Trailer Train Co. v. State Bd. of Equalization

• Decision Date: 30 April 1986
• Citation: 225 Cal.Rptr. 717,180 Cal.App.3d 565
• Court: California Court of Appeals Court of Appeals
• Parties: TRAILER TRAIN COMPANY, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION, Defendant and Respondent. (Two Cases) AO21208, AO27732.

Page 717

225 Cal.Rptr. 717

180 Cal.App.3d 565

TRAILER TRAIN COMPANY, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION, Defendant and Respondent. (Two Cases)

AO21208, AO27732.

Court of Appeal, First District, Division 4, California.

April 30, 1986.

Review Denied Aug. 13, 1986.

Weyman I. Lundquist, David H. Neeley, Patricia L. Shanks, Jonathan P. Hayden, Heller, Ehrman, White & McAuliffe, San Francisco, for plaintiff and appellant.

Ephraim Margolin, Nicholas Arguimbau, Christina Hall, Karin Kramer, Kramer & Hall, San Francisco, for amicus curiae on Behalf of plaintiff and appellant.

John K. Van de Kamp, Atty. Gen., Edward P. Hollingshead, Robert D. Milam Deputy Attys. Gen., Sacramento, for defendant and respondent.

CHANNELL, Associate Justice.

Respondent State Board of Equalization (Board) annually assesses and levies a property tax on appellant Trailer Train Company's fleet of flatcars pursuant to the Private Railroad Car Tax Law (PRCTL). (Rev. & Tax. Code, § 11401.) ¹ In these consolidated appeals, Trailer Train challenges adverse trial court rulings that upheld the Board's acts of levying an escape assessment for the 1976 tax year by disallowing a claim for functional obsolescence (Case No. AO21208) and refusing to use only the income capitalization method to value Trailer Train's fleet of flatcars for the tax years 1977 through 1980 (Case No. AO27732) under the PRCTL. (§§ 11201 et seq.)

In its appeal of the 1976 escape assessment, Trailer Train contends that: (1) the Board had no authority to levy the escape assessment; (2) the Board abused its discretion when applying an assessment different from that used in the original assessment; (3) substantial evidence did not support the Board's findings; and (4) the trial court erred in granting the Board's motion for summary judgment. In its appeal of the Board's 1977-1980 assessments, Trailer Train contends that: (1) Board procedures violated due process; (2) it properly exhausted its administrative remedies before seeking judicial relief; and (3) the Board violated its own rules by using the cost method to assess Trailer Train's car. In both appeals, Trailer Train contends that its flatcars are exempt from taxation under the PRCTL and that the trial court should have exercised its independent judgment when reviewing the Board's findings. An amicus brief also supports Trailer Train's due process contentions. After considering each contention, we find them meritless and affirm the judgments.

I. FACTS

A. Escape Assessment for 1976

Appellant Trailer Train is owned by railroad companies who lease its flatcars. In preparation for the 1976 tax year assessment, Trailer Train submitted its annual report on its flatcars along with claims for both economic and functional obsolescence ² to respondent Board. The Board staff and Trailer Train representatives discussed the obsolescence claims. After viewing a slide presentation, Board staff members agreed that some of Trailer Train's flatcars were becoming functionally obsolete because they were too short to accommodate the optimum number of industry-standard freight containers. The staff asked Trailer Train to provide objective data to support the amount of lost value it attributed to functional obsolescence, but Trailer Train did not do so. With reservations, the staff eventually accepted both the economic and functional obsolescence claims in the estimated amounts when levying the private car tax for the 1976 tax year. That tax was based on a value determined by using 80 percent of the cost method calculation and 20 percent of the income method calculation.

When considering Trailer Train's 1977 tax, Board supervisor Rudy Bischof reviewed the 1976 assessment. Bischof questioned the obsolescence claims included in the 1976 assessment. He noted that the fact that Trailer Train's fleet was used over 90 percent of the time did not tend to support its claim that 28 percent of the fleet was obsolete. The Board staff subsequently audited Trailer Train to again seek objective support for these claims. Again, Trailer Train did not provide any objective data to support its claim and the audit revealed no such information. Bischof determined that the claim for economic obsolescence included loss of value for all forms of obsolescence, including functional obsolescence. Acting on the staff's recommendation, the Board levied an escape assessment, ^{3 3} disallowing the claim for functional obsolescence. Trailer Train was assessed an additional $280,072 in back taxes. After Trailer Train's formal protest, the Board conducted hearings, during which Board members again asked Trailer Train to provide the objective data needed to support the functional obsolescence claim. When no data was supplied, the Board upheld the escape assessment.

Although the Board considered offsetting the escape assessment taxes due against an unrelated refund the Board owed Trailer Train, Trailer Train paid the tax under protest. ⁴ The company brought suit for refund of the escape assessment. The complaint cited three causes of action: (1) that Trailer Train's flatcars were exempt from the PRCTL; (2) that the escape assessment was improper because it was based on a change of opinion by Board staff; and (3) that the escape assessment constituted a denial of due process. Trailer Train moved for summary judgment on the second cause of action. The Board countered by filing its own motion for summary judgment on all three causes of action. Trailer Train's response to the Board's motion did not discuss the due process cause of action. The trial court denied Trailer Train's motion for summary judgment and granted the Board's motion on all three causes of action. Trailer Train filed a timely appeal from the judgment entered in the 1976 escape assessment action.

B. Assessments for 1977-1980

The second appeal, involving assessments for tax years 1977-1980, arises as a result of a continuing dispute between the parties about the proper method of valuing Trailer Train's fleet. Simply put, Trailer Train would have the Board calculate value solely on the basis of the income capitalization method of valuation. (See Cal.Admin. Code, tit. 18, § 8.) Instead, the Board applies the replacement cost method of valuation (see Cal.Admin. Code, tit. 18, § 6), at one time in combination with the income approach and now as its exclusive method of valuation. The income capitalization method computes the value of a car on the basis of the income that a reasonable purchaser could earn during the future life of the car. The replacement cost method computes the value of a used car on the basis of the cost to replace it with a new car, allowing deductions for the car's depreciation in value resulting from its earlier use. (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; see also Cal.Admin. Code, tit. 18, §§ 6, subd. (b), (e), 8, subds. (b), (c).)

In 1977, the Board staff calculated the fleet's value using 70 percent of the cost method calculation and 30 percent of the income method calculation. Challenging the assessment, Trailer Train urged the sole use of the income method, which would result in a lower value for each of its cars. However, the Board adopted the staff recommendation, finding that Trailer Train's unusually high cost of maintenance and repair made its income too low to justify using the income method.

In 1978, the staff valued the fleet using 66- 2/3 percent of the cost method calculation and 33- 1/3 percent of the income method calculation. Trailer Train again challenged the Board's valuation, contending that its rental rates were competitive with rates set by the Interstate Commerce Commission (ICC) for the lease of cars owned by railroad companies ("interchange rates"), that it earned a reasonable profit on its fleet, that its maintenance costs were reasonable, and that its fleet should be valued as a unit, rather than on a per-car basis. ⁵ The Board found that Trailer Train's income method calculation did not comply with Board rules (see Cal.Admin Code, tit. 18, § 8) and adopted its staff's recommendation.

The close relationship between Trailer Train and the owner-railroad companies had already caused the staff members to suspect that the fleet's actual income did not reflect its potential income. By this time, the Board discovered a resolution of Trailer Train's directors supporting the Board's conclusion that the rental income received for use of the fleet did not include a reasonable profit. Trailer Train's directors and major shareholders--those who set its rates--were also its major users--those who pay the rates. This evidence of the lack of an arm's distance relationship between Trailer Train and the railroads it served tended to support the conclusion that Trailer Train's actual income did not reflect the full income that the fleet was capable of earning.

In 1979 and 1980, the staff computed the value of the fleet entirely on the basis of the cost method. Trailer Train contested these valuations, contending that its fleet was exempt from the PRCTL and that the state was taxing its flatcars twice, once to owner Trailer Train and once to the user railroads. ⁶ Trailer Train again argued for exclusive use of the income method and contended that the Board staff had not complied with its rules. The Board still disagreed with Trailer Train and relied solely on the cost method when computing the value of the fleet.

Trailer Train filed suit for refund for each tax year between 1977 and 1980. Each suit made the same claims: that Trailer Train was exempt from the PRCTL; that only the income method of valuation should be applied; that Board findings were not supported by substantial evidence; that Board procedures did not comport with due process; and that the Board's action resulted in multiple taxation. The four cases were consolidated for a court trial, at which Trailer...