By Kevin O'Hanlon

The Associated Press.

LINCOLN, NE (AP)--The Nebraska Court of Appeals fired a shot March 20 in the escalating war over a new method of valuing farm land for tax purposes that has angered farmers and ranchers across the state.

The court invalidated so-called "market areas" that had been set by the Thayer County assessor for valuing farm land.

The use of market areas, which has become increasingly popular in Nebraska the past five years, allows recent land sales and other factors to be used to set different values for similar tracts of land in different areas of a county.

In some counties, for example, land near a city or a highway is valued higher than similar land in more remote areas.

What rankles landowners, however, is that when boundaries for the market areas are drawn, the land on one side of the line is valued higher than an adjacent parcel.

After all, they argue, state law says similar property should be valued equally for tax purposes.

Under state law, county assessors set property values each year.

The state Tax Equalization and Review Commission reviews those valuations to make sure they fall within a mandatory range--residential property must be valued at between 92% and 100% of market value; agricultural land is valued at no more than 80% of its actual value.

In Tuesday's ruling, the appeals court sided with Dennis and Joyce Schmidt, who challenged the valuation placed on 160 acres of farm land they own. The value was raised from $88,0000 to $127,000 in 1999, after Thayer County began using market areas.

According to court documents, Thayer County was divided into two market areas, with land in one area generally receiving a higher tax value because it had greater irrigation potential.

In the ruling, Judge Frankie Moore said Thayer County failed to justify the lines dividing the market areas.

"The boundaries separating the market areas ... appear to be arbitrarily drawn, and there is no evidence to the contrary," Moore said. "It is clear that the market areas were not based on soil types, but rather, on location of property within the county."

The state Supreme Court ruled last year in a Dawes County case involving market areas but did not settle the issue.

While that case focused on the due process rights of taxpayers who file complaints about valuations, the high court said the state tax commission had no proof that the Dawes County market areas were valid--other than a comment from the county assessor that "there has to be a line somewhere."

The high court said a market area is not a subclass of agricultural land recognized by state statutes. The court said subclasses of agricultural property must be based on soil classification for purposes of taxation.

The Legislature is trying to address the issue.

A bill by the Revenue Committee would allow the state's Tax Equalization and Review Commission to adjust the values of property in market areas.

At least 70 county assessors have established market areas to set values on agricultural land over the past five years.

Gregory Damman, the attorney for the Schmidts, was not immediately available for comment.

Catherine Lang, the state's property tax administrator, said she was not alarmed by the ruling and was confident the Legislature would address the problem.

"The court was relying on a strict interpretation of existing law,' she said. "Because of the way the case developed, there was ... very little information in the record regarding why the county did what it did."

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