Time Warner Cable Inc. v. Cnty. of L. A.

• Decision Date: 19 July 2018
• Docket Number: B270062
• Citation: 25 Cal.App.5th 457,235 Cal.Rptr.3d 867
• Court: California Court of Appeals Court of Appeals
• Parties: TIME WARNER CABLE INC. et al. Plaintiffs and Respondents, v. COUNTY OF LOS ANGELES, Defendant and Appellant.

25 Cal.App.5th 457

235 Cal.Rptr.3d 867

TIME WARNER CABLE INC. et al. Plaintiffs and Respondents,

v.COUNTY OF LOS ANGELES, Defendant and Appellant.

B270062

Court of Appeal, Second District, Division 1, California.

Filed July 19, 2018

Mary C. Wickham, County Counsel, Albert Ramseyer, Deputy County Counsel; Glaser Weil Fink Howard Avchen & Shapiro and Elizabeth G. Chilton for Defendant and Appellant.

Gordon & Polland, Paul M. Gordon, Oakland; Sutherland, Asbill & Brennan, Eversheds Sutherland and Douglas Mo, Sacramento, for Plaintiffs and Respondents.

JOHNSON, J.

Time Warner Cable (Time Warner) operates a cable system that uses public rights-of-way in Los Angeles to provide cable television,¹ broadband, and telephone services. Time Warner initially only provided television services. Once changing technologies enabled broadband and telephone services to be delivered over cable rights-of-way, Time Warner and many other cable operators began to provide their customers broadband and telephone services over these same rights-of-way.

Time Warner’s right to use the public rights-of-way and to conduct business as a television cable operator are conferred via cable television franchise agreements with numerous local franchising authorities. The right to use the public rights-of-way (the possessory interest) is a taxable interest; the right to do business as a cable operator is not. The fee for these franchises is, by federal law, limited to no more than five percent of revenue generated from the provision of television services only.² Federal law also prohibits local franchising authorities from granting exclusive franchises.

The issues before us stem from a dispute between the parties as to how the County of Los Angeles (the County) may tax Time Warner’s possessory interests. The trial court found that the Assessor of the County of Los Angeles (the Assessor) may tax the possessory interests only on the franchise fee because anyone can obtain an identical franchise for five percent of television revenue. We disagree, as we find no legal restriction on the County valuing the possessory interests in providing all three services. We agree with the trial court that the Assessor’s valuation was not supported by substantial evidence. We agree with the trial court that the County erred in taxing the entire five percent of revenue rather than the value of the possessory interests alone. We also agree with the trial court that substantial evidence supported the Los Angeles County Assessment Appeals Board’s (the Board) finding that the reasonably anticipated term of possession of Time Warner’s rights-of-way was 10 years.

Accordingly, we affirm in part and reverse in part.

BACKGROUND

On January 1, 2005, Time Warner was party to 13 franchise agreements with public entities in the County. Each franchise included both a right to maintain wires and appurtenances—the distribution plant—on public rights-of-way (the possessory interest) and a right to provide cable services to subscribers. On July 31, 2006, Time Warner purchased the assets of Comcast and Adelphia, which included 77 additional franchises.³ Each franchise was originally granted for a 10-year term, but as of the assessment years of 2005 to 2008, each had fewer than 10 years remaining. Further, it was undisputed that pursuant to the Digital Infrastructure and Video Competition Act of 2006, Public Utilities Code section 5800 et seq. (DIVCA), the franchising authority for cable television systems would be reassigned to the California Public Utilities Commission as of January 2, 2008.

Time Warner’s acquisition of Comcast’s and Adelphia’s assets triggered a Proposition 13 reassessment of the newly-acquired possessory interests to determine their "base year" value, i.e., the value upon which current and future tax assessments would based. At the same time, Time Warner sought to reduce the property tax assessment of its legacy interests, contending they declined below the roll value. Time Warner thus initiated proceedings before the Board to dispute the value of the legacy interests.⁴

Eleven days before the commencement of the Board proceedings, the Assessor sent notice of his intent to augment the values of the possessory interests. Time Warner paid the resulting taxes then instituted refund proceedings before the Board to contest the Assessor’s valuation. The Board found against Time Warner on all grounds. Time Warner then filed the instant action in the superior court.

The trial court reversed the Board’s decision to uphold the Assessor’s valuation of Time Warner’s possessory interests based on television, broadband, and telephony revenue. The court reversed the Board’s finding that five percent of broadband and telephone revenue represented the fair market value of the possessory interest in providing these services. The court also reversed the Board’s determination that the Assessor could tax the full five percent of revenue rather than the portion of economic rent attributable to Time Warner’s possessory interests. The court upheld the Assessor’s use of a 10-year term in valuing Time Warner’s acquired possessory interests, finding substantial evidence supported the Board’s conclusion that Time Warner’s acquired franchises would be renewed.

DISCUSSION

A. Burden of proof

In this case, the Assessor bore the burden of proof on all valuation issues. Ordinarily, when the taxpayer appeals a property tax assessment, he or she has the burden of proving that the value on the assessment roll is incorrect, or that the property in question has been incorrectly assessed. ( Cal. Code Regs., tit. 18, § 321.) However where, as in this case, the assessor gives notice that he intends to seek a higher value than the one placed on the assessment roll, the burden shifts to the assessor to prove the higher value. ( Cal. Code Regs., tit. 18, § 313, subd. (f).)

B. Standard of review

" ‘Where a taxpayer challenges the validity of the valuation method used by an assessor, the trial court must determine as a matter of law "whether the challenged method of valuation is arbitrary, in excess of discretion, or in violation of the standards prescribed by law." [Citation.] Our review of such a question is de novo.’ " ( Charter Communications Properties, LLC v. County of San Luis Obispo (2011) 198 Cal.App.4th 1089, 1101, 131 Cal.Rptr.3d 455.) " ‘[W]here the taxpayer challenges the application of a valid valuation method, the trial court must review the record presented to the Board to determine whether the Board's findings are supported by substantial evidence but may not independently weigh the evidence. [Citations.] This court ... reviews a challenge to application of a valuation method under the substantial evidence rule.’ " ( Ibid ., italics added.)

We therefore review the Assessor’s choice of valuation method de novo, and the resulting valuation itself for substantial evidence.

C. General legal principles

Before turning to the issues in dispute between the County and Time Warner, we briefly summarize basic legal principles relevant to cable television franchising and the taxation of possessory interests.

1. Cable television franchising

Time Warner provides cable television, broadband, and telephone services through a "[m]ixed-[u]se" cable network. ( In the Matter of Implementation of Section 621(a)(1) of the Cable Communications Policy Act of 1984 As Amended by the Cable Television Consumer Prot. & Competition Act of 1992 (2007) 22 F.C.C. Rcd. 5101, 5155.) Federal law sets the maximum franchise fee a local franchising authority can collect at five percent of revenue from cable services. ( 47 U.S.C. § 542(b).) Under federal law, "cable service" only includes television and related video services, and revenue generated from broadband and telephone services cannot be included in the calculation of "gross revenue" for the purpose of determining the franchise fee. ( 47 U.S.C. §§ 542(b), 522(6).) In addition, federal law prohibits local franchising authorities from "unreasonably refus[ing] to award an additional competitive franchise." ( 47 U.S.C. § 541(a)(1).) Thus, franchising authorities are prohibited from granting an exclusive franchise to any prospective cable television operator.

2. Taxation of possessory interests

Unless exempt, all property is taxable in proportion to its "full value." ( Cal. Const., art. XIII, § 1 ; Rev. & Tax. Code, § 201.) " ‘Property’ includes all matters and things, real, personal, and mixed, capable of private ownership." ( Rev. & Tax. Code, § 103.) Real property includes a possessory interest in land, including a cable company’s right-of-way granted by a public entity. ( Rev. & Tax. Code, §§ 104, 107 ; American Airlines, Inc. v. County of Los Angeles (1976) 65 Cal.App.3d 325, 328–329, 135 Cal.Rptr. 261 ; Cox Cable San Diego, Inc. v. County of San Diego (1986) 185 Cal.App.3d 368, 378, 229 Cal.Rptr. 839.) However, the right to engage in business as a cable service provider is not an assessable property interest. ( County of Stanislaus v. Assessment Appeals Bd . (1989) 213 Cal.App.3d 1445, 1452, 262 Cal.Rptr. 439.)

Full value means " ‘full cash value’ or ‘fair market value[,]’ ... the amount of cash or its equivalent that 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 the buyer and the seller have 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." ( Rev. & Tax. Code, § 110, subd. (a).) Property is therefore assessed based on how a hypothetical purchaser in an open and competitive market would value the property, including the normal uses to which the purchaser could put it and the enforceable restrictions upon those uses.

The methods for valuing a possessory interest granted to a cable television operator via franchise "shall include, but not be...