Appeal from the Circuit Court of Cook County, the Hon. Francis
Barth, Judge, presiding.
JUSTICE WARD DELIVERED THE OPINION OF THE COURT:
Rehearing denied May 31, 1985.
United States Steel Corporation (hereafter U.S. Steel or the objector), filed specific objections, pursuant to sections 194 and 235 of the Revenue Act of 1939 (Ill. Rev. Stat. 1979, ch. 120, pars. 675 and 716), to the Cook County collector's application for judgment and sale pertaining to real estate taxes on the objector's South Works plant in Chicago for the years 1975 through 1979. The taxes for each year were paid in full and under protest. U.S. Steel claimed that the assessor had valued the South Works plant in excess of its full, fair market value and that the assessor systematically undervalued other properties in Cook County. Following a bench trial, the circuit court of Cook County held that the South Works plant had been properly valued by the assessor at 100% of fair market value for the years in question, but held that the assessments constituted constructive fraud in that other properties in the county were valued at a lower percentage of market value prior to debasement. The court ordered refunds to U.S. Steel for each year in question. The total amount of the refunds is $9,991,230.71.
The Cook County treasurer, as ex officio county collector, appeals from that part of the judgment finding constructive fraud and ordering refunds. U.S. Steel cross-appeals from that part of the judgment accepting the values established by the assessor as fair market valuations of the South Works plant for the years in question. We allowed a direct appeal under our Rule 302(b) (87 Ill.2d R. 302(b)).
Anglo-American Warehouses, the Illinois State Chamber of Commerce, the American Can Company, the Taxpayers' Federation of Illinois, the Chicago Association of Commerce and Industry, the Illinois Manufacturers' Association, and the Mid-America Legal Foundation have filed amicus briefs supporting the objector. The Chicago Teachers Union filed an amicus brief in support of the Cook County treasurer.
U.S. Steel's South Works plant was established in 1881. The plant sits on 579.82 acres of land, 423.33 of which are subject to the county real estate tax and 156.49 of which are classified as common carrier real estate and are exempt from county taxation. South Works is an integrated steel mill consisting of a complex of one-story and multi-story manufacturing and warehouse buildings. In addition to the facilities for iron and steel production, there exist general support facilities and vacant and secondary-use buildings. Over the years numerous changes and improvements have been made and new facilities have been located wherever land was available and without reference to a master plan. This absence of planning has resulted in a steel-making plant which is inefficient compared to more modern facilities.
The market demand for domestic steel in general, and for South Works' products in particular, has diminished greatly in recent years. Furthermore, due to declining demand and increased foreign competition, the rod mill at South Works, which was constructed in 1974 and is the most modern facility at South Works, was closed in 1981.
Prior to the 1979 quadrennial reassessment, U.S. Steel submitted to the assessor a five-volume appraisal by William Townsley, an independent auditor, whom it had commissioned for that purpose. The Townsley appraisal relied primarily on the "cost approach" method of valuation, although it also contained a "market approach." Townsley found the fair market value of South Works to be $147.5 million as of January 1, 1979, the date of valuation for the 1979 tax year. This figure was actually an extrapolation of three different methods of valuation: the first reflected the original cost of items classified as real estate, less the quantifiable physical depreciation and functional and economic obsolescence, and plus the calculated land value ($149.8 million); the second method involved calculating the value of the entire operating property as a whole, deducting physical depreciation and functional and economic obsolescence, debasing the amount by the percentage of the property classified as real estate (29%), and then adding the underlying land value ($145.4 million); the final method utilizing the market approach involved the review of prior sales of three other operating steel mills. (The market-approach method of valuation required numerous adjustments to account for underutilized capacity and differences among the plants. The adjusted-market-approach figure was also debased by the percentage of property classified as real estate, and the land value was added, resulting in a figure of $149.3 million.) Townsley's final valuation of $147.5 million relied heavily on the first two methods of valuation (both involving the cost approach) because they provided for a more detailed analysis than the market approach.
Kenneth Kaval, director of appraisals for the Cook County assessor's office, coordinated the 1975 and 1979 quadrennial reassessment of South Works. In 1975, Kaval utilized the cost-approach method of valuation incorporated in the assessor's manual to arrive at the market value for South Works. According to Kaval, the manual accounts for functional and economic obsolescence in the application of the manual's depreciation chart. Kaval, however, did not know how the chart accounted for such obsolescence. Kaval noted that the manual includes a "depreciation system called the CDU, which includes one depreciation factor, realistic allowance for physical, functional, economic depreciation." Somewhat ironically, Townsley was the principal author of the manual which was prepared when he was a supervisor with the Cook County assessor's office. Townsley testified that the manual did not account for functional and economic obsolescence for specialized property such as South Works, but did not elaborate on the reasons why it did not.
In 1979, Kaval analyzed the Townsley appraisal and disagreed with Townsley in several respects. Most significantly, Kaval refused separate deductions for functional and economic obsolescence and applied a higher capitalization rate than that used by Townsley. Furthermore, Kaval included in the reassessment certain uncertified pollution-control facilities which U.S. Steel had represented to Townsley as being certified and not assessable. Similarly to Townsley, Kaval used a cost-approach valuation method. Kaval testified at trial that wherever possible he derived cost figures from the assessor's manual. For blast furnaces and other specialized steelmaking equipment, Kaval arrived at per unit cost figures after consulting periodicals and other steel producers.
The Cook County assessor found that in 1979 South Works had a fair market value of $169,852,400 and an assessed value of $67,940,960. (Cook County Ordinance 80-014 classified real property within the county and provides for assessment of each class at the following percentages of full market value:
Class 1 & vacant land 22%
Class 2 residential, 6 units or less 17% ...