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Western States Petroleum Association v. State Board of Equalization

January 19, 2012

WESTERN STATES PETROLEUM ASSOCIATION, PLAINTIFF AND RESPONDENT,
v.
STATE BOARD OF EQUALIZATION, DEFENDANT AND APPELLANT.



APPEAL from a judgment of the Superior Court of Los Angeles County, Robert L. Hess, Judge. Affirmed. (Los Angeles County Super. Ct. No. BC403167)

The opinion of the court was delivered by: Bigelow, P. J.

CERTIFIED FOR PUBLICATION

For more than 25 years, the State Board of Equalization (SBE) directed county assessors to assess the value of the "real property" at petroleum refineries by applying valuation formulas generally applicable to all industrial and manufacturing properties. (See Cal. Code Regs., tit. 18, § 461.) Then, responding to entreaties from a number of county-level government officials, SBE concluded that it had become necessary to adopt new valuation formulas uniquely applied to petroleum refineries. (See Cal. Code Regs., tit. 18, § 474 (hereafter Rule 474).) The current litigation by the Western States Petroleum Association (WSPA) followed. WSPA filed a complaint for declaratory relief that Rule 474 was invalid for several reasons, including that SBE had violated various requirements of the Administrative Procedures Act (APA; see Gov. Code, § 11340 et seq.) in adopting Rule 474 and/or that Rule 474 was inconsistent with constitutional law (see Cal. Const., art. XIIIA) and statutory law (see Rev. & Tax. Code, § 51, subd. (d)). On materially undisputed facts presented in the context of cross-motions for summary judgment (MSJ), the trial court declared Rule 474 invalid, and entered judgment in favor of WSPA. SBE appeals. We affirm.

FACTS

Background: The Valuation of Real Property

From California's earliest days, its residents and business enterprises have pursued their economic activities and expectations in light of the constitutional principle that "'all property in this state shall be taxed in proportion to its value, to be ascertained as directed by law . . . .'" (State Bd. of Equalization v. Board of Supervisors (1980) 105 Cal.App.3d 813, 820, quoting Cal. Const. of 1849, art. XI, § 13.) This constitutional principle remains in influence in present times. (See Cal. Const., art. XIII, § 1, subd. (a) ["All property is taxable . . . ."].) At the same time, however, the defining or classifying of what constitutes "real property," or "tangible personal property," or any other cognizable property interest subject to taxation, is largely a legislative and/or regulatory function, as is the establishment of the rules that prescribe the formulas by which the value of real property or other types of taxable property is to be determined. Created by state constitutional amendment in 1879, SBE is an elective body with the authority, among its other powers, to assure that real property assessment practices -- i.e., valuation formulas -- are equalized and made uniform across our state so that real property owners share the load equally when it comes time to pay their real property taxes. (See Cal. Const., art. XIII, §§ 17, 18; and see also Gov. Code, § 15606.)

The issues in case before us today grow out of the valuation intricacies involved when assessors assess the value of the real property at an industrial or manufacturing property. These valuation intricacies involve the interplay between valuing the land, valuing the improvements, i.e., buildings and structures, and valuing the fixtures on the site such as machinery and equipment, which are more-or-less affixed. As a general proposition, the definition of real property for purposes of ad valorem real property taxes encompasses all three of the components noted in the previous sentence. (See Rev. & Tax. Code, §§ 104, 105; and see generally Morse Signal Devices v. County of Los Angeles (1984) 161 Cal.App.3d 570, 577.) The noted interplay is the result of the long-recognized accounting realities that fixtures typically depreciate in value year-to-year, whereas land and improvements typically appreciate in value year-to-year, the last few years of our state's history notwithstanding.

As best as we are able to discern from the parties' briefs on appeal and the appellate record, assessors for many years leading up to the late 1970's assessed the value of land and improvements as one appraisal unit, and assessed the value of fixtures as a separate appraisal unit in order to account for depreciation. And, it appears from the appellate record that while the owner of a manufacturing or industrial property may have received a single real property tax bill each year, the bill would have been the reflection of an assessed value for land and improvements, and an assessed value for fixtures. The total assessed value of the real property would then be computed by adding the two distinct appraisal units, with the ad valorem real property tax then imposed on the total assessed value. As a result of the practice of applying these separate appraisal units valuation formulas, the value of the fixture-related appraisal unit of an industrial or manufacturing property would, in the absence of the addition of new fixtures, decline each year to reflect depreciation. This means that the amount of real property taxes attributable to fixtures would also decline.*fn1

In June 1978, the voters of California adopted Proposition 13 (Prop. 13), adding article XIIIA to the California Constitution.*fn2 Broadly summarized, Prop. 13 restricts the "maximum amount of any ad valorem tax on real property" to a prescribed percent of the "full cash value of such property," and requires that the "full cash value" of real property be measured as of the time of acquisition. (See art. XIIIA, § 1.) This acquisition value is commonly known as the base year value. Prop. 13 also limits any year to year increase in the base year value to a prescribed inflation factor, not to exceed two percent per year. (See art. XIIIA, § 2). In short, Prop. 13 changed our state's real property tax system from a system based on the current market value of real property, to a system based on the acquisition value of real property, plus an allowable, trended or indexed increase over time. Basically, that means that real property owners do not pay property taxes on unrealized or non-monetized increases in the value of their real property as it is defined under the law. After Prop. 13, as it was before, the task of classifying or defining what constitutes real property for purposes of any ad valorem real property tax, as well as the adoption of formulas by which the value of a taxable unit of such real property is to be computed, largely remains a legislative and/or regulatory function, but restricted by Prop. 13.

In its original, initiative version, Prop. 13 contained no language on the subject of what would occur when the market value of real property declined below its trended or indexed taxable value -- its Prop. 13 value -- due to a disaster or economic conditions. In November 1978, the voters of California addressed this issue by adopting Proposition 8 (Prop. 8), which amended Prop. 13. Prop. 8 provides that the taxable trended or indexed value of real property enrolled on an assessor's books, its Prop. 13 value, may be adjusted down to reflect its actual fair market value when the actual fair market value of the property declines below its taxable trended or indexed value, i.e., its Prop. 13 value, due to a disaster or economic conditions. (See art. XIIIA, § 2, subd. (b).)

After the voters of California adopted Prop. 13 and Prop. 8 in the 1978 elections, the Legislature formed a task force to study the implementation of the new real property tax system mandated under the propositions. In January 1979, the task force submitted a report and recommendations to the Assembly Committee on Revenue and Taxation, the so-called "Task Force Report." The Task Force Report is well-recognized as a statement of legislative intent for purposes of the interpretation of the statutes enacted to implement Prop. 13 and Prop. 8. (See, e.g., Auerbach v. Assessment Appeals Bd. No. 1 (2006) 39 Cal.4th 153, 161.)

Among its myriad elements, the Task Force Report recommended that any statute governing the formulas to be used for determining whether a particular taxable unit of real property had suffered a decline in value should be based on a continuation of the then widely-followed practice of assessing the value of real property by the appraisal unit approach. In the words of the Task Force Report: " . . . [T]he purpose of Prop. 13 was to place a cap on the value of [real] property in any one year, while Prop. 8 sought to allow the values [of real property] to rise and fall without restriction at any point below this cap, should actual market values so dictate. [¶] The purpose of the 'appraisal unit' concept is to ensure that these increases or declines in value be measured in the same manner as such property was appraised prior to Prop. 13." (Italics added.)*fn3

Effective July 1979, the Legislature enacted a number of Revenue and Taxation Code sections to implement the property tax system mandated by Prop. 13 and Prop. 8. (See Stats. 1979, ch. 242, p. 506.) Within this legislation, Revenue and Taxation Code section 51 prescribes the formulas for fixing the two real property value figures which are to be compared in determining whether a decline in value has occurred.*fn4 It provides that an assessor should compare the actual current market value of a particular unit of real property against its enrolled "Prop. 13 value" in order to determine whether the former figure is less than the latter figure, thus evidencing a decline in value.

Under section 51, subdivisions (a)(1) and (a)(1)(D), the Prop. 13 value of real property as of the lien date (a given tax year), is its "base year value, compounded annually since the base year by an inflation factor" which in "no event shall . . . exceed 2 percent of the prior year's value." Under section 51, subdivision (a)(2), the current market value of real property as of the lien date, is measured as its "full cash value [in the event it was exposed for sale in an open market transaction in which neither the buyer or seller had an unfair advantage] . . . , taking into account reductions in value due to damage, destruction, depreciation, obsolescence, removal of property, or other factors causing a decline in value."*fn5

This brings us to section 51, subdivision (d),*fn6 which provides: "For purposes of this section [governing the valuation of real property in a decline-in-value examination], 'real property' means that appraisal unit that persons in the marketplace commonly buy and sell as a unit, or that is normally valued separately." (Italics added.) Here ends our historical review of the constitutional and statutory underpinnings of the current case.

SBE and Its Regulations

As noted above, SBE tries to equalize and make uniform throughout the state the real property assessment practices employed by assessors. To that end, SBE adopts rules that "govern assessors when assessing . . . ." (See Cal. Code Regs., tit. 18, § 1.) In 1979, after the voters adopted Prop. 13 and Prop. 8, and after the Legislature enacted statutes to implement the tax system which was constitutionally-mandated by the propositions, SBE adopted California Code of Regulations, title 18, section 461 (hereafter Rule 461).*fn7 From then until now, Rule 461 has prescribed (with exceptions that are discussed below) the valuation formulas that are to be applied when determining "real property value changes" resulting from a "purchase, change of ownership or a decline in value." From 1979 to the present day, Rule 461 has remained materially the same, with minor changes that mostly deal with format.

Rule 461(e) provides: "Declines in values will be determined by comparing the current lien date full value of the appraisal unit [i.e., its value in the event it was exposed for sale in a fair, open market transaction] to the indexed base year full value of the same unit [i.e., the taxable value of the appraisal unit as measured and enrolled under Prop. 13] for the current lien date. Land and improvements constitute an appraisal unit . . . . For purposes of this subdivision, [i.e., for purposes of determining a decline in value] fixtures and other machinery and equipment classified as improvements constitute a separate appraisal unit." (Italics and underscoring added.)

An "Assessors' Handbook" issued by SBE in October 2002 explains Rule 461 in these terms: "Measuring declines in value can be simple when only one appraisal unit is involved. Fixtures, for example, as a separate appraisal unit are valued at current market value on the lien date and at the indexed base year value [i.e., the Prop. 13 value], and the lower value is enrolled." The Assessors' Handbook then explains that, when measuring declines in values "in a total property appraisal" situation, i.e., where land and buildings are examined in an appraisal unit, and fixtures are examined in a separate appraisal unit, the task "may become more difficult" because each appraisal unit must be examined "separately." The Assessors' Handbook provides a decline in value example in which the land and buildings are examined as an appraisal unit ("Unit 1') and measured by a current market value ($575,000) and a Prop. 13 factored or indexed base year value ($185,000), with the lower figure ($185,000) enrolled as the assessed value of that appraisal unit. In the example, fixtures are examined as a separate appraisal unit ("Unit 2") and measured by a current market value ($40,000) and a Prop. 13 factored or indexed base year value ($52,000), with the lower figure ($40,000) enrolled as the assessed value of that appraisal unit. The example concludes by calculating a total assessed property value consisting of "Unit 1 Unit 2" which measures in at $225,000 ($185,000 for land and improvements and $40,000 for fixtures).

In September 2006, after Rule 461 had been applied to petroleum refineries for more than 25 years, SBE's board members voted 3-2 to adopt Rule 474 to address specifically "the valuation of the real property, personal property, and fixtures used for the refining of petroleum." In December 2006, SBE submitted Rule 474 to the Office of Administrative Law (OAL) for review. In February 2007, SBE withdrew its submission. In April 2007, SBE resubmitted Rule 474 to the OAL. In June 2007, the OAL rejected Rule 474 upon determining that SBE's "Initial Statement of Reasons" (ISR) why it was adopting the rule (see Gov. Code, § 11346.2, subd. (b)) was inadequate. In September 2007, SBE submitted Rule 474 with a revised ISR. SBE thereafter submitted a "Final Statement of Reasons," including two addenda. (Gov. Code, § 11346.9.) Broadly summarized, SBE's Final Statement of Reason's for Rule 474 is the agency's official proclamation that it had determined it was necessary to adopt a special rule applicable to petroleum refineries in order to implement Prop. 8's decline in value provisions correctly.

In November 2007, the OAL approved Rule 474 for transmittal to the Secretary of State and publication in the California Code of Regulations. Rule 474 became effective in December 2007.

Rule 474

Rule 474 reads:

"(a) The provisions of this rule apply to the valuation of the real property, personal property, and fixtures used for the refining of petroleum.

"(b) General.

"(1) The unique nature of property used for the refining of petroleum requires the application of specialized appraisal techniques designed to satisfy the requirements of article XIII, section 1, and article XIIIA, section 2, of the California Constitution. To this end, petroleum refineries and other real and personal property associated therewith shall be valued pursuant to the principles and procedures set forth in this section.

"[¶] . . . [¶]

"(c) Definitions For the purposes of this section.

" [¶] . . . [¶]

(2) 'Appraisal unit' consists of the real and personal property that persons in the marketplace commonly buy and sell as a unit.

"(d) Declines in Value. For the purposes of this section:

"(1) Declines in value of petroleum refining properties will be determined by comparing the current lien date full value of the appraisal unit [i.e., its value in the event it was sold in an open market transaction] to the indexed base year full value [i.e., the Prop. 13 value] of the same unit.

"(2) The land, improvements, and fixtures and other machinery and equipment classified as improvements for a petroleum refining property are rebuttably presumed to ...


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