Upper Republican Natural Resources District and Steve Yost, Appellees,
Dundy County Board of Equalization, Appellant And Cross-Appellee. and FEM, Inc., and M & L Cattle Company, Appellees and Cross-Appellants,
Taxation: Judgments: Appeal and Error. An
appellate court reviews Nebraska Tax Equalization and Review
Commission decisions for error appearing on the record of the
__:__ . 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.
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
Taxation: Appeal and Error. Questions of law
arising during appellate review of Nebraska Tax Equalization
and Review Commission decisions are reviewed de novo.
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.
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
Appeal and Error. An appellate court
ordinarily considers only those errors assigned and discussed
in the briefs, but may notice plain error.
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.
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.
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
R. McWha, of Waite, McWha & Heng, and Lindsay E. Pedersen
for appellees FEM, Inc., and M & L Cattle Company.
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.
NATURE OF CASE
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
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").
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."
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
Assessor Notice of Taxable Status
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. The notices did not state that the
assessor had determined that any of the parcels were being
leased at less than fair market value.
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
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
Protests to Board
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.
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.
Appeal to TERC
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.
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.
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.
Evidence and Arguments Presented
informal hearing, the NRD and the Board were given the
opportunity to present evidence and argument. 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.
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.
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.
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
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.
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
Purchases and Implementation of Plan
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
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.
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.
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.
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.
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
Soil Conservation and Range and Wildlife
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."
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.
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.''
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.
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.
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
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
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.
lease also established a rent of 5 cents per bushel of all
grain the lessees brought onto the property.
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.
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
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.'"
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