EHP Glendale v. County of Los Angeles: Intangibles in Property Tax Assessment
In a controversial recent decision, EHP Glendale v. County of Los Angeles, (2011) 193 Cal. App. 4th 262, the California Court of Appeal held that the trial court erred in granting summary judgment in favor of the taxpayer in a property tax appeal. The property at issue was a hotel which included real property, personal property, and certain intangible assets and rights (e.g., the franchise agreement with Hilton and the management contract). The taxpayer purchased the hotel for $79.8 million, which is the amount that was originally enrolled by the assessor. Contending that the market value of the property should be reduced, the taxpayer filed an assessment appeal and argued “that the assessment impermissibly captured the value of nontaxable intangible assets.” Id. at 381.
The taxpayer’s expert appraiser testified that after valuing the property using all three recognized approaches to value (i.e., sales comparison, income capitalization, and cost), his final opinion of value of the going concern hotel business was $77.3 million. From this amount, however, he deducted the claimed total value for intangible assets and rights worth $14.6 million. Thus, the taxable value of the property, according to the taxpayer’s appraiser, was $62.6 million.
The assessor’s expert testified that he used the income capitalization approach, and after projecting the hotel’s income from all sources, deducted appropriate expenses to arrive at a net operating income for the hotel. The deductions included Hilton’s management and franchise fees, labor costs and marketing expenses. The assessor contended that the taxable value of the property was $73.3 million. The board adopted the assessor’s property valuation.
The taxpayer challenged the board’s decision in superior court and brought a motion for summary judgment, contending that “the assessor’s valuation, adopted by the Board, relied on an invalid appraisal methodology that did not fully identify value and exclude intangible assets from the assessed property as required by California law.” Id. at 268. In support of its motion, the taxpayer presented “only fragmentary excerpts of the administrative record.” Id. The trial court granted the motion for summary judgment, holding that the board had erred as a matter of law in adopting the assessor’s methodology because it failed to fully exclude intangible assets from the property assessment.
The Court of Appeal reversed on procedural grounds and held “that the trial court erred in granting summary judgment on an incomplete record.” Id. at 264. Then, in dicta, contrary to past precedent and Senate Bill 657, which introduced California Revenue and Taxation Code section 110(d)(1) (“The value of intangible assets and rights relating to the going concern value of a business using taxable property shall not enhance or be reflected in the value of taxable property.”), the Court of Appeal stated that the issue of whether the assessor improperly applied the income approach by not deducting intangibles presented a question of fact, rather than a question of law.
Counties across the state viewed this dicta as a broadly applicable judicial pronouncement of the appropriate standard of review in a property tax matter, and successfully petitioned the court to publish this case. Assessors and counties may attempt to cite this as the holding in the case, however, critics of the opinion note that the Court of Appeal came to this conclusion without any meaningful discussion or analysis. Thus, it is possible that the court is simply saying that the record was incomplete and thus, factually, it was unclear whether the intangibles were deducted. Nevertheless, because the opinion does not discuss this issue further, EHP Glendale may have ramifications on the standard of review applied to a taxpayer’s appeal of an assessment appeals board’s decision in superior court.
If you have any questions regarding the contents of this newsletter, please contact the following attorneys in the firm’s State and Local Tax Practice Group.
| Chicago (312) 558-5600 | San Francisco (415) 591-1000 |
| Robert F. Denvir | Charles J. Moll III |
| Alan Lindquist | Troy M. Van Dongen |
| Bradley R. Marsh | |
| Jocelyn M. Wang | |
| Dina M. Bronshtein |