Laws, Regulations & Annotations

Property Taxes Law Guide – Revision 2017

Revenue and Taxation Code

Property Taxation

Part 2. Assessment

Chapter 4. Assessment by State Board of Equalization Generally

Article 1. General Provisions*

Section 721

721. Valuation and assessment. The board shall annually value and assess all of the taxable property within the state that is to be assessed by it pursuant to Section 19 of Article XIII of the Constitution and any legislative authorization thereunder.

Construction.—Under this section, the Board has the constitutional authority to assess railroads' properties, and the trial court is precluded from substituting its judgment for the Board's on questions of fact or discretionary appraisal decisions. A remand to the Board is generally required when the determination of refunds is dependent upon an exercise of valuation functions and does not involve mere mathematical computations. However, a limited remand rather than a broad, de novo remand to the Board is appropriate if the Board has failed to address or consider a specific question or questions. Union Pacific Railroad Co. v. State Board of Equalization, 231 Cal.App.3d 983.

Public utility property.—Although the Board followed a published policy of valuing public utility property at not more than its reproduction cost new less depreciation (RCNLD), it was free to alter its method of assessing such property subject to the requirements of fairness and uniformity. An assessment based primarily upon the capitalization of income method and exceeding RCNLD is not necessarily in excess of the value of a taxpayer's property and does not necessarily constitute a tax on a taxpayer's franchise in violation of Article XIII, Section 19 of the Constitution. ITT World Communications, Inc. v. Santa Clara County, 101 Cal.App.3d 246. The Board was not entitled to use historical cost when valuing a railroad's property. The railroad, although regulated by the Interstate Commerce Commission, did not use historical cost as a rate base; and the conditions precedent to the Board's use of historical cost had not been met, and it was a violation of the Board's own property tax rule 3(d) to do so. Southern Pacific Transportation Co. v. State Board of Equalization, 191 Cal.App.3d 938.

Pipeline property.—While Article XIII, Section 19 of the Constitution allows for the unit taxation of all public utility property, only those items deemed to constitute a private, intercounty pipeline may be assessed by the Board, including enumerated mechanical parts, fittings, and tanks necessary to the pipeline's operation. Real property interests, land and rights-of-way, are excluded from the definition of a pipeline. Similarly, specific facilities, including a products plant, a wharf and a marine terminal, engaged in multiple uses were not essential to the operations of intercounty pipelines that terminated there and thus, were not parts of the pipelines which the Board could assess. Southern Pacific Pipe Lines, Inc. v. State Board of Equalization, 14 Cal.App.4th 42.

Composite life model.—The trial court erred in concluding that the Board's composite life model, a variant of the limited life technique used to assess railroads' operating assets, violated property tax rule 8(c), in that it failed to include in gross outgo the capital expenditures (costs of replacements in kind) necessary to maintain the estimated income. Property tax rule 8(b) specifically allows the use of a limited life model, and when a limited life model is used, rule 8(c) must be read as requiring only the deduction of capital expenditures needed to maintain the estimated income for the limited lifetime. The trial court did not err, however, in concluding that the composite life/no replacement cost model depended on assumptions that were so unrealistic when applied to railroad properties as to insure that the value estimate would be unreliable. The model rested on a central unsupported and untestable assumption: that future capital replacements would, in general, earn at least their capital cost. It was assumed that investments and replacements would be discretionary with future management, and would not be made if they would not earn enough to justify the cost. However, because of two characteristics of the railroad industry—mandated reinvestment and economic integration of assets—it was incorrect to assume, as the Board did, that future investment in replacements would always "pay their own way." Union Pacific Railroad Co. v. State Board of Equalization, 231 Cal.App.3d 983.

Valuation method.—Since no single method of the three generally used by assessors in determining the "full value" of property (market data on sales of similar property, replacement cost, and income from the property) alone can be used to estimate the value of all property, an assessor, subject to requirements of fairness and uniformity, may exercise his discretion in using one or more of them. ITT World Communications, Inc. v. Santa Clara County, 101 Cal.App.3d 246. Southern Pacific Transportation Co. v. State Board of Equalization, 191 Cal.App.3d 938; Los Angeles SMSA Ltd. Partnership v. State Board of Equalization, 11 Cal.App.4th 768. A valuation methodology used to assess tangible property that did not satisfactorily account for the value of the taxpayer's intangible assets was invalid. Intangible assets are not subject to property taxation, although their value may be included in the valuation of otherwise taxable tangible property. The Board erred in assuming that unit valuation, especially when calculated by the capitalized earnings ability method, necessarily taxed only the intangible values as they enhanced the tangible property. Such obscured the Board's duty to exclude intangible assets from assessment. GTE Sprint Communications Corp. v. Alameda County, 26 Cal.App.4th 992.

Notice.—An assessment notice must disclose to a taxpayer the methods of valuation and the method or methods actually used to determine the amount of assessment, sufficient to permit the taxpayer to challenge the assessment in an administrative proceeding. Southern Pacific Transportation Co. v. State Board of Equalization, 191 Cal.App.3d 938.

Income from enterprise activity.—Where a capitalized earnings approach is used in valuing property, income derived in large part from enterprise activity, which is subject to income taxation, may not be ascribed to the property being appraised. ITT World Communications, Inc. v. Santa Clara County, 101 Cal.App.3d 246.

* Article 1 was added by Stats. 1976, Ch. 877, p. 1990, in effect January 1, 1977.