APPEAL from the Circuit Court of Cook County; the Hon. ROBERT
J. DEMPSEY, Judge, presiding.
MR. JUSTICE JIGANTI DELIVERED THE OPINION OF THE COURT:
The United States Steel Corporation (U.S. Steel) appeals from orders entered by the circuit court of Cook County overruling its objections to the 1971 quadrennial assessment and 1972, 1973 and 1974 assessments of its South Works steelmaking plant located in Hyde Park Township in Cook County. The 1971 objection was tried in one proceeding and the 1972-74 objections were tried in a second proceeding. All objections for the years 1971 through 1974 have been consolidated on appeal.
On appeal U.S. Steel argues the assessments imposed on its South Works for the years 1971-1974 were not made in accordance with the law or in amounts which bore a proper relationship to the actual value of the property, or to property generally.
The 1971 quadrennial assessment of U.S. Steel's South Works increased the 1970 assessment from $45,754,781 to $82,589,679. The 1972 assessed value was $79,350,110, the 1973 and 1974 assessed values were each $79,402,766.
South Works is a plant which produces iron, steel and steel products, located on 416 acres of land on Lake Michigan at the Calumet River. At the time of the assessments there were 11 blast furnaces at South Works, although only eight were capable of production and all eight could not be operated at one time.
In the 1971 case, U.S. Steel contended the actual value of South Works was not in excess of $134,170,000 and that the lawfully assessed value was not more than 50% of that figure, or $67,085,000. In the 1972-1974 case, U.S. Steel contended that the 1972 actual value was not in excess of $136,570,000, and the total lawfully assessed value was not in excess of $65,285,000. The values asserted for 1973 were not in excess of $135,500,000 and $40,650,000 respectively; for 1974, $132,000,000 and $52,800,000.
U.S. Steel hired the American Appraisal Company (American) to determine the actual or market value of South Works as of January 1, 1971, 1972, 1973 and 1974. Richard Nichols, assistant vice-president of American, was in charge of the work and testified in both trials. The appraisal reports were introduced in each case.
Nichols testified that there are three basic approaches for determining the fair market value of a parcel of real estate: (1) cost approach, (2) income approach, or (3) market approach. The market approach was not used because industrial complexes such as South Works infrequently change ownership. An income approach was also deemed inappropriate because the segregation of an earnings stream which would be attributable only to South Works is difficult due to the many facets of the business, the many locations of other of U.S. Steel's steel producing real property, and the difficulty of making a profit determination for any single component of the "production line." Nichols thus determined that a cost approach was most appropriate in this situation. Replacement rather than reproduction cost was considered the better measurement. The American appraisal involved the estimate of the cost of a "model" replacement plant, located on the site of South Works, which would produce like products and would have a design capacity of 3,780,000 shipped tons. That capacity is 28% greater than the previous five years' average shipments, and 22% greater than the 1970 shipments, the year in which the greatest volume was produced during the five-year period.
Nichols further testified that the actual production of a blast furnace is usually less than rated capacity. He said that each of the conceptual replacement furnaces would have to be relined after 3,000,000 tons of production and that the downtime for relining would be three to four months. The conceptual replacement plant permitted a determination of the cost of replacing South Works and allowed the differences in the operations of the existing plant and its replacement to be measured so as to determine the functional obsolescence of South Works. The total cost of all the facilities envisioned as part of the conceptual replacement plant established the upper limit of what someone would pay for South Works. Present replacement cost is $363,900,000. From this was deducted a percentage representing observed physical deterioration. Replacement cost less observed deterioration produced the figure of $181,200,000.
Nichols explained that functional obsolescence was dealt with in part in the replacement facility by doing away with excess construction. Additionally, the difference in operational efficiency between the current and replacement facilities was analyzed and a penalty cost developed, representing the excess costs of operating South Works. Excess costs were estimated at $39,270,000 per year. Economic obsolescence was reflected in the curtailment of the remaining life of facilities in plant areas which were affected by the market.
Only half of the excess operating costs, or $19,635,000, was considered savings in light of the tax consequences. Such costs were assumed to continue for the remaining life of the facilities which created them. The present value of $19,635,000 for an eight-year remaining life at an 8% capitalization rate is $113,100,000. The discount factor and the economic remaining life were applied to the excess operating costs to develop the total operating obsolescence penalty for each year in issue.
Sixty-two percent of the assets contributing to the cost differential were attributed to real estate. Therefore, the present value of the functional obsolescence attributable to real property is $70,200,000.
The appraisal then combines the improvement appraised value ($181,200,000), the land appraised value ($6,870,000), the construction in progress appraised value ($16,300,000), and subtracts the functional obsolescence figure ($70,200,000), to arrive at American's opinion that the fair cash value was $134,170,000 as of January 1, 1971.
A similar approach was used to arrive at the fair cash values of South Works for the years 1972 through 1974:
January 1, 1972 $132,423,000
January 1, 1973 $132,580,000
January 1, 1974 $129,700,000
David H. Belt, manager of taxes for U.S. Steel, testified in each case. He said the assessor had not included a sufficient depreciation factor in making his assessments because a chart was used which related to age alone as a deduction from reproduction costs. Irrespective of age, a 30% floor prevents any depreciation allowance in excess of 70%. He also said the chart is not designed for industrial facilities. As computed, the reproduction cost created duplications of value. New facilities intended to replace old ones were fully assessed in addition to a full assessment of the old ones which would be replaced. Also, some major facilities which were assessed were inoperable due to physical deterioration and because of city ordinances requiring their termination.
Belt also testified that U.S. Steel had not complied with the assessor's request for cost information pertaining to four new facilities because of difficulty in determining which portions of them constituted real property as opposed to personal property. Belt conceded the cost records did exist and that U.S. Steel had been able to develop cost data for its 1971 personal property tax return.
Victor Lindberg testified in each case. At the time of the 1971 trial he was assistant general superintendent of South Works. When he testified in the second case he was general superintendent of South Works. Lindberg described the maximum productive capacity of the blast furnaces as compared to the formula used by the assessor. Lindberg said the maximum output which was ever achieved at South Works was 10,890 tons per month. In Lindberg's opinion, the assessor's formula failed by some 200% to reflect accurately the production. Lindberg also testified that since the time the assessed value of South Works was doubled in 1971, there had been a decrease in the utilization of South Works' facilities. The plant had become an uncompetitive high-cost operation, although it was competitive with other U.S. Steel plants prior to 1971.
Herman Walther, a real estate appraiser, testified in the 1971 case that the actual value of the land without any improvements was 45 cents per square foot. American's report for 1971 shows the land ...