CAT Partnership v. County of Santa Cruz

• Decision Date: 13 April 1998
• Docket Number: No. H016374,TELE-COMMUNICATION,INC,H016374
• Citation: 74 Cal.Rptr.2d 652,63 Cal.App.4th 1071
• Court: California Court of Appeals Court of Appeals
• Parties: , 98 Cal. Daily Op. Serv. 3610 CAT PARTNERSHIP et al., Plaintiffs and Respondents, v. COUNTY OF SANTA CRUZ, Defendant and Appellant., Plaintiff and Respondent, v. COUNTY OF SANTA CRUZ, Defendant and Appellant.

Page 652

74 Cal.Rptr.2d 652

63 Cal.App.4th 1071, 98 Cal. Daily Op. Serv. 3610

CAT PARTNERSHIP et al., Plaintiffs and Respondents, v. COUNTY OF SANTA CRUZ, Defendant and Appellant.

TELE-COMMUNICATIONS, INC., Plaintiff and Respondent, v. COUNTY OF SANTA CRUZ, Defendant and Appellant.

No. H016374.

Court of Appeal, Sixth District, California.

April 13, 1998.

As Modified on Denial of Rehearing May 11, 1998.

Review Denied July 15, 1998.

Rutan & Tucker and William M. Marticorena, Costa Mesa, for Defendant and Appellant.

Shartsis, Friese & Ginsburg, Douglas Mo and Tracy Salisbury, San Francisco, Gordon & Goddard and Paul M. Gordon, Oakland, for Plaintiffs and Respondents and for Plaintiff and Respondent.

ELIA, Associate Justice.

Respondent cable operators filed actions seeking a property tax refund. (Rev. & Tax.Code, § 5141.) ¹ They challenged the decision of the Santa Cruz Assessment Appeals Board ("AAB") to tax certain Rate Protection Provisions included as part of the cable operators' franchise agreements with local governments. The trial court determined that the Rate Protection Provisions were enforceable restrictions and therefore not subject to taxation. It excised the Rate Protection Provisions from the AAB's calculations but left the rest of the AAB's determination intact.

On appeal, the County of Santa Cruz argues that (1) the cable operators did not exhaust their administrative remedies; (2) the Rate Protection Provisions were not enforceable restrictions but "in kind" payments; and (3) the trial court erred in failing to remand the matter to the AAB.

We will conclude that (1) the exhaustion requirement was satisfied; (2) the Rate Protection Provisions were enforceable restrictions; (3) the trial court did not err in failing to remand the matter to the AAB. Accordingly, we will affirm the judgment.

Factual Background

This case concerns the cable television system serving the Cities of Santa Cruz and Scotts Valley and certain unincorporated portions of Santa Cruz County (the "cable system"). The cable system reaches customers by transmitting television signals via cable from a central distribution point, commonly referred to as a headend, to each customer's home. About two-thirds of the cable is located on public land, and about one-third is situated on private land.

The cable system operator must obtain permission from the local government to operate the cable system within the local government boundaries and to place its cable on public land. (47 U.S.C. § 541; Gov.Code, § 53066.) Both authorizations are set forth within the franchise agreement between the local government and the cable system operator.

The Santa Cruz County cable television market is unique due to limited over-the-air television reception. Because of this limitation, there have been significantly higher than average penetration rates since the system's construction. In fact, in an unrelated judicial proceeding, it was determined that the Santa Cruz area constituted a "captive market" and that the Santa Cruz cable operator therefore possessed a monopoly.

The uniqueness of the Santa Cruz market prompted the local government to attempt to quantify the profitability of the Santa Cruz cable franchises by comparing them with franchises serving communities with viable over-the-air reception. The local government sought to obtain a portion of the economic surplus for itself and for subscribers by implementing rate controls as part of the franchise agreement.

With this in mind, the local government solicited bids for a cable provider. Negotiations with Group W, the prior cable operator, had disintegrated. In 1986, Greater Santa Cruz Cable TV Associates ("GSCC") was awarded the franchise. As part of the franchise agreement, GSCC agreed to controls on the rates it could charge for its cable service. ²

On June 18, 1987, respondent CAT partnership acquired the cable system. Respondent Tele-Communications, Inc. ("TCI") was one of three partners in CAT Partnership. On September 9, 1989, the cable system was acquired by its current owner, respondent UACC Midwest, Inc. (UACC). UACC is a subsidiary of TCI. When UACC assumed ownership of the cable system franchise, it also agreed to restrictions (the Rate Protection Provisions) on the rates it could charge for cable service.

The Santa Cruz County Assessor calculated the property tax owed by the cable operator for the possessory interest in the cable system. ³ Respondents disagreed with the Assessor's decision. CAT and UACC appealed the Assessor's property tax determination to the Santa Cruz County Assessment Appeals Board.

The AAB used an income approach to determine the fair market value of the cable operator's possessory interest in the cable system. The AAB based its determination upon the annual rent which it interpreted as the economic rent. The AAB found that economic rent constituted the amount that would be paid in money or in kind for the right to use the real property which constituted the possessory interest. (Property Tax Rule 21(g).) ⁴ With respect to the amounts offered in kind for the franchise, the AAB considered a number of concessions and services. Among others, these included Subscriber Rate Protection Provisions and Senior Citizen and Handicapped Rate Protections (collectively the Rate Protection Provisions). ⁵

In its decision, the AAB recognized that the tax owed could be reduced by enforceable restrictions upon the property. However, the AAB found that the in kind concessions or services were not enforceable restrictions. The AAB reasoned that the concessions and services were not required by regulation but were offered by bidders as part of the franchise bidding process. The AAB also found that the concessions and services listed were not "land use restrictions" needed to implement a public policy of encouraging and maintaining effective land use planning. The AAB concluded that only these types of land use restrictions were excludable in its calculation of the economic rent.

The cable operators disagreed with the AAB's decision. They alleged multiple errors by the AAB, including the alleged erroneous taxation of the Rate Protection Provisions. In 1995, CAT and UACC filed a refund claim with the Santa Cruz County Board of Supervisors. In 1996, TCI filed a virtually identical claim for a refund. The claim for refund was denied by the Board of Supervisors.

CAT Partnership and UACC filed a complaint in superior court seeking a property tax refund. (§ 5141.) TCI filed a similar action and the two claims were consolidated. CAT Partnership, UACC and TCI all argued that it was improper to tax the Rate Protection Provisions because the provisions constituted enforceable restrictions. ⁶

After considering the evidence, the trial court ruled that the assessment of the Rate Protection Provisions was erroneous, void and illegal in its entirety. Since the AAB had assigned a separate taxable value to the Rate Protection Provisions, the trial court subtracted that value from the AAB's calculation of the in-kind portion of the economic rent and adjusted the figures with the Rate Protection Provisions excised. The trial court left the rest of the AAB property tax determination intact. ⁷

The County of Santa Cruz appeals the trial court's decision.

Standard of Review

We review questions of fact resolved in an administrative proceeding under the substantial evidence standard. Questions of law are subject to de novo review. (Bret Harte Inn, Inc. v. City and County of San Francisco (1976) 16 Cal.3d 14, 23, 127 Cal.Rptr. 154, 544 P.2d 1354.)

The AAB is required to use a reasonable method in estimating the value of property. (Property Tax Rule 3; De Luz Homes, Inc. v. San Diego County (1955) 45 Cal.2d 546, 563-564, 290 P.2d 544; Texaco, Inc. v. County of Los Angeles (1982) 136 Cal.App.3d 60, 186 Cal.Rptr. 16; Shubat v. Sutter County Assessment Appeals Bd., supra, 13 Cal.App.4th 794, 17 Cal.Rptr.2d 1.) The AAB's decision about which valuation methodology to use is a question of law subject to challenge if the valuation method is arbitrary, in excess of discretion, or in violation of specific standards imposed by law. (Bret Harte Inn, Inc. v. City and County of San Francisco, supra, 16 Cal.3d 14, 23, 127 Cal.Rptr. 154, 544 P.2d 1354.) Accordingly, the selection of a valuation method must be sustained unless it is arbitrary, in excess of discretion, or in violation of law. (GTE Sprint Communications Corp. v. County of Alameda (1994) 26 Cal.App.4th 992, 1002, 32 Cal.Rptr.2d 882.)

Discussion

I. Exhaustion of Administrative Remedies

Appellant argues that respondent TCI failed to exhaust its administrative remedies because TCI was not an applicant in the AAB proceeding. ⁸ As we explain below, we disagree.

Section 1603 permits "the party affected or his or her agent" to prosecute an appeal before the AAB. ⁹ TCI argues that CAT and UACC were "parties affected" and therefore it was permissible for CAT and UACC to be applicants before the AAB even though TCI was not. We need not determine whether CAT and UACC may be characterized as "parties affected" pursuant to 1603. This is because we conclude that the exhaustion requirement is satisfied in these particular circumstances.

The requirement of exhaustion of administrative remedies is a fundamental prerequisite of judicial jurisdiction in all California administrative agency matters. (Abelleira v. District Court of Appeal (1941) 17 Cal.2d 280, 292, 109 P.2d 942; Morton v. Superior Court (1970) 9 Cal.App.3d 977, 982, 88 Cal.Rptr. 533; County of Contra Costa v. State of California (1986) 177 Cal.App.3d 62, 77, 222 Cal.Rptr. 750.) The rule prevents premature judicial interference with the actions of the legislative branch, acting through statutorily authorized administrative agencies. It also permits disputes to be reviewed in the first instance by agencies presumably specially equipped to consider the matters consigned to them and...