Southern Pacific Transportation Co. v. State Bd. of Equalization

Decision Date06 May 1987
CourtCalifornia Court of Appeals Court of Appeals
PartiesSOUTHERN PACIFIC TRANSPORTATION COMPANY et al., Plaintiffs and Appellants, v. STATE BOARD OF EQUALIZATION et al., Defendants and Respondents. Civ. C000011.
Pohle, Johnson & Mitchell, Michael L. Johnson, Sacramento, Arnold I. Weber, William E. Saul and Claude F. Kolm, San Francisco, for plaintiffs and appellants

John K. Van de Kamp, Atty. Gen., Edward P. Hollingshead, Deputy Atty. Gen., L.B. Elam, County Counsel, Monte L. Fuller, Deputy County Counsel, Sacramento, George Agnost, City Atty., and John J. Doherty, Deputy City Atty., San Francisco, for defendants and respondents.

BLEASE, Associate Justice.

This is an action by Southern Pacific Transportation Company (Southern Pacific) to obtain a refund of property taxes it paid for the year 1977 predicated upon its claim that the State Board of Equalization (Board) illegally assessed its property. (Rev. & Tax. Code, § 5140.) 1 The Board was granted a summary judgment and Southern Pacific appeals. We will hold that the Board failed to give Southern Pacific fair notice of the method or methods, if any, by which it assessed the value of its property, sufficient to permit Southern Pacific to challenge the assessment in administrative proceedings before the Board. That conclusion compels the reversal of the

summary judgment with directions to the trial court to remand the case to the Board for further proceedings.

FACTS AND PROCEEDINGS

On May 24, 1977, the Board assessed the fair market value of the property of Southern Pacific for the year 1977, as unitary property, 2 in the amount of $715,000,000. The Board sent a notice of the assessment to Southern Pacific setting forth that amount, accompanied by a single page containing appraisal data prepared by the Board staff. The data included six methods of valuing the property, the values derived from their application to the property, and a staff estimate of its unitary value as $600,000,000.

Southern Pacific filed a petition for reassessment (§ 741), challenging the assessment as arbitrary or as predicated on cost factors which are not valid criteria of the value for railroad property. The appropriate method of determining the fair market value of the property, it claimed, is the earning capacity of the company. A hearing was held before the Board on June 13, 1977. The Board took official notice of its case files. Southern Pacific introduced no other evidence. It argued that the historical cost and reproduction cost methods are not reliable indicators of the fair market value of railroad property, as recognized by the Board's own rules and publications and past practices. The Board denied the petition.

The Board made findings, incorporating the previously noticed staff data, which stated: "In reaching its full value conclusion, the Board had before it the following staff calculated value indicators:

1. Historical Cost Less Depreciation

                        (historical cost)                 $  814,874,082
                  2.  Reproduction Cost Less
                        Depreciation (reproduction cost)  $2,373,781,524
                  3.  Capitalized Earning Ability
                        (capitalized earnings)
                      A. Based on net operating
                        revenue for one year              $  658,765,298
                      B. Based on averaged net
                        operating revenue for five years  $  591,262,216
                  4.  Stock and Debt Value (calendar
                        year)                             $  505,285,000
                  5.  Stock and Debt Value (February 28)  $  499,953,000"
                

(Emphasis added.)

Southern Pacific paid the disputed taxes and filed a claim for refund with each of the taxing entities. (§ 5096, et seq.) The claims were rejected and this action followed. The complaint asserts: (1) the assessed amount was arbitrary, without valid support in the record, and not compatible with any calculation by the Board's staff; (2) the cost factors, i.e., historical cost and reproduction cost, should not be given any weight; (3) capitalized income value as calculated by the staff was excessive; and (4) the staff's calculation of the stock and debt value was excessive.

The Board answered and alleged procedural defects in Southern Pacific's challenge before the Board. It was granted a summary judgment on grounds that (1) since the use of cost factors was not shown to be invalid as a matter of law, the assessed amount was not arbitrary, and (2) Southern Pacific's other claims were barred for failure to raise them in the administrative forum. This appeal from the ensuing judgment followed.

DISCUSSION
I Introduction

This case involves a dispute about the Board's methods of assessment of the fair market value of Southern Pacific's property. It also involves a question of the notice which was due Southern Pacific in order that it might effectively exercise its statutory right to a hearing to resolve the dispute. These issues are intertwined because there were a multiplicity of potential methods by which the Board might have assessed Southern Pacific's property and Southern Pacific was given no notice of which, if any, of them was applied.

In general, there are three recognized methods (plus their variations) by which to measure the (hypothetical) fair market value of property; comparable sales; the cost of the component assets; and comparable investments yielding the same income. (See e.g., De Luz Homes, Inc. v. County of San Diego (1955) 45 Cal.2d 546, 563-564, 290 P.2d 544; Cal.Admin.Code, tit. 18, §§ 4, 6, and 8.) Given their variations, six separate methods of valuation, plus their combinations, were potentially at issue in this case.

Each of these methods utilizes unique indicia of value. The reliability of each method depends upon distinct considerations. For comparable sales, these considerations include the number, remoteness, and comparability of sales. For the cost of components, some variables are the accuracy of valuation, the liquidity of the assets and the premium attributable to their integration. For comparable investments, the variables include the comparability and accuracy of projected rates of return. The varying nature of property makes it reasonable at times to assess fair market value by selecting one method alone and at other times by combining the methods giving proportionate weights to the disparate indicia of value. (See De Luz Homes, Inc., supra, 45 Cal.2d at p. 564, 290 P.2d 544.)

Southern Pacific was given no notice of the method or methods used by the Board, if any, among the six possibilities, plus their combinations, suggested to Southern Pacific by the staff analysis which accompanied the notice of assessment. Nonetheless, at the Board hearing following the assessment it tendered challenges to some, though not all, of these methods. It added challenges in the trial court not tendered to the Board. As to these it was found that Southern Pacific had failed to exhaust its administrative remedies before the Board. 3

Southern Pacific does properly contend that the Board's assessment is improper on two grounds. First, assuming that the Board utilized the cost of assets methods, historical cost or reproduction cost, it argues that neither method is appropriate because of the nature of the railroad industry. As appears, use of the historical cost method is improper per se and the use of the reproduction cost method is suspect. Second, Southern Pacific claims that the Board failed to meet its statutory obligation to state its method of valuation. (§ 744, subd. (a).) Southern Pacific argues that there is no stated or implicitly obvious method disclosed by the Board's notice or findings which shows why the assessed value straddles the figures derived by the Board's staff. These grounds have merit and compel reversal of the judgment upholding the Board's assessment.

As we will show, the Board's action failed to comply with the requirements of law because, although Southern Pacific was informed of six different methods by which the value of its property might be measured, it was not informed if or whether one or more of them was actually used to determine the amount assessed. This failure was compounded by its replication in the findings of the Board. The nature of these errors suggests that the assessment itself was arbitrary because it was not based upon any standard of assessment. In any of these cases, the Board's assessment action exceeded the bounds of law. If we presume in favor of the Board that it used (say) the two methods giving values between which the assessed value was located, the assessment is illegal because the Board's use of (upper and closest) historical cost method is outlawed by the Board's own regulations.

As a predicate to the detailed exposition of these conclusions, we examine the methods of valuation which the Board may apply and the procedures which must be afforded the taxpayer.

II The Standard of Valuation

The California Constitution mandates that the Board annually assess property owned or used by railroad companies. (Cal. Const., art. XIII, § 19.) 4 Such property is subject to taxation to "the same extent and in the same manner as other property." (Ibid.) It must be assessed at its "fair market value or full value." (§ 722; see also fn. 4, infra.) Fair market value "means the amount of cash or its equivalent which property would bring if exposed for sale in the open market under conditions in which neither buyer nor seller could take advantage of the exigencies of the other and both with knowledge of all of the uses and purposes to which the property is adapted and for which it is capable of being used and of the enforceable restrictions upon those uses and purposes." (§ 110.) 5

The measurement of fair market value may be a difficult and elusive undertaking. Nonetheless, "no property may escape taxation because of the difficulty of determining its full cash value." (Bret Harte Inn, Inc. v. City and County of San Francisco (1976) 16 Cal.3d 14, 23, 127...

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