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Upper Republican Natural Resources District v. Dundy County Board of Equalization

Supreme Court of Nebraska

June 15, 2018

Upper Republican Natural Resources District and Steve Yost, Appellees,
v.
Dundy County Board of Equalization, Appellant And Cross-Appellee. and FEM, Inc., and M & L Cattle Company, Appellees and Cross-Appellants,

         1. Taxation: Judgments: Appeal and Error. An appellate court reviews Nebraska Tax Equalization and Review Commission decisions for error appearing on the record of the commission.

         2. __: __:__ . When reviewing a Nebraska Tax Equalization and Review Commission judgment for errors appearing on the record, the inquiry is whether the decision conforms to the law, is supported by competent evidence, and is neither arbitrary, capricious, nor unreasonable.

         3. Administrative Law. An administrative agency's decision is arbitrary when it is made in disregard of the facts or circumstances without some basis which would lead a reasonable person to the same conclusion; administrative agency action taken in disregard of the agency's own substantive rules is also arbitrary and capricious.

         4. Taxation: Appeal and Error. Questions of law arising during appellate review of Nebraska Tax Equalization and Review Commission decisions are reviewed de novo.

         5. Constitutional Law: Due Process. The determination of whether the procedures afforded to an individual comport with constitutional requirements for procedural due process presents a question of law.

         6. Taxation. Neb. Rev. Stat. § 77-5016(8) (Cum. Supp. 2018) provides that for questions other than taxable value, the Nebraska Tax Equalization and Review Commission's power is limited to questions that are both (1) raised in the proceeding before the commission and (2) a basis for the order, decision, determination, or action appealed from.

         7. Appeal and Error. An appellate court ordinarily considers only those errors assigned and discussed in the briefs, but may notice plain error.

         [300 Neb. 257] 8. Appeal and Error: Words and Phrases. Plain error is error plainly evident from the record and of such a nature that to leave it uncorrected would result in damage to the integrity, reputation, or fairness of the judicial process.

         9. Taxation: Property: Public Purpose. Property can be used by a public entity in more than one way and for more than one public purpose, and all public purpose uses should be considered together in evaluating whether any private use of the property is merely incidental in the analysis under Neb. Rev. Stat. § 77-202(1 Xa) (Cum. Supp. 2012) of the extent to which the property is used or being developed for use for a public purpose.

          Appeal from the Tax Equalization and Review Commission.

          Jeanelle R. Lust, Richard C. Reier, and Carly L. Bahramzad, of Knudsen, Berkheimer, Richardson & Endacott, L.L.R, for appellant.

          Todd R. McWha, of Waite, McWha & Heng, and Lindsay E. Pedersen for appellees FEM, Inc., and M & L Cattle Company.

          Joel E. Burke, of Burke & Pribbeno, L.L.P, for appellee Upper Republican Natural Resources District.

          Heavican, C.J., Miller-Lerman, Cassel, and Stacy, JJ., and Luther and O'Gorman, District Judges.

          O'Gorman, District Judge.

         I. NATURE OF CASE

         This is an appeal by the Dundy County Board of Equalization (Board) from the decision of the Tax Equalization and Review Commission (TERC). The central issue in this appeal is the tax exempt status of land purchased by the Upper Republican Natural Resources District (NRD) as part of a ground water integrated management plan. The NRD retired irrigated acres and converted them to grassland to achieve soil conservation [300 Neb. 258] and range management objectives. The NRD leased much of that grassland for grazing. The parties dispute the extent to which the lease was at fair market value for a public purpose, as described by Neb. Rev. Stat. § 77-202(1)(a) (Cum. Supp. 2012). The parties also dispute the scope, under Neb. Rev. Stat. § 77-5016(8) (Cum. Supp. 2016), of the questions properly before the TERC; whether due process allowed for any tax assessment to the lessees if they lacked notice of the proceedings before the Board; and whether it is legally permissible, under Neb. Rev. Stat. § 77-202.11 (Reissue 2009), to assess property tax to a public entity that has leased land for a nonpublic purpose.

         II. BACKGROUND

         1. Purchase and Lease Agreements In order to comply with the Republican River Compact and to meet other water management objectives, in 2011, the NRD paid approximately $10 million to purchase from FEM, Inc., approximately 4, 080 acres of agricultural land, 3, 262 of which were certified irrigated acres. Under the terms of the purchase agreement, FEM retained the right to lease back the property, but once the NRD had decertified the irrigated acres, FEM's use of the land was limited to grazing and use of certain fixtures. During the years pertinent to this appeal, the land had been converted from irrigated land to native grassland. FEM exercised its right to lease back the entirety of the FEM property and, as allowed by the terms of the lease, subleased the land to M & L Cattle Company (M&L), the company through which FEM conducts its cattle operations (M&L and FEM together are referred to herein as "lessees").

         The lease agreement between the NRD and FEM provides that the NRD "shall pay all real estate taxes and personal property attributable to fixtures located on the property."

         In 2013, the NRD purchased an additional 3, 200 certified irrigated acres from Maurice Wilder, for $8, 050, 000. The land [300 Neb. 259] was contiguous to the FEM parcels and was also acquired in order to carry out the objectives of the management plan. Both properties were located in Dundy County, Nebraska.

         2. Assessor Notice of Taxable Status

         In 2013, the Dundy County assessor sent the NRD notices of taxable status for 12 FEM parcels and 6 Wilder parcels. The notices stated that the reason the assessor determined the parcels to be taxable was because they were not being used for a public purpose.[1] The notices did not state that the assessor had determined that any of the parcels were being leased at less than fair market value.

         The notices advised the NRD that if the property was leased to another entity and the NRD "d[id] not intend to pay the taxes as allowed under subsection (4) of section 77-202.11, [the NRD] must immediately forward this notice to the lessee." The NRD did not forward the notices to the lessees, and the lessees did not have actual notice of the assessment.

         The assessor similarly determined the parcels nonexempt in 2014 and 2015. The NRD similarly failed to forward notices of the 2014 and 2015 assessments to the lessees, who lacked actual knowledge thereof.

         3. Protests to Board

         The NRD protested the 2013 through 2015 assessments to the Board. The NRD had apparently paid assessments by the assessor for 2012, when the land was still being utilized by the lessees as irrigated farmland. The NRD did not object to the 2013 through 2015 assessments against it on the ground that it was legally impermissible to assess property tax against a public entity leasing public land. The NRD argued simply that the property was exempt from taxation, because it was being used for a public purpose. The lessees did not have notice of [300 Neb. 260] the NRD's protests and were not parties to the proceedings before the Board.

         Following a hearing, the Board determined that all 18 parcels were nonexempt, taxable property for the years 2013 through 2015. The Board stated as the basis for its decision that the surface and buildings were not being used for a public purpose. The Board was not presented with and did not pass upon the issue of whether the lease was at fair market value.

         4. Appeal to TERC

         The NRD timely appealed to the TERC. The NRD stated in its appeal form that it was appealing the Board's determination that the property was not used for a public purpose. Again, the NRD did not raise any issue of whether the lessees, rather than the NRD, should be assessed tax liability in the event the TERC rejected its contention that the parcels were for a public use. The lessees received notice of the appeal, but they were not originally made parties.

         (a) Necessary Parties

         The TERC issued an order to show cause whether it had jurisdiction to determine the tax-exempt status of any leased parcel without all lessees as parties. The NRD argued at the show cause hearing that the lessees were not necessary parties, because the question presented to the TERC was limited to the NRD's tax liability. But the TERC ultimately concluded that any determination of whether the property was used for a public purpose would have implications for lessee tax obligations. Therefore, the TERC decided that it lacked some necessary parties to the appeal.

         Though the informal hearing on the merits had already been held, the TERC vacated the hearing. The NRD, upon an order to disclose, stated that M&L was the missing necessary party to the proceedings. The TERC scheduled a new hearing and, pursuant to its authority under Neb. Rev. Stat. § 77-5015.01 (Cum. Supp. 2016), served notice to M&L. Upon a joint stipulation of the Board, the NRD, FEM, and M&L, the TERC [300 Neb. 261] determined the issues based on the exhibits and transcript of the prior hearing.

         (b) Evidence and Arguments Presented

         At the informal hearing, the NRD and the Board were given the opportunity to present evidence and argument.[2] The underlying facts related to the use of the property were not in dispute. Instead, the parties disputed how those facts applied to the concept of public purpose as set forth in the statutes. Neither party presented argument as to whether the lease was at fair market value.

         The Board conceded that there was some public purpose served by the NRD's ownership of the parcels, but argued that in determining whether the predominant use was for a public purpose, the TERC should focus on the use of the surface of the land and not the use or nonuse of the water underneath. The assessor explained that in determining the parcels were agricultural and not predominantly for a public use, she was "looking at the surface and the surface only." She also found it pertinent in her assessment that the NRD was not specifically required by law to purchase land as the means of complying with its legal duties.

         The NRD responded that its use of the land should include the use or nonuse of the water rights, because ownership of the overlying land was essential to that purpose. Moreover, the NRD's ownership of the land brought into play important statutory duties of soil conservation and range and wildlife management, as set forth in Neb. Rev. Stat. § 2-3229 (Reissue 2012), which were furthered by the grazing.

         (i) Management Plan

         Dr. Jasper Fanning, general manager of the NRD, testified at the hearing. Fanning explained that the impetus behind the NRD's purchase of the parcels was to carry out the goals of [300 Neb. 262] the NRD's integrated management plan, which involved both the retirement of irrigated acres to reduce use and the establishment of a well field for controlled augmentation of stream-flow during dry periods. Fanning explained that this combination of retirement and augmentation was a more reliable tool for ground water management than simply retiring irrigated acres and letting the water flow naturally into the streams during wetter periods.

         The integrated management plan was directed primarily at compliance with the Republican River Compact. Fanning explained that the location put the NRD at the forefront of compliance. The augmentation aspect of the plan also sought to benefit local water users by increasing the amount of water that could be allotted to each irrigated acre.

         Fanning explained that the integrated management plan required a sizable property, since the amount of water a property owner can reasonably use is related to the area of overlying land. The property would also have to have a lot of irrigation to retire, in order to balance the supply and use. The property had to be a certain distance from the river to be able to use the land's aquifer as storage for the augmentation part of the plan. Finally, the land would have to have high-capacity wells.

         (ii) Purchases and Implementation of Plan

         The NRD discovered the FEM property listed for sale on the open market, and it was "ideal for what the district needed.'' Fanning explained that the fact that the parcels were available in the open market "allowed us to purchase those at market cost and not have to go out and condemn property from multiple landowners to try to put the project together."

         Before the purchase by the NRD, the FEM parcels were being used for irrigated agriculture. By January 2013, the FEM parcels were decertified. By the relevant taxation period, the NRD had decertified all the FEM parcels and had completed construction of miles of pipeline underneath the FEM parcels.

         [300 Neb. 263] Fanning explained that the ground water aquifer under the FEM parcels acted as a storage vessel. The NRD could then discharge that water at a creek on the adjoining landowner's property as needed in order to "retime natural flows to the river from all the other upland irrigation pumping that occurs throughout the district." The NRD utilized wells already on the land and formerly for irrigation to monitor the water depth and record the impact of pumping for the augmentation project.

         Fanning testified that while the NRD could conceivably have purchased solely the right to use the water on the FEM parcels, this would not have served its augmentation purposes. The NRD also considered the purchase of water rights to be a risk, since the NRD would not have the land ownership that would justify the reasonable use needed for the integrated management plan. Moreover, the purchase price of the land from FEM with the leaseback was less than the purchase price of water rights alone would have been.

         With regard to the leaseback provision of the purchase agreement, Fanning explained that FEM insisted upon the leaseback as a condition of the sale, and it reduced the purchase price of the FEM parcels.

         In 2013, the NRD determined that due to declining water levels, it needed to acquire additional certified irrigated acres in order to balance water use. This led to the purchase of the Wilder parcels. There were no augmentation wells on the Wilder parcels, but the retirement of the irrigated acres adjacent to the FEM well field would allow for the infiltration of Wilder water onto the FEM parcels. This, in turn, would allow the NRD larger use for pumping water on the FEM property.

         (iii) Soil Conservation and Range and Wildlife Management

         Fanning explained that as the owner of the land, the NRD was required to carry out its soil conservation and other duties set forth in § 2-3229. The soil conservation also protected the [300 Neb. 264] water quality in that area. While the NRD purchased the property primarily as an augmentation project, Fanning pointed out that the NRD was a multipurpose natural resources district and that it was "not going to turn [the properties] into wasteland and watch it blow away."

         The NRD worked with Nebraska's Game and Parks Commission, which considered the acquired parcels part of the biologically unique Sand Sage Prairie area. With a large grant from the Nebraska Environmental Trust, the NRD reseeded the parcels with a mix of native grasses, forbs, and sand sage to fit that biologically unique landscape. According to Fanning, it was one of the largest conversions of irrigated land to native grasslands ever undertaken in Nebraska.

         The NRD understood that the parcels were going to "require significant mowing unless we want to fill every fence within 20 or 30 miles full of tumbleweeds." The alternative to mowing was grazing. Fanning described that mowing would cost the NRD $1 to $12 an acre. In contrast, the NRD could receive $5 or $6 an acre for the same weed control through a lease allowing someone to seasonally graze cattle on the land. Grazing, Fanning explained, had the additional advantage of incorporating the seed through "hoof action.''

         Three FEM parcels had improvements other than wells and underground pipelines. Fanning testified that these improvements were used primarily by the lessees for the lessees' agricultural or commercial purposes. One parcel contained seven grain bins and a 1-acre farmsite. One parcel contained three mobile homes, scales and a scale house, 12 grain bins, a garage, a livestock shed, two vertical tanks, a 1-acre farmsite, and a 4-acre homesite. And one parcel contained an old airplane hangar and a 2.07-acre farmsite.

         With respect to the Wilder parcels, the NRD did not retire the certified irrigated acres and reseed with grassland during the first year of acquisition. At the time of acquisition, it was too late in the season to do so. Rather, the NRD determined that the best course of action for its ultimate goal of [300 Neb. 265] planting native grasses was to plant sorghum and a ground cover first. The NRD did not harvest the crop, but planted it to add organic matter to the soil and to prevent soil erosion. The NRD irrigated the sorghum, but Fanning emphasized that this use was a reduction from the parcels' historical, fully irrigated use.

         The NRD planted native grasses the following year, in 2014, and retired the Wilder irrigated acres. One of the Wilder parcels contained a house, a machine shed, 10 grain bins, a scale house, a scale, a dryer, two vertical tanks, two anhydrous tanks, and a 1-acre homesite. All of these improvements were unusable. While the Wilder parcels had a lessee who was grazing cattle on the land at the time of purchase, those parcels were no longer leased after May 1, 2013. By the tax levy date of October 15, 2013, none of the Wilder parcels were leased.

         (iv) Rents

         Under the lease portion of the purchase agreement with FEM, the NRD could evaluate each year how many cattle were allowed to graze, in order to serve the NRD's purposes without overgrazing the property. When asked if the lease had a base rate for grazing, based upon animal units per acre, Fanning responded:

Yeah, we knew that the lease was going to be variable - or the real world is going to be variable in the number of cows that they'd be able to graze, so the lease essentially sets out a grazing rate based on kind of what their fair market value was at the time for grazing a cow/calf pair, and then it's adjusted based on the number of animals that we determined they can actually run.

         The FEM lease also established a rent of 5 cents per bushel of all grain the lessees brought onto the property.

         During the relevant tax years, after the NRD retired the irrigated acres and the lessees were limited to grazing and use of fixtures, the total annual income derived from the leaseback agreement with FEM was approximately $57, 000. [300 Neb. 266] Fanning explained that by retiring the irrigated acres and turning them into grassland, the NRD reduced the market value of the land from "a $4, 000 piece of irrigated property . . . into something that's worth 5- or 600 bucks." And Fanning pointed out that the NRD's yearly rental income under the lease was less than its monthly electricity bill for the augmentation project.

         (c) Posthearing Briefs

         The NRD and the Board submitted posthearing briefs. The lessees did not. In its posthearing brief, the NRD argued that the parcels were predominantly used for the public purposes of ground water management, compact compliance, soil erosion control, and other public purposes under the NRD's statutory authority.

         The Board asserted in its posthearing brief that "[t]he narrow question before the Commission is whether 6, 640 acres of real property owned [by the NRD] are exempt from taxation in 2013 because the property is 'used or being developed for use ... for a public purpose, '" although the Board also pointed out that the NRD had never adduced "independent" evidence on the fair market value of the lease. The Board concedes in this appeal that the "narrow question before TERC was whether 6, 640 acres of real property owned by [the NRD] were exempt from taxation because the property is 'used or being developed for use ... for a public purpose.'"[3]

         (d) TERC's Decision

         Pursuant to 350 Neb. Admin. Code, ch. 15, § 003.07 (2009), the TERC examined separate and distinct use portions of the properties and divided them broadly into three groups: the FEM parcels with improvements, the FEM parcels without ...


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