A hearing was held on January 31, 1994, regarding the debtor's objections to the claims of the Kenai Peninsula Borough. Peter Giannini appeared for the debtor. Dennis Fennerty and Bryan Merrell appeared for the Kenai Peninsula Borough.

Introduction

      This is an action to determine the pre- and post-petition tax liabilities of Chugach Alaska Corporation (Chugach) to the Kenai Peninsula Borough (KPB). Chugach seeks a reduction and refund of taxes assessed against its Seward Lumber mill for tax years 1990, 1991, and 1992. The mill cost Chugach approximately $27,000,000.00 to construct in 1990. It has been extremely unprofitable in operation, however, which lead to Chugach's chapter 11 filing and a complete shutdown of lumber production. After a great amount of time and money was spent trying to market the mill, it was eventually sold for $1,471,000.00 to a joint venture, Seward Forest Products in December of 1992. Chugach retains a minority interest in the mill through the joint venture.

      Chugach did not take any action to contest its tax liabilities to the KPB before the filing of its bankruptcy petition. It did object to the KPB tax claim in its omnibus claims objections. Chugach also preserved its right to contest the amount of KPB taxes through 11 U.S.C. § 505 in its confirmed plan. Chugach did not initiate any state law actions to preserve its tax reduction claims. It even paid post-petition taxes to the KPB without designating that the payments were made under       3 ABR 360  protest.

      This court has jurisdiction over this dispute in accordance with 28 U.S.C. § 157(b)(2)(B),(C), and (O), and 11 U.S.C. § 505. I find for the KPB for tax years 1990 and 1991 and for Chugach for tax year 1992.

Procedural Defects

      The KPB maintains that the debtor's failure to actively pursue its state law remedies for reduction of its tax liabilities preempts this court's ability to determine taxes under 11 U.S.C. § 505. I disagree.

11 U.S.C. § 505 provides in part:

      (a)(1) Except as provided in paragraph (2) of this subsection, the court may determine the amount or legality of any tax, any fine or penalty relating to a tax, or any addition to tax, whether or not previously assessed, whether or not paid, and whether or not contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction.

      (2) The court may not so determine--

(A) the amount or legality of a tax, fine, penalty, or addition to tax if such amount or legality was contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction before the commencement of the case under this title; or

(B) any right of the estate to a tax refund, before the earlier of-

(i) 120 days after the trustee properly requests such refund from the governmental unit from which such refund is claimed; or

(ii) a determination by such governmental unit of such request.

      These taxes have never been contested before or adjudicated by a judicial or administrative tribunal. Therefore, under the broad language of § 505(a) (1), this court has the authority to determine the amount or legality of any KPB tax. Collier contains an excellent discussion of § 505.

      Under section 505(a), the bankruptcy court is authorized to redetermine a tax previously determined if such prior determination was not "contested." This provision, which protects the estate from the negligence or indifference of a debtor who has defaulted in tax assessment proceedings,       3 ABR 361  derives from Section 2a (2A) of the former Act. Former Section 2a(2A) was enacted in 1966 in part to clarify Arkansas Corporation Commission v. Thompson. [313 U.S. 132, 61 S. Ct. 888, 85 L.Ed 1244 (1941).]

      Until that decision, the great weight of authority held that the bankruptcy court had full power to look into the validity and amount of taxes constituting the basis for prior claims in bankruptcy, and to withhold the payment for such claims to the extent that it found the underlying tax had exceeded what was justly due and owing.

      The Arkansas case established, that when a duly constituted quasi-judicial agency, state or federal, has passed upon a tax claim by virtue of a due hearing thereon, the bankruptcy court cannot redetermine such claim or alter its amount unless (1) the agency has made an improper arithmetical computation, (2) has acted beyond its legal powers, or (3) the assessment has been tainted by discernible illegality under the applicable tax law as distinguished from a mere alleged overassessment based upon an excessive valuation. In the Arkansas case postbankruptcy taxes were involved. The trustee took part in the hearings before the Corporation Commission,but no further appeal was taken from the decision of the Commission. Thus, the Arkansas case did not present the problem of the estate being bound by the negligence or inactivity of a debtor in securing a proper and just assessment prior to a case under title 11.

      This problem was subsequently addressed by the enactment of Section 2a(2A) permitting relitigation in bankruptcy court of uncontested assessments.

      The KPB has no basis for disputing a hearing on the merits. There have been no prior hearings on contested assessments. As noted in In Re AWB Associates, 144 B.R. 270, 278 (Bankr. E.D. Pa. 1992):

      With the exception of one decision, In re Qual Krom South, Inc., 119 B.R. 327, 329 (Bankr. S.D. Fla. 1990), there is no support for the principle that a debtor's failure to follow state-court procedures (there, filing for a refund within a statutory one-year period) bars application of § 505. We agree with all of the other authority on this point, which concludes that procedural requirements are pre-empted by the Bankruptcy Code, Fairchild Aircraft, 124 B.R. at 493 n. 3, and find that the contrary holding in Qual Krom South is "unpersuasive." Ledgemere, supra, 135 B.R. at 198.

      3 ABR 362  Texas statutory and case law authority mandating that certain procedural steps constitute the exclusive procedure by which property tax valuations may be contested are of course preempted by the provisions of the Bankruptcy Code.

Applicable State Law

      While federal law allows this court to determine the debtor's tax liability, this court must apply state law to determine the appropriate amount of tax. In Re Fairchild Aircraft, 124 B.R. at 492. Here, AS 29.45.110(a) provides:

The assessor shall assess property at its full and true value as of January 1 of the assessment year, except as provided in this section, AS 29.45.060, and 29.45.230. The full and true value is the estimated price that the property would bring in a open market and under then prevailing market conditions in a sale between a willing seller and a willing buyer both conversant with the property and with prevailing general price levels.

      (a) If an appellant fails to appear, the board of equalization may proceed with the hearing in the absence of the appellant.

      (b) The appellant bears the burden of proof. The only grounds for adjustment of assessment are proof of unequal, excessive, improper, or under valuation based on facts that are stated in a valid written appeal or proven at the appeal hearing. If a valuation is found to be too low, the board of equalization may raise the assessment.

      (c) The board of equalization shall certify its actions to the assessor within seven days. Except as to supplementary assessments, the assessor shall enter the changes and certify the final assessment roll by June 1.

      (d) An appellant or the assessor may appeal a determination of the board of equalization to the superior court as provided by rules of court applicable to appeals from the decisions of administrative agencies. Appeals are heard on the record established at the hearing before the board of equalization.

      Alaska case law has been very deferential to determinations of assessors and boards of equalization. In Ketchikan Packing Co. v. City of Ketchikan, 167 F. Supp. 846 (D. Alaska 1958), Federal District Judge Kelly refused to reduce an assessment against the Ketchikan Packing Company. The decision is unclear as to whether Judge Kelly was reviewing a board of equalization determination or a simple assessment. He stated that: "[T]here is a presumption of validity of the appraised value, and the Court will not substitute its judgment as to valuation for that of the appraiser." Ketchikan Packing Co. v. City of Ketchikan, 167 F. Supp. at 849. He went on to uphold the assessment.

      In a later case, the Alaska Supreme Court affirmed a board of equalization assessment. The court stated:

It [the court] will not substitute its judgment for the judgment of those upon whom the law confers the authority and duty to assess and levy taxes. This court is concerned with nothing less than fraud or the clear adoption of a fundamentally wrong principle of valuation. Neither has been shown here.

      Similarly, the Alaska Supreme Court again refused to overturn an assessment in Hoblit v. Greater Anchorage Area Borough, 473 P.2d 630 (Alaska 1970). Citing Twentieth Century, the court found credible evidence in the record sustaining the board's action. Absent fraud or the clear adoption of a fundamentally wrong principle of valuation, the assessment would not be disturbed.

      Again, in North Star Alaska Housing Corp. v. Board of Equalization, 844 P.2d 1109 (Alaska 1993), the Alaska Supreme Court refused to overturn a board assessment. Finding that the board had a reasonable basis for its assessment, the court affirmed the board's findings. Finally, in Cool Homes. Inc. v. Fairbanks North Star Borough, 860 P. 2d 1248 (Alaska 1993), the Alaska Supreme Court reiterated its approval of a deferential standard when dealing with board action. Citing Hoblit, the court noted that the taxpayer must show fraud or the clear adoption of a       3 ABR 364  fundamentally wrong principle of valuation. Utilizing this standard, the determination of the board was upheld.

      Based on this case law, the KPB contends that Chugach must prove the borough chose a method of valuation that was either fraudulent or fundamentally wrong. For a number of reasons, I disagree.

      First, the KPB position ignores both the plain meaning and the purpose of 11 U.S.C. § 505(a) (1), which provides in part, "the court may determine the amount of any tax . . . whether or not previously assessed, whether or not paid, and whether or not contested . . . ." If the KPB standard is adopted, there is no real determination: rather the original assessment, regardless of its merit, is simply rubber stamped in the absence of fraud or a fundamentally wrong method. As noted in Websters Ninth New Collegiate Dictionary, "determine" can mean "to find out or come to a decision about by investigation, reasoning, or calculation." If the KPB standard is adopted, § 505(a)(1) is effectively emasculated. Moreover, as the board has never even considered the merits of the appeal, Chugach has effectively been denied its day in court.

      Secondly, the KPB position is at odds with the intent of § 505. The intent of this section has been to protect the estate from the negligence or indifference of a debtor who defaults in tax assessment proceedings. 3 Collier on Bankruptcy, supra. The estate cannot be protected, however, from such negligence when the simple decision of an assessor is afforded overwhelming weight. By seeking a determination under § 505, the KPB would effectively put the debtor in a worse position and subject to a higher standard than through a simple appeal and appearance before the board of equalization.

      This leads to the final and perhaps most significant reason for departing from the proposed KPB standard. In virtually every case cited by the KPB and previously discussed by this court, the courts decision was based upon an appeal from a board of equalization decision. Twentieth Century, Hoblit, Cool Homes, and North Star Housing all involved appeals from determinations by the board, in accordance with AS 29.45.210(d). None of them involved a direct appeal from an assessment without board action. This court is effectively sitting as a board of equalization. As such, the deferential standard of Alaskan case law cannot apply.

      The proper standard for a determination by this court is clearly set forth in AS 29.45.210(b). Chugach bears the burden of proof. The only for adjustment are unequal, excessive, improper or under valuation Chugach should not and will not be punished by the application of a strict standard designed for appeals from board determinations.

Determination of Tax

      The following chart outlines the key areas of dispute. Those areas are: (1) personal property; (2) the mill building; and (3) the chip loading facility.

      As the chart illustrates, the dispute is centered around the valuation of personal property, primarily mill equipment, and the mill building and chip loading facility. The differences between the parties positions range from a low of $7.4 million in 1990 to a high of $13 million in 1991.

      The KPB offered the testimony of its assessor, Wayne Haerer (Haerer). Haerer testified that the KPB utilized a cost less depreciation method of determining value. The taxpayer submits an annual report that outlines its costs of acquiring real and personal property.       3 ABR 366  The KPB then inputs the report data into a Marshall-Swift computer program for valuation annually. The computer determines the appropriate value on a cost less depreciation basis. As assessor, Haerer has the ability to amend the computer assessment if he finds it improper. While Haerer admits that market and income data are relevant in the determination of value, he made no adjustments for such data in the assessments.

      Chugach relies primarily on the testimony of Neal Anderson, former Chugach president and controller, and James Morgan, a joint venturer and current operator of the mill. Anderson testified in regard to the history of the operation. He stated that after incurring about $7,000,000.00 in mill operating losses in 1990, Chugach started actively looking for an equity partner or joint venturer. Buck Mehl, the mill operator at the time, "trolled" the west coast looking for equity capital or an outright sale in the spring and summer of 1991. He was unsuccessful, due in part to the distressed state of the Northwest timber industry at the time. Chugach filed for Chapter 11 in March of 1991. The mill continued its operations and lost another $7,000,000.00 during 1991. These losses forced Chugach to close the mill in November and continue its search for equity capital or a sale.

      Chugach retained Equity Partners, Inc., and its agent, Wayne Basore, to embark on an all-out marketing effort. Basore advertised in the Wall Street Journal and various trade publications. He mailed extensive brochures to companies involved in the forest products industry, both nationally and internationally. The brochure was translated into Japanese, Chinese, and Korean. He followed up with phone and/or personal contact with anyone interested in the mill. Despite his efforts, which were extensive and costly to the estate, the best price he could obtain was only $1,000,000.00. This bid was rejected by creditors and the court in the spring of 1992. Chugach emerged from bankruptcy in July of 1992 with a confirmed plan. The plan authorized Chugach's sale of the mill. No sale was pending at confirmation, however.

      Finally, after nearly two years of effort, a sale of the mill and other assets to a joint venture, Seward Forest Products, was undertaken. The mill accounted for approximately $1,471,000.00 of the sale. Chugach, Citigreen, Inc., and Young and Morgan North, Inc., were the three joint
      3 ABR 367  venturers. Each has a one--third interest in the mill. The sale closed in December of 1992. I find that the sale was a market sale. The prodigious efforts undertaken by Chugach for sale are by no means similar to the "forced sale" examples cited by the KPB. While the sale was made in accordance with a confirmed plan, it was not similar to a sale by a Chapter 7 trustee or any other type of forced judicial liquidation.

      The first issue I will address is the value of the mill on January 1, 1992, in accordance with AS 29.25.110(a). As a preface to my determination, I note the following: This mill was constructed at the wrong time, at the wrong place, for the wrong price. It is a unique asset in a remote location. In many respects, it is the ultimate "white elephant." The fair and true value of this unique asset cannot be established, under these circumstances, with the blind application of a cost less depreciation computer program for tax year 1992. By 1992, the mill had been for sale on the open market for an extended period of time. The prevailing market conditions were very poor in the Northwest. The money placed in the mill by Chugach was the rough equivalent of dumping bundles of $1,000.00 bills on a conveyor into Resurrection Bay. There is no way that Chugach's cost was a reasonable estimate of market conditions for the mill in 1992. The $1,000,000.00 bid received by Chugach in the spring of 1992, the fact that the mill was no longer in production, and the testimony of Jim Morgan convince me that the KPB's 1992 assessment was excessive and improper. Chugach has sustained its burden of proof for tax year 1992. I adopt Chugach's contentions with regard to the value of the mill for 1992.

      1990 and 1991 are a different story, however. Chugach has failed to sustain its burden of proof under AS 29.45.210(b) with regard to those tax years. Jim Morgan did not relate his 1992 value opinions for the mill back to 1990 or 1991 in a persuasive manner. The mill was only beginning operations in 1990. There had been no extensive marketing of the mill or search for equity partners on January 1, 1990 or January 1, 1991. While the mill had sustained heavy losses in 1990, no sales efforts were underway. I cannot equate values obtained in 1992 with market value in January of 1990 or 1991 without evidence. Chugach's attempt to bootstrap its 1992 evidence back to 1990 and 1991 will be rejected. While I suspect the KPB's 1990 and 1991 assessments were very       3 ABR 368  high, the evidence submitted by Chugach simply does not confirm my suspicions for those years.

Conclusion and Order

      This court has the power and the duty to determine the proper amount of taxes due the KPB for the tax years 1990, 1991, and 1992 from the debtor. The KPB's assessments for 1990 and 1991 are determined to be correct. The debtor's objections to the KPB's 1992 assessment are well founded. The debtor is entitled to a refund in the sum of $133,464.39 for tax year 1990.

      IT IS ORDERED:

      1. The assessments of the Kenai Peninsula Borough for the tax years 1990 and 1991 are determined to be correct as to debtors Chugach Alaska Corporation and Chugach Forest Products, Inc.;

      2. The court determines the following assessments for tax year 1992 to be correct as to Chugach Alaska Corporation and Chugach Forest Products, Inc.:

      3. The debtor's objections to the claims of the Kenai Peninsula Borough are sustained and denied as set forth in paragraphs one and two;

      4. Chugach Alaska Corporation and its subsidiary, Chugach Forest Products, Inc., shall recover the sum of $133,464.39 from the Kenai Peninsula Borough, together with interest on such sum from the date paid to the Borough at the rate of 10.5% per annum; and,

      5. Each party shall pay its own costs and attorney's fees.

      Let judgment be entered and docketed accordingly.

DATED: April 20, 1994.

BY THE COURT
DONALD MacDONALD IV
United States Bankruptcy Judge