APPEAL from a judgment of the Superior Court of Kern County, No. S-1500-CV-269386 William D. Palmer, Judge.
Cahill, Davis & O’Neall, C. Stephen Davis, John D. Cahill and Andrew W. Bodeau for Plaintiff and Appellant.
Theresa A. Goldner, County Counsel, and Jerri S. Bradley, Deputy, for Defendant and Respondent.
HILL, P. J.
Plaintiff challenges the assessment of property taxes on the equipment and personal property in its novelty ice cream production lines. Plaintiff stipulated to or did not dispute various elements in the property tax assessment, leaving only a single issue to be determined: Whether plaintiff was entitled to a reduction in the value of the property, based on excess capacity or underutilization of the property, which plaintiff claims was the result of lack of market demand for the products produced by the equipment. The Assessment Appeals Board (the board) found in favor of defendant, and the trial court upheld that decision. Plaintiff appeals, contending the trial court applied the wrong standard of review and, if the substantial evidence standard of review applies, there was insufficient evidence to support the judgment. We find no error and affirm.
FACTUAL AND PROCEDURAL BACKGROUND
Plaintiff operates a facility that produces bulk ice cream, sold in half-gallon containers, and novelty ice cream products, such as ice cream bars, ice cream sandwiches, and push-ups. It runs 27 production lines, which operate independently, each generally producing only one type of product. In 2006, plaintiff filed an application for changed assessment, seeking to change the property tax assessment of the value of its property as of the lien date of January 1, 2006. At the hearing before the board, the parties stipulated to the value of the real property, buildings and fixtures, leaving only the value of the personal property and equipment in issue. Plaintiff’s plant had undergone an expansion in 2005, adding new production lines to the facility; the parties agreed on the valuation of the equipment in the new production lines. The only issue presented at the administrative hearing was whether the value of the equipment and personal property in the preexisting production lines, referred to as the novelty lines, should be reduced due to external obsolescence in the form of excess capacity.
Plaintiff presented evidence of the annual production of each novelty line for the years 2003, 2004, and 2005. It calculated the facility’s total capacity, allowing for holidays, weekends, an annual maintenance shutdown, regular shutdowns for cleaning, and unexpected interruptions. Using the actual production and total capacity figures, plaintiff calculated the capacity utilization as a percentage of total capacity for each year. Its evidence indicated its capacity utilization was 53.2 percent for 2003, 65.3 percent for 2004, and 63.5 percent for 2005. Plaintiff’s plant controller, Timothy Selgelid, testified these rates were historically not uncommon for the plant, and he anticipated a continuation of the historical utilization pattern in the future. Plaintiff’s expert, Alex Steele, testified the facility had a persistent overcapacity, mostly in the novelty line equipment. He calculated the appropriate reduction for excess capacity to be 27.19 percent, or $13, 905, 831. He identified lack of market demand as the external factor that caused the overcapacity and justified a reduction for external obsolescence. Steele concluded there was a lack of market demand based on plaintiff’s decrease in production and his research, which indicated that the market was volatile.
A representative of the assessor’s office, Todd Reeves, testified that the appraised value of the equipment and improvements in issue was $147, 646, 375. He stated that there might be some underutilization, but he found no external factors that accounted for it. He considered making an underutilization adjustment, but determined it was not appropriate. Defendant also presented an expert economist, Dr. Mark Evans, who testified regarding economic obsolescence, which is concerned with external economic factors that are within the knowledge and expertise of economists. He testified that using less than 100 percent of capacity did not establish underutilization without evidence that external forces in the industry caused the deviation between capacity used and capacity available; he found no such evidence in plaintiff’s records or in his research. Referring to Selgelid’s testimony that the facility operates “as hard as it possibly can” during the summer months, but shuts down for about three weeks in the winter for major maintenance, Evans discussed the effect of seasonal fluctuations in production on excess capacity. Based on national figures provided by the federal government for production of ice cream and frozen desserts, Evans concluded the average company would require at least 25 percent excess capacity to allow the company to absorb seasonal fluctuations in demand. Additionally, based on plaintiff’s production figures and on the published national figures, Evans stated that the trend in production from 2003 to 2005 was an increase of 15 percent at the national level and 40 percent at plaintiff’s facility. Evans opined that there might be good business reasons for maintaining some excess capacity in the facility, such as accommodating seasonal fluctuations in production or maintaining some potential for growth in order to preserve the company’s dominance in the marketplace.
The board found in favor of defendant. It noted that, when external factors cause machinery or equipment to lose value, the taxpayer is entitled to an adjustment for external obsolescence; to show that such an adjustment applied, plaintiff had the burden of proving some factor external to the property caused a decline in its value. The board concluded that, while plaintiff’s exhibits showed the percentage of capacity used declined in 2005, they also showed that production increased between 2003 and 2005. The decrease in percentage of capacity used was primarily due to expansion in the production lines that increased capacity, not to market factors. Plaintiff’s expert opined there was a decrease in demand for novelty products during the relevant period, but presented no evidence to support his opinion. The board also noted that Evans was persuasive when he testified the market conditions necessary to show economic obsolescence and inutility were not present. The board expressly found plaintiff did not present sufficient evidence to prove external factors created economic obsolescence; it failed to prove either excess capacity or an external market condition that justified application of economic obsolescence.
Plaintiff sought review of the board’s decision by filing a complaint in the trial court for a refund of a portion of its property taxes. After determining that the standard of review was substantial evidence, the trial court ruled in favor of defendant, finding that substantial evidence supported the findings of the board and adopting those findings. The trial court noted the only external force cited by plaintiff in support of its claim of external obsolescence was a lack of market demand, which it attempted to prove through its own experience. The trial court rejected plaintiff’s assertion that lack of market demand was established by Selgelid’s testimony that plaintiff was selling all the ice cream it produced and it could have produced more if it could have sold it. It noted that production on the novelty lines increased each of the three years leading up to 2006, and plaintiff expanded these lines during that time period. The trial court concluded there was substantial evidence in the administrative record to support the board’s decision that plaintiff failed to meet its burden of proof; it affirmed that decision. Plaintiff appeals from the trial court’s decision.
I. Standard of ...