American Sheds, Inc. v. County of Los Angeles

• Decision Date: 11 August 1998
• Docket Number: No. B111513,B111513
• Court: California Court of Appeals Court of Appeals
• Parties: , 98 Cal. Daily Op. Serv. 6836, 98 Daily Journal D.A.R. 9341 AMERICAN SHEDS, INC., et al., Plaintiffs and Appellants, v. COUNTY OF LOS ANGELES, Defendant and Respondent.

Page 58

78 Cal.Rptr.2d 58

66 Cal.App.4th 384, 98 Cal. Daily Op. Serv. 6836,

98 Daily Journal D.A.R. 9341

AMERICAN SHEDS, INC., et al., Plaintiffs and Appellants, v. COUNTY OF LOS ANGELES, Defendant and Respondent.

No. B111513.

Court of Appeal, Second District, Division 2, California.

Aug. 11, 1998.

Rodi, Pollock, Pettker, Galbraith & Cahill, John D. Cahill and Cris K. O'Neall, Los Angeles, for Plaintiffs and Appellants.

De Witt W. Clinton, County Counsel, and Albert Ramseyer, Deputy County Counsel, for Defendant and Respondent.

FUKUTO, Acting Presiding Justice.

American Sheds, Inc. (ASI), and its parent corporation Browning-Ferris Services, Inc. (BFI; collectively plaintiffs), appeal from a judgment after court trial in an action for refund of real property taxes paid to defendant County of Los Angeles (county). The taxes were levied on a 302-acre landfill property in the cities of Azusa and Irwindale (the property), which ASI acquired in 1987 together with ownership of the corporation that operates the landfill, Azusa Land Reclamation Company (ALR).

Plaintiffs' fundamental contention is that in assessing the market value of the property, the county's assessment appeals board (board) improperly included the value of certain related intangibles of the landfill business, namely, its operating permits and "business enterprise" value. Plaintiffs also contend that certain factors of the board's value determination are not supported by substantial evidence. We conclude that the judgment approving the board's method of valuation must be affirmed.

FACTS

In 1987, ASI acquired the property, and the stock of ALR, for a consideration of $60.3 million, together with agreed additional payments to the seller of 10 percent of the "gate revenues" from the property. Those payments were to become payable upon the occurrence of one of two contingencies, which ultimately did not materialize. Among the most significant of ALR's assets were an assortment of governmental permits authorizing the landfill operation, principally the operating permit issued by the county's Department of Health Services and waste discharge requirements issued by the regional water quality board. After the transfer of ownership, ALR sought enlargement of the discharge requirements, for expansion of the landfill use, but in 1991 the administrative proceedings culminated in restriction of the landfill to deposit of inert waste at the original site, a situation of " 'virtua[l] shutdown.' " (Main San Gabriel Basin Watermaster v. State Water Resources Control Bd. (1993) 12 Cal.App.4th 1371, 1378, fn. 4, 16 Cal.Rptr.2d 288 [rejecting challenge to administrative decision].)

ASI's purchase of the property triggered reassessment. The county assessor initially appraised the property at $60 million for the base year of 1987. Subsequent assessments through 1990 reflected this value. Beginning in 1991, when ALR's permits were restricted, the assessment was reduced by about 90 percent, under Revenue and Taxation Code section 51, subdivision (a)(2), which provides that taxable value shall take into account factors "causing a decline in value." Contending that all of these valuations should have been substantially lower, ASI sought reduction from the board.

Before the board, the parties agreed that the income method of value determination was appropriate for the property. That method involves capitalizing, or reducing to present value, the future income attributable to a property. (See Bret Harte Inn, Inc. v. City and County of San Francisco (1976) 16 Cal.3d 14, 24, 127 Cal.Rptr. 154, 544 P.2d 1354 (Bret Harte ); Freeport-McMoran Resource Partners v. County of Lake (1993) 12 Cal.App.4th 634, 642, 16 Cal.Rptr.2d 428.) The parties differed, however, regarding the specific method for attributing or projecting income. The county's proposed approach took into account the entire projected income realizable through the landfill business, less expenses and a return to management. ASI tendered the "royalty method," under which the income to be considered would be a percentage rent, or royalty, such as would be paid to the owner by an independent lessee-operator of the property.

A principal issue was the treatment to be given to intangible rights associated with the property and the landfill operation, particularly the permits. As discussed below, such intangibles are not directly subject to real property tax. On the other hand, the presence of intangible features may enhance the value of real property, which may be determined by assuming their presence. For example, in explaining one of his opinions of value, ASI's principal appraiser testified that "there is an enhancement to the real property by virtue of the franchise which the company has to operate a landfill on that real property." The royalty valuation method, advanced by ASI, was meant to isolate the income attributable to the property itself, and thereby yield a value exclusive of intangibles.

In its decision, the board adopted the royalty approach to determining income, as ASI had advocated. However, to determine and capitalize income, the board employed royalty and discount rates that were respectively greater and less than those ASI had proposed as appropriate. ¹ Applying these factors to a projection of operator income, the board determined the taxable value of the property for the 1987-1993 tax years to be as follows: 1987 and 1988, $61 million; 1989, $62,220,000; 1990, $63,464,400; 1991, following restriction of the permits, $5.5 million; 1992, $6.2 million; 1993, $6.9 million.

Having paid the taxes, plaintiffs filed a claim for refund and then this case. Plaintiffs contended that in valuing the property the board had "improperly included the value of non-taxable intangible franchises, permits and licenses," that the royalty and discount rates were not supported by substantial evidence, and that the board had incorrectly attributed to the property's value ASI's entire purchase price, for the property and for ALR and its permits and licenses. These contentions intermeshed: in plaintiffs' view, the calculation rates had produced a valuation equal to the cost of both the land and the intangibles, thus subsuming and effectively taxing those non-taxable elements.

Upon review of the administrative record and the parties' arguments, the trial court ruled in favor of the county. In its statement of decision, the court found speculative the contention that the board had applied the royalty method "with a design to come as near as possible to the property's nominal sales price." The court further held that the board had not unlawfully included the intangibles in its valuation. Finally, the court found that the board's royalty and discount rates were reasonable in view of the evidence.

Plaintiffs' contentions on this appeal essentially mirror those below. Substantively, plaintiffs contend that the board's valuation improperly included the permits and other intangibles associated with the landfill, and that the royalty and discount rates utilized were not grounded in substantial evidence. In addition, plaintiffs pose an initial issue regarding the scope of the trial court's review.

DISCUSSION

1. Scope of Review.

Plaintiffs initially contend that the trial court applied an incorrect scope of review to the board's decision. We conclude that the court's analysis on this score was free of prejudicial error.

The scope of judicial review of tax assessment valuations was explained in Bret Harte, supra, 16 Cal.3d at p. 23, 127 Cal.Rptr. 154, 544 P.2d 1354, as follows: "If the plaintiff claims only that the assessor and the [board] erroneously applied a valid method of determining full cash value, the decision of the board is equivalent to the determination of a trial court, and the trial court in turn may review only the record presented to the board. [Citations.] The trial court may overturn the board's decision only when no substantial evidence supports it...." [Citations.] On the other hand, when the taxpayer challenges the validity of the valuation method itself, the trial judge is faced with a question of law. [Citations.] That question ... is whether the challenged method of valuation is arbitrary, in excess of discretion, or in violation of the standards prescribed by law."

Plaintiffs contended below that their claim that the board had improperly included intangibles in its valuation represented a challenge to the validity of the valuation method, requiring review as a question of law under the above rules. The trial court initially agreed, and ruled that plaintiffs accordingly would not be limited to the administrative record but could introduce additional evidence on the question. Subsequently, however, the court reversed itself, noting that the board had employed a valuation method (royalty income) which not only was recognized but indeed had been propounded by ASI itself. The court concluded that the board's decision did not on its face reflect improper inclusion of intangibles in the valuation, and thus the case raised only "a claim of error in applying the correct calculation method." The court restated and adhered to this ruling in its statement of decision.

Plaintiffs again urge that the issue of intangibles should have been considered as a question of law, but we essentially agree with the trial court's conclusion, and also find the issue academic as an appellate matter. In the first place, it is clear that the actual valuation method employed--the royalty income method--not only was legally recognized but also was adopted at ASI's own suggestion. To that extent, the method was valid as a matter of law, and plaintiffs were estopped from urging otherwise. Second, the claim that this method was applied improperly, to the permits and other intangible In disagreement, plaintiffs cite a number of cases in which assessing authorities' treatment of intangibles was held to give rise a challenge...