226 Cal. App. 4th 471
Cal. Ct. App.2014Background
- SHC Half Moon Bay (owner) purchased the Ritz-Carlton Half Moon Bay in 2004; purchase price included tangible property and claimed intangibles. County Assessor enrolled the property at essentially purchase price for Proposition 13 purposes.
- SHC claimed $16,850,000 of the purchase price represented nontaxable intangibles (workforce, leasehold in employee parking, golf-course operator agreement, and goodwill) based on a FASB 141 allocation.
- The Assessor used the income (Rushmore) approach, deducting management and franchise fees (about $1.6M) and personal property, producing a valuation the Board upheld.
- Board found the income/Rushmore approach appropriate, treated the Assessors’ Handbook as nonbinding guidance, and concluded management/franchise fees largely captured goodwill.
- SHC sought a refund in superior court; trial court upheld the Board. On appeal the Court of Appeal reviewed methodology de novo and reversed for failure to identify and remove certain intangibles.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Assessor's income/Rushmore method improperly included nontaxable intangible assets in valuation | Assessor failed to identify, value, and deduct specific intangibles (workforce, parking leasehold, golf agreement, goodwill) as required by Cal. law and the Assessors’ Handbook | Rushmore/income method is accepted industry practice; deducting management and franchise fees removes intangible value | Held for SHC: method was legally deficient because it failed to attribute and deduct the value of the workforce, parking leasehold, and golf agreement prior to taxation; goodwill issue was a factual dispute resolved by Board and sustained on substantial-evidence review |
| Standard of review: de novo vs. substantial evidence when taxpayer challenges methodology | De novo — challenge attacks valuation methodology (legal question) | County: substantial evidence because income approach is valid and this is an application issue | Held de novo applies when taxpayer challenges the valuation method itself; here SHC challenged methodology, so de novo review appropriate |
| Whether deducting management and franchise fees automatically removes all intangibles (including goodwill) | Deduction of fees does not remove distinct intangibles; Assessors’ Handbook requires separate identification and deduction | Deducting market-rate management/franchise fee removes majority (or all) intangible/business value, including goodwill | Held partially for County on goodwill: Board’s factual finding that fees captured goodwill was supported by substantial evidence; but fees did not capture the workforce, parking leasehold, and golf agreement, so those must be separately deducted |
| Whether the Assessors’ Handbook is binding on assessors and dispositive here | Handbook prescribes identifying and valuing intangibles and supports SHC’s approach | Handbook is guidance only and not binding; industry practice supports Rushmore method | Held: Handbook is nonbinding guidance but persuasive; its principles align with statutory commands to exclude intangibles — the Assessor nevertheless failed to meet the statutory requirement to identify and remove certain intangibles |
Key Cases Cited
- Elk Hills Power, LLC v. Board of Equalization, 57 Cal.4th 593 (Cal. 2013) (section 110 requires identifying and deducting intangibles that directly enhance an income stream before taxation)
- Sky River LLC v. County of Kern, 214 Cal.App.4th 720 (Cal. Ct. App. 2013) (de novo review applies to methodological legal challenges; income-method elements must comply with rules)
- GTE Sprint Communications Corp. v. County of Alameda, 26 Cal.App.4th 992 (Cal. Ct. App. 1994) (assessor must identify and exclude nontaxable intangibles; cannot ignore taxpayer evidence)
- Service America Corp. v. County of San Diego, 15 Cal.App.4th 1232 (Cal. Ct. App. 1993) (challenge to inclusion of going-concern value is legal/methodological)
- Union Pacific Railroad Co. v. State Bd. of Equalization, 231 Cal.App.3d 983 (Cal. Ct. App. 1991) (if method inherently produces systematic errors for property class, issue is legal)
- De Luz Homes v. County of San Diego, 45 Cal.2d 546 (Cal. 1955) (describes income method and capitalization approach to value)