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Cris K.
O’Neall is an attorney with the Los
Angeles law firm of Rodi, Pollock, Pettker, Galbraith &
Cahill. Mr. O’Neall specializes in handling property tax
matters, and has advised and represented numerous property taxpayers
in matters involving intangible assets and rights. Mr. O’Neall
can be contacted at cko@rodipollock.com.
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The treatment of intangibles in
the property taxation arena has always been troublesome, primarily
because of the difficulty with the manner of segregating intangible
assets and rights from tangible taxable property. This
difficulty, with which taxpayers and assessors alike have struggled
for many years, is embodied in the California Supreme Court’s 1948
decision in Roehm v. County of Orange which held that
intangible assets and rights be “reflected” in the assessment of
property.
For
many years, the meaning of the term “reflected” in Roehm
plagued property taxpayers, preventing them from excluding
non-taxable intangibles from the real property. However, over
the past decade, the logjam created by Roehm was finally
broken. During that time, nearly a dozen appellate court
decisions were issued, legislation was promulgated, and State Board
of Equalization publications came out explaining the term
“reflected” and, more importantly, establishing specific standards
for the proper handling of various intangible assets and rights in
the property tax context.
The
California Court of Appeal was the first to address the issue
directly. In the 1993 case of GTE Sprint Communications
Corp. v. County of Alameda, the First District of the
Court of Appeal, while acknowledging that intangibles be “reflected”
in assessing properties, nevertheless held that intangible assets
that were identified by a property taxpayer had to be valued and
removed by the taxing agency if a going concern valuation method
(income approach) was used to value the property.
Almost
simultaneously, the Fourth District Court of Appeal issued two
decisions describing how to segregate intangible assets and rights
from the value of taxable property. First, in County of
Orange v. Orange County Assessment Appeals Board the appellate
court held that using a cost approach method was a valid means for
directly determining the value of the tangible taxable property
alone. Then, in Service America Corp. v. County of San
Diego, the fourth appellate district held that that portion of
income attributable to intangible assets and rights had to be
excluded, and that only income generated by real property be used to
determine assessed value when an income approach method was used to
value the property.
Finally, the Third District
Court of Appeal in Shubat v. Sutter County Assessment Appeals
Board, following the lead of GTE Sprint, ruled that it
was appropriate to deduct the appraised value of specifically
identified intangible assets and rights from the value of a going
business concern in order to arrive at the assessed value of the
remaining tangible taxable property.
Relying upon these appellate
court precedents, the California Legislature took up the issue of
property taxes and intangibles, passing what became known as the
“Maddy Bill” in 1995. Codified as Revenue and Taxation Code
sections 110(c) through (f) and 212(c), these legislative provisions
put many of the issues resolved by the 1993 appellate court
decisions into statutory form. Unfortunately, the statutes
created some confusion by including a provision carried over from
Roehm, namely that the presence of intangibles be assumed in
order to put property to beneficial and productive use.
Fortunately, in 1998 the State
Board of Equalization promulgated Assessor’s Handbook Section 502
entitled “Advanced Appraisal.” A portion of Chapter 6 in that
handbook described in great detail the correct manner for handling
intangible assets and rights. Most importantly, the “Advanced
Appraisal” manual spelled out, at page 152, the requirement that
value associated with intangibles be excluded from a property’s
assessed value:
“[Revenue and Taxation Code]
sections 110(e) and 212(c) do not authorize adding an
increment to the value of taxable property to reflect the value of
intangible assets and rights necessary to put the taxable property
to beneficial or productive use. Instead, those sections
indicate that, in valuing taxable property, it is appropriate to
assume the presence of the intangible assets and rights which are
necessary to put taxable property to beneficial or productive use.
For example, a business which owns taxable property may need working
capital and other intangible assets in order to productively use its
tangible property. Although the presence of the intangible
assets is assumed in the valuation of the tangible property, this
does not mean that their values are included in that
valuation.” (Emphasis added)
This requirement was confirmed
in the most recent Court of Appeal decision on intangibles, Mola
Development Corp. v. County of Orange, which was issued by the
Fourth District in 2000, where the appellate court
stated:
“For purposes of its value to
California law, the Sweepster opinion is faulty mainly in
this regard: it included the value of a clear
intangible in the value of the real property …. The correct
approach is actually the opposite, given our Constitution’s mandate
to value just the property. * * * But that
is the result of the fact that we are only dealing with real
property tax valuations. If you buy real property plus an
intangible, you are only taxed on the value of the
property.”
It is also noteworthy that the
12th Edition of the Appraisal Institute’s leading
treatise on property valuation, The Appraisal of Real Estate,
published in 2001, also now counsels appraisers to segregate from
real estate value all value associated with intangible assets and
rights.
The groundwork by the Court of
Appeal, Legislature and State Board of Equalization appears to have
taken hold. For example, a Letter to Assessors setting forth
“Guidelines for the Assessment of Billboard Properties,” issued by
the State Board of Equalization in December 2002 (LTA No. 2002/078),
requires the exclusion of intangible asset value from the value of
taxable billboard properties. LTA No. 2002/078 also states that
the cost approach is the preferred method for determining assessed
value because, as explained in State Board of Equalization’s
“Advanced Appraisal” manual, the cost method does not capture the
value of intangible assets and rights.
The proper treatment of
intangible assets and rights by taxing authorities in recent years
is a bright spot for property taxpayers. However, more work
remains to be done. For example, the few appellate court
decisions which appear to condone assessment of intangibles need to
be distinguished and further explained. Those efforts, as well
as efforts to protect the gains taxpayers have made in the past
decade, must continue as part of the ongoing effort to “level the
playing field” for California taxpayers. |
