursuant to ASC 805-30-20. The plain

meaning of “goodwill” is broader and encompasses not only the general resid-

ual concept at issue in this case (“the excess of the purchase price of a business

over and above the value assigned to its net assets exclusive of goodwill”), but

also a range of attributes “incidental to the business” (“the custom of a trade

or business: the favor or advantage in the way of custom that a business has

acquired beyond the mere value of what it sells whether due to the personal-

ity of those conducting it, the nature of its location, its reputation for skill or

promptitude, or any other circumstance incidental to the business and tending

to make it permanent”). Webster’s Third New Int’l Dictionary 979 (unabridged

ed 2002). Cf. Webster’s Int’l Dictionary of the English Language 638 (1907)

(“[t]he custom of any trade or business; the tendency or inclination of per-

sons, old customers and others, to resort to an established place of busi-

ness; the advantage accruing from such tendency or inclination”); Black’s

Law Dictionary 544 (2nd ed 1910) (“every positive advantage[ ] that has been

acquired by a proprietor in carrying on his business, whether connected with

the premises in which the business is conducted, or with the name under which

it is managed, or with any other matter carrying with it the benefit of the

business”).

Cite as 23 OTR 440 (2019) 493

of Accounting Goodwill, then the Accounting Goodwill

amount is not impaired and that same existing amount is

carried forward unchanged on the financial statement for

that subsequent year. Taxpayer undertook the required

impairment testing annually, according to its financial

statements, with the result that the amount shown as

Accounting Goodwill attributable to the 2013 acquisi-

tion of tw telecom is exactly the same for calendar years

2014 and 2015: $5,124,000,000. The court therefore is

concerned that the reported amount may bear little rela-

tionship to the aggregate value of taxpayer’s customer

and vendor relationships, workforce in place, and other

items within the ordinary meaning of “goodwill.” These

concerns about the usefulness of the Accounting Goodwill

amount do not cause the court to simply subtract it from the

department’s cost indicator of value, as taxpayer requests.

Instead, these concerns justify limiting the weight that the

court will assign to the cost approach, as will be discussed

below.

In addition to taxpayer’s argument based on the

allegedly erroneous treatment of goodwill as property,

taxpayer urges the court to reject the department’s cost

approach on the ground that Eyre failed to assume an

accurate rate of obsolescence for taxpayer’s equipment.

Taxpayer’s witnesses Laurel Clark (an electrical engineer

employed by taxpayer as principal network architect) and

William Gray (an electrical engineer/MBA and inventor

employed as taxpayer’s executive architect of profit accel-

eration) testified cogently and without serious evidentiary

challenge from the department that taxpayer’s equipment

becomes obsolete remarkably quickly, due to a combina-

tion of rapid technological advancement and rapid growth

in customer demand for capacity. Taxpayer claims that

Eyre inappropriately relied on ordinary book depreciation

to reflect the rate of obsolescence, and that he should have

adjusted the rate further for both functional and economic

obsolescence. Eyre defended his reliance on book depreci-

ation as a source taxpayer itself generated; he also testi-

fied that his cost approach used historical cost as a starting

point, and that a specific adjustment to historical cost would

be “improper” under GAAP. Although such an adjustment

494 Level 3 Communications LLC III v. Dept. of Rev.

would be allowable in an analysis based on replacement

or reproduction cost, compiling the data to use either of

those methods would require extensive resources and, in

the end, “would [not] give you a better estimate of value

than what you get with your income or market approach to

value.”

The court does not consider it necessary to resolve

the parties’ disagreement over the extent of any adjustment

to the department’s historical cost indicator of value. The

court already has deep concerns that Accounting Goodwill

is at best an incomplete amount that excludes any self-

created goodwill, and that the amount becomes less reli-

able as it is carried forward to future years. These con-

cerns apply regardless, whether goodwill is viewed as an

attribute of the shares or other ownership interests in the

company or as intangible property that the company holds.

Because the amounts shown as Accounting Goodwill in

this case constitute between 23 percent and 41 percent of

the department’s total cost indicator of value, the court

finds the department’s entire cost indicator of no use. The

department’s own rebuttal expert, Dr. Antonio Bernardo,

recommended assigning no weight to the cost approach,

undermining even Eyre’s approach of assigning the

“least” weight to the cost approach. Taxpayer’s own valu-

ation analyses do determine a cost approach indicator of

value,46 but they place no weight on the result, character-

izing it instead as a “high benchmark corroboration” of the

value derived by the income approach. The court assigns

no weight to either party’s proffered result under the cost

approach.

C. Market Approach

The third major approach to value is the market

approach, which relies on the prices at which similar prop-

erties have sold in arm’s-length transactions. See PP&L, 308

Or at 55-56. The market approach is difficult to apply when

valuing the property of large enterprises such as taxpayer,

46

At least for the two tax years unaffected by the unit dispute, taxpayer’s

resulting value corresponds closely to Eyre’s Historical Cost Less Depreciation

result illustrated in the table above, minus Accounting Goodwill.

Cite as 23 OTR 440 (2019) 495

because comparable units of property rarely are sold. See id.

To address this problem, the “stock and debt” approach has

developed, which looks to the value of the company’s stock

and debt as a proxy for the value of the property that the

company holds. See id. As would be expected, given taxpay-

er’s legal and factual arguments discussed above, taxpayer

entirely rejects application of the stock and debt approach,

on the ground that:

“[s]tock prices include the value of people, reputation,

expectations of profitability on future assets and invest-

ments, brand identity, contracts and a host of intangibles.

“People are not property, but the skills and abilities of

the management team were a significant part of the price

of Level 3 shares. In addition stock prices reflect growth

forecasts which imply higher profitability in the future

than existing assets can produce without additional capital

expenditures.”

Thus, for essentially the same reasons discussed above,

taxpayer performed no analysis under the stock and debt

approach.

The department did perform a stock and debt

market approach analysis and places “significant” or “sec-

ondary” reliance on that approach. Taxpayer criticizes the

department’s approach for including the value of Investment

Attributes, that the court has addressed above, and for valu-

ing taxpayer’s business enterprise as a “going concern.” On

the latter point, taxpayer seeks to distinguish between the

valuation of property on a “going concern premise of value”

and valuation of the enterprise itself. Although the court

appreciates taxpayer’s distinction, the analysis above indi-

cates that the distinction essentially does not matter for

Oregon central assessment purposes.

Beyond urging rejection, taxpayer offers no alterna-

tive computations under a stock and debt approach. Although

the department’s stock and debt analysis reaches substan-

tially higher conclusions of value than shown in any of the

department’s income approach methods, as discussed below

in the court’s reconciliation analysis, the court accepts the

496 Level 3 Communications LLC III v. Dept. of Rev.

overall validity of the department’s stock and debt indicator

of value.

D. Taxpayer’s Other Methodology Arguments; Reconciliation

of Values; Department’s Burden of Proof

Taxpayer disputes a number of other specific steps

the department took in determining the value of the unit

of property. Taxpayer’s rebuttal witness Reilly identified 10

alleged errors in the department’s appraisal reports. The

court considers six of the 10 issues to be addressed (and

rejected) in the court’s discussion of the income approach,47

and three are rendered irrelevant by the court’s conclu-

sion that the cost approach is entitled to no weight in this

case.48 As to one criticism—that the wide range of value

indicators in Eyre’s reports reduces the overall credibil-

ity of the reports—taxpayer cites no authority and offers

47

Reilly asserts that Eyre erroneously “perform[ed] a business valuation

rather than a unit principle valuation” (Criticism #1); “relied on the Level 3 busi-

ness enterprise expected long-term growth rates” (#5); erroneously used a “direct

capitalization income approach” that is suited for business valuations but not for

the valuation of property (#8); and “failed to remove (a) intangible investment

attributes and (b) the present value of future growth opportunities” (#9).

Reilly also criticizes Eyre’s report for “fail[ing] to estimate a credible

weighted average cost of capital” (#6). On close examination, this sixth criticism

also rests on taxpayer’s legal and factual theories addressed above. Reilly’s sixth

criticism attacks Eyre’s use of the “capital asset pricing model” (CAPM), that

in Reilly’s view is suitable for a “relatively short-term investment in publicly

traded securities,” but not suitable for the controlling interest in “illiquid oper-

ating assets of an individual corporation.” Reilly proceeds to propose alternative

computations that start with Eyre’s method but modify it to reduce reliance on

the CAPM. While the court appreciates receiving alternative computations that

translate taxpayer’s theory into specific results, the court cannot rely on them

here because they rest substantially on a premise that Oregon law requires a

sharp distinction between valuing the unit of property and valuing the com-

pany that uses it. The court has concluded that Oregon law does not require that

distinction.

Reilly’s seventh criticism is that Eyre “failed to select relevant guideline

publicly traded companies” (#7). Eyre chose AT&T Inc., CenturyLink, Inc., and

Verizon Communications Inc. and Reilly viewed those companies as not compa-

rable to taxpayer due to their much larger size and lower risk profile. The value

difference attributable to this factor is, however, not apparent, as Reilly included

the issue in his computations under Criticism #6, which the court does not accept

as discussed above.

48

Reilly asserts that the department erroneously ignored two replacement

cost methods in favor of a strictly historical cost method (#2); included recorded

goodwill (#3); and incorrectly measured the amount of economic obsolescence

affecting taxpayer’s property (#4).

Cite as 23 OTR 440 (2019) 497

no alternative calculation specific to this point; the court

assigns it no weight.49

Having rejected taxpayer’s only value computations

as incorporating an incorrect view of the scope of property

that may be valued, the court now examines whether the

department has carried its burden to prove values higher

than those on the assessment roll. The court first consid-

ers the most substantial potential increases, namely, those

asserted in the department’s amended answers. In the

amended answers, which the court allowed approximately

seven weeks before trial, the department asserts values

derived from a transaction involving CenturyLink, Inc.

The parties dispute nearly every aspect of the transaction,

including whether to refer to it as an acquisition of taxpayer

by CenturyLink or as a merger; the tax year in which the

transaction should be considered to have occurred; the final

amount of consideration; and whether and how the consid-

eration should be allocated among taxpayer’s assets. See

Level 3 Communications, LLC v. Dept. of Rev., 22 OTR 533,

534 (2018). In any event, the department’s experts Eyre

and Bernardo did not use the transaction in their respec-

tive analyses, and the department describes the transac-

tion only as “corroborat[ing]” Eyre’s analysis. The date the

department relies on for the transaction, November 1, 2017,

was nearly two years after the January 1, 2016, assessment

date for the last of the three tax years at issue. The court

accordingly assigns no weight to the CenturyLink transac-

tion and the values the department asserts in its amended

answers.

As to the values concluded by the department’s

appraiser, Eyre relied on two acceptable valuation approaches:

the income approach and the market approach, as well as the

cost approach, which the court rejects. As the first table in

this opinion shows, Eyre’s overall conclusions of value for tax

years 2015-16 and 2016-17 are relatively close to those on the

49

Eyre’s range of value conclusions is summarized in Table 2 on page 498.

The court notes that the department explains the wide range in Eyre’s conclu-

sions by the fact that the assessment dates for tax years 2015-16 and 2016-17

were close in time to taxpayer’s late 2014 acquisition of tw telecom, which caused

Eyre’s market approach conclusions, and to some extent his income approach

conclusions, to increase substantially.

498 Level 3 Communications LLC III v. Dept. of Rev.

Table 2

Cite as 23 OTR 440 (2019) 499

roll.50 The table above shows that Eyre’s DCF and con-

stant growth yield capitalization values for those years

are somewhat below his ultimate conclusion, but the mar-

ket approach conclusions are substantially higher (more

than $28 billion and $26 billion, respectively, for tax years

2015-16 and 2016-17). Eyre does not disclose what weight he

gave to each approach, other than to say he gave “the least”

weight to the cost approach and gave the market approach

“secondary” weight (less than the income approach). The

court ordinarily would be inclined to modify Eyre’s overall

conclusions to account for the fact that he gave any weight

at all to the cost approach, but neither party has provided

the court with the data to do so, as nearly all of taxpayer’s

criticisms are grounded in, or intertwined with, taxpayer’s

theories of the definition of property. Moreover, Eyre’s cost

approach values are slightly higher than the roll value for

tax year 2015-16 and slightly lower than the roll value for

2016-17, roughly canceling each other out. Accordingly, the

court sustains Eyre’s conclusions that the RMVs for the two

tax years are as shown below:

Court’s Conclusions of RMV for

2015-16 and 2016-17

Tax Year System Oregon

2015-16 $16,650,000,000 $184,815,000

2016-17 $19,150,000,000 $224,055,000

E. Unit Issue for 2014-15 Tax Year

The court can understand the frustration of a

taxpayer that undergoes central assessment for a number

of years based on a unit of property that the department

defines by a particular geographic area, and in the course

of an appeal is presented with a new department valuation

based on a greatly expanded unit. Notwithstanding the for-

mulary approach by which a portion of the value of the unit

is allocated to Oregon, expanding the pie often means that

Oregon receives a larger slice in terms of absolute value.

50

For 2015-16, Eyre’s overall conclusion of an Oregon RMV of $184,815,000 is

5.91 percent higher than the $174,500,000 shown on the roll. For 2016-17, Eyre’s

Oregon RMV is $224,055,000, which is 1.61 percent higher than the roll value of

$220,500,000.

500 Level 3 Communications LLC III v. Dept. of Rev.

In this case, the department’s selection of a new unit for

tax year 2014-15 during this appeal led the department’s

appraiser to conclude an Oregon RMV of $127,575,000,

as opposed to the roll RMV of only $68,000,000. However

startling that increase may be, the court finds nothing in

Oregon law that prevents the department from making the

change during litigation in this court.

ORS 308.555 clearly authorizes the department to

“value the entire property, both within and without the State

of Oregon, as a unit.” (Emphasis added.) As a textual mat-

ter, this statute encompasses a potential unit that extends

as far as a taxpayer’s centrally assessed business, including

worldwide. As discussed above, other portions of the central

assessment statutes, as well as the historical context, show

that the Oregon legislature expected the taxing authority

to consider the company’s entire property. The same statute

uses the word “may” in conferring unit valuation authority

on the department, indicating a level of discretion. A dis-

cretionary authority to use unit valuation or not, and to

determine a unit with company-wide reach, also impliedly

authorizes the department to determine a unit that could

range in size from a single facility or other item of property

to all property that the company uses or holds in its cen-

trally assessed business. Although courts have interpreted

the several statutes that exclude certain property from the

permissible unit (generally based on the degree of use in

connection with the listed business),51 the court is not aware

of any cases that interpret the scope of the department’s

discretionary authority to define whether the unit encom-

passes only a particular standalone facility, a particular set

51

See generally ORS 308.505(9)(c) (excluding from the unit items of intangi-

ble property that represent * * * “[c]laims on other property, including money at

interest, bonds, notes, claims, demands or any other evidence of indebtedness,

secured or unsecured; or * * * [a]ny shares of stock in corporations, joint stock

companies or associations”); ORS 308.515(1) (central assessment generally does

not apply to property not used or held for future use in performing or maintain-

ing a business or service listed in ORS 308.515(1)); ORS 308.510(4) (if property

has an integrated use across businesses, and at least one business or service is

enumerated in ORS 308.515, the department will exclude property that is not

“primarily used” in the business or service enumerated in ORS 308.515); ORS

308.555 (allowing deduction for property located outside the state and not con-

nected directly with the business. In this case, taxpayer makes no claim that the

department has included property required to be excluded by statute.

Cite as 23 OTR 440 (2019) 501

of facilities, all property statewide, or a national or interna-

tional territory in which the company operates. See DISH

Network, 364 Or at 258 n 2 (department “not required to

use unit assessment”); see also Pacificorp Power Marketing

v. Dept. of Rev., 17 OTR 334, 342 (2004) (“concept of a unit is

a tool in valuation and, even then, is a concept the depart-

ment has the choice to employ under ORS 308.555”).

The department has adopted by rule its own stan-

dards for selecting the unit. This court has previously held

that, when the department adopts rules in an area of dis-

cretionary authority, the rules “cabin” the department’s dis-

cretion, such that the department may not “ ‘act contrary to

its rule.’ ” ADC Kentrox I v. Dept. of Rev., 19 OTR 91, 96-97

(2006) (quoting Resolution Trust Corp. v. Dept. of Rev., 13

OTR 276, 278 (1995)). In this case, the principal rule pro-

vides that the department “may consider a variety of facts

to determine what property should be assessed as a unit.”

OAR 150-308-0660(3). These facts include, but are not lim-

ited to:

“(a) Functional integration, determined by looking at

the operation of the property used in the business at its

highest and best use;

“(b) Integration of management, administration, mar-

keting, financing, use of employees and other resources of

the business in which the property is used;

“(c) Use of the property that contributes to the service

or business listed in ORS 308.515;

“(d) How both stock investors and investors acquiring

all or a portion of the business assets or stock view invest-

ment in the property;”

Id. The rule also provides that the department may look to

information contained in:

“(A) Reports filed by publicly traded companies with

the Securities and Exchange Commission;

“(B) Filings with other governmental or nongovern-

mental agencies or organizations; and

“(C) Other documents or materials used by the busi-

ness in its service or sales.”

502 Level 3 Communications LLC III v. Dept. of Rev.

OAR 150-308-0660(3)(A) - (C).

In addition, when valuing property as a unit,

“The department may include property used or held

for future use by a parent company, holding company, sub-

sidiary, or any other type of legal entity, including but not

limited to partnerships, LLCs or joint ventures, when the

department determines that the property of such business

is operationally or financially integrated without regard

to the physical location of the property, whether within or

without the United States.”

OAR 150-308-0660(4)(a).

The WSATA Handbook, adopted by reference as

an administrative rule pursuant to OAR 150-308-0690,52

states:

“In defining the unit, the appraiser should be guided

by any existing statute or controlling case law in the state.

However, as a general guideline, the appraiser should recog-

nize that ‘under the unit concept, the market value of the unit

includes the synergistic value of all properties which compro-

mise the unit. This includes all assets owned, used, and/or

leased by a Firm and needed in the operation of its business.’ ”

WSATA Handbook at I-10 (quoting National Conference of

Unit Valuation States, Public Utility Appraisal Standards,

Standard I. B. (October 2005)).

WSATA bases its composition of the unit on the

premise that “all functionally related operating property

contributing to the operating cash flows of the firm would

be transferred upon the sale of the property.” WSATA

Handbook at I-11. “In order to include out-of-state prop-

erty in the appraisal unit, the appraiser must demon-

strate that it is an integral part of the interstate system

and logically adds to the value of the intrastate unitary

property.” Id. at I-12. The WSATA Handbook provides that

the “specific criteria the appraiser should use to deter-

mine the appraisal unit include but are not limited to the

following:

52

See OAR 150-308-0660(1) (“Determination of the proper unit of property to

be valued is a question of fact to be decided by the appraiser under rules adopted

pursuant to 308.655 and the guidelines in the WSATA Handbook, adopted in

OAR 150-308-0690.”).

Cite as 23 OTR 440 (2019) 503

“a) The unit with the most reliable audited financial

statements looks at economic integration which consid-

ers such things as centralized management, marketing,

financing, whether the same employees are working for

both companies, and control of intellectual property.

“b) The nature of the property or how it is physically

integrated.

“c) The manner in which the property is used. The use

and management is often found by looking at functional,

physical, and economic integration. Functional integration

should be determined by looking at the operation of the

property at its highest and best use. Economic integration

is most closely aligned with the concept of market value

and the highest and best use.

“d) The permissible and most probable use of the

properties.

“e) The ownership and control of the properties.

“f) The manner in which the properties might be sold.

“g) The extent of the assessing body’s jurisdiction.”

Id. at I-10 - 11.

The department’s expert Eyre testified that he

chose to appraise a unit comprising taxpayer’s entire world-

wide property because (1) a complete set of audited finan-

cial statements (10Ks) existed for that grouping of property,

including notes containing detailed explanations of how

overhead costs were allocated among subsidiaries; (2) the

10Ks stated that taxpayer’s property is physically and eco-

nomically integrated as a worldwide unit; and (3) the 10Ks

indicated that the property worldwide is controlled (as well

as owned) “centrally.” On cross-examination, Eyre acknowl-

edged that financial information regarding only the North

American properties was available as well, but he testified

that he preferred to use the 10Ks because he was “very con-

cerned about certain aspect[s] of what was on that North

American financial statement.” The court finds that Eyre

applied factors described in the department’s rules, includ-

ing the WSATA Handbook, in determining the unit to value

for tax year 2014-15.

504 Level 3 Communications LLC III v. Dept. of Rev.

Taxpayer’s rebuttal witness Reilly testified to the

effect that the financial information available on the North

American unit was incorporated into, and thus as reliable

as, the information in the 10Ks. Reilly also testified that

Eyre should have selected the North American unit as the

smallest unit for which reliable information was available.

Reilly cited no authority requiring use of the smallest unit,

but expressed his professional opinion that selection of the

smallest unit would filter out the “noise” of higher growth

rates for other portions of the company operating in areas

of less competition, as well as currency and political risks.

However, taxpayer does not assert that the department’s

use of the international unit for tax year 2014-15 was an

abuse of discretion, and the court finds that there was none.

Rather, taxpayer argues that two provisions of

Oregon law prohibited the department from changing its

determination of the unit after finalizing the roll for that

year.53 Taxpayer first asserts that the department’s reliance

on the international unit at trial violated ORS 308.595.

That statute provides:

“The Director of the Department of Revenue, while

reviewing and apportioning the tentative assessment roll,

may not increase the valuation of any property on the roll

without giving to the company or person in whose name

the property is assessed at least six days’ written notice

to appear and show cause, if any, why the valuation of the

assessable property of the company or person, or some

part thereof, to be specified in the notice, should not be

increased. A notice is not necessary if the person or com-

pany appears voluntarily before the director and is notified

by the director that the property of the person or company, or

some specified part thereof is, in the opinion of the director,

assessed below its assessed value.”

ORS 308.595 (emphases added). That statute, by its terms,

applies during the time the department’s director “reviews”

the “tentative” assessment roll and apportions the value

of all centrally assessed property to each county assessor.

53

Taxpayer describes the use of the international unit as “arbitrary,” but the

court understands this argument to refer to the department’s decision to switch

to a different unit after the assessment was final, rather than as a criticism of the

substantive decision of how the unit should be defined.

Cite as 23 OTR 440 (2019) 505

The statutory context shows that these are terms of art. No

later than May 25 of each year, the department is required

to mail a “notice of tentative assessment” to each centrally

assessed taxpayer. ORS 308.582(1). No later than June 15,

three things must happen: (1) the department must deliver

the entire “tentative assessment roll” of all centrally

assessed properties to the director for examination (see ORS

308.585); (2) the director must then “review the tentative

assessment roll” to correct valuation and apportionment

errors (ORS 308.580(1)(a)); and (3) a taxpayer must file any

request for a conference with the director to discuss a reduc-

tion or change in apportionment (ORS 308.584(2)). Du

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