A Captain s View of the Most Recent Court Cases

Transcription

1 A Captain s View of the Most Recent Court Cases Gregory R. Broege, Esq. Attorney Ajalat, Polley, Ayoob & Matarese Glendale, CA gbroege@apataxlaw.com Seth I. Davenport, Esq. Attorney Law Offices of Seth I. Davenport, LLC Montville, NJ seth@taxcounsel.com 1

2 Intangibles EHP Glendale, LLC v. County of Los Angeles (2011) 193 Cal.App.4th 262 ( EHP Glendale I ) Elk Hills Power, LLC v. Board of Equalization (2013) 57 Cal.4th 593 ( Elk Hills ) EHP Glendale, LLC v. County of Los Angeles (2013) 219 Cal.App.4th 1015 (ordered depublished Dec. 18, 2013) ( EHP Glendale II ) SHC Half Moon Bay, LLC v. County of San Mateo (2014) 226 Cal.App.4th 471 ( Half Moon Bay ) 2

3 EHP Glendale I The taxpayer purchased the Glendale Hilton Hotel for $77.3 million, which included the real property, personal property, and certain intangible assets. It was undisputed that the personal property was worth $3.4 million The Assessor, using the Rushmore Method, determined a value for the real property of $73.3 million (the $77.3 million purchase price less the $3.4 million of personal property). 3

4 EHP Glendale I The taxpayer s appraiser valued the hotel business at $77.3 million and then removed the value of the personal property and intangibles to determine a value for the real property of $62.6 million. The Los Angeles County Assessment Appeals Board ruled in favor of the Assessor and the taxpayer appealed the decision to the courts primarily challenging whether the Rushmore Method was a valid valuation method. 4

5 EHP Glendale I California Revenue & Taxation Code 110(d)(1) states: [t]he 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 the taxable property. California Revenue & Taxation Code 110(e) states that: Taxable property may be assessed and valued by assuming the presence of intangible assets or rights necessary to put the taxable property to beneficial and productive use. 5

6 EHP Glendale I The taxpayer s primary challenge in court was whether the Rushmore Method is a valid appraisal methodology because it violates Section 110(d)(1), which would be subject to de novo review. The Court of Appeal, instead of determining whether or not the Rushmore Method was valid, simply stated that an income approach was used and therefore the standard of review must be substantial evidence. 6

7 Sky River LLC v. County of Kern (2013) 214 Cal.App.4th 720 Not an intangibles case, but concerned standard of review. The Assessor used an income approach to value the real property, however the Assessor used an estimated average income tax rate, rather than the marginal rate prescribed by the Assessors Handbook when converting the discount rate from an after tax-rate to a before-tax rate. 7

8 Sky River Court determined that even though an income approach was applied, the methodology used was invalid and was subject to de novo review. 8

9 Elk Hills For the first time in over half a century, the California Supreme Court accepted review of an intangibles case. Elk Hills involved the taxation of emission credits ( ERCs ), an intangible asset. 9

10 Elk Hills The California State Board of Equalization ( SBE ) included in its cost approach a line item for the cost of acquiring the ERCs. Also, the SBE did not make any deduction in its income approach for the value related to ERCs. 10

11 Elk Hills The California Supreme Court tackled the question of the interplay between Sections 110(d)(1) and 110(e) and determined that the subdivisions must be applied together and are not mutually exclusive. 11

12 Elk Hills The California Supreme Court determined that: assessors cannot tax the value of intangible assets directly, but that principle does not prevent assessors from assuming the presence of intangible assets when valuing taxable property. In other words, assessors must do their constitutional duty to assess taxable property at fair market value while making sure that the value of intangible assets is not improperly subsumed within the value of taxable property. 12

13 Elk Hills California Supreme Court created two categories of intangibles. First, intangible rights that merely allow for taxable property to generate income when put to productive use (ex. Business license, FCC license). Second, intangibles such as goodwill or customer base that make a direct contribution to the going concern value of the business. 13

14 EHP Glendale II Just one month after Elk Hills, the Court of Appeal in EHP Glendale II decided to ignore the California Supreme Court. The Court of Appeal again ignored the pertinent question of law of whether the Rushmore Method is a valid valuation methodology and upheld the valuation on a substantial evidence review. 14

15 EHP Glendale II The California Supreme Court ordered the depublication of EHP Glendale II on December 18,

16 Half Moon Bay The Court of Appeal in Half Moon Bay was confronted with the same question as the Court of Appeal in EHP Glendale: whether the Rushmore Approach is a valid valuation methodology. The Court first determined that the standard of review was de novo. 16

17 Half Moon Bay The Court proceeded to distinguish and criticize the decision in EHP Glendale I. The Court analyzed the Rushmore Method and determined that the removal of the management fee and the franchise fee from the income stream did not remove all intangible value from the property. The court stated that the Rushmore Method was akin to paying lip service to the concept of exempting intangibles from taxation. 17

18 Half Moon Bay However, while the taxpayer won the battle on the validity of the Rushmore Method, the taxpayer lost the war, as the court upheld the AAB s factual finding of a $0 value for goodwill. 18

19 Attorney s Fees Ocean Avenue LLC v. County of Los Angeles (2014) 227 Cal.App.4th 344 and related pending case B Substantive case concerned whether or not a Section 64(c) change in ownership occurred. Assessor argued that Section 64 as well as Property Tax Rule were invalid and unconstitutional. 19

20 Attorney s Fees Section 538 states that the Assessor cannot assess a taxpayer in violation of statute or regulation. If the Assessor believes that a statute and/or regulation is invalid, the Assessor must file a declaratory relief action against the SBE. Section 5152 awards attorney s fees to a taxpayer if the Assessor violates Section

21 Marina District Development Co., LLC, v. City Of Atlantic City, 27 N.J. Tax 469 (Tax Ct. 2013) Borgata Hotel and Casino as of valuation dates for tax years 2009 and 2010 facility consisted of 3,508,231 sq. ft., 2,768 hotel rooms, banquet facilities, 160,287 gaming space, spas, water club, and other facilities. Assessed for 2009 and 2010 at $2.26 Billion. Plaintiff offered three experts, two valuation and one EBITDA multiplier (Cap Rate) expert. 21

22 Borgata Defendant offered one expert, local, solo appraiser. All valuation experts opinioned casinos sell based upon income approach and that EBITDA method was the best indicator of market participants. Plaintiff s valuation experts testified extensively on the economics that AC casinos were facing at that time. There was a major downturn in national economy and increased casino competition from neighboring states. These factors tempered the income and multiplier those experts applied. Defendant s expert eschewed those factors. 22

23 Borgata All experts concluded initially to overall business value from all operations including gambling. Important factor to consider was how the experts extracted Business Value from their conclusion of overall business value. Plaintiff s experts hypothecated a management fee/expense (Rushmore) and Defendant s expert made no deduction. All experts proffered a formula for deducting the personal property from their value conclusions. 23

24 Borgata Court ultimately relied upon the value conclusions of Plaintiff s second expert, noting that The court is mindful of the fact that the determination of the true market value of real property, particularly real property as complex and intertwined with a commercial enterprise as is the subject property, is not an exact science. Reasonable, experienced experts can differ on how best to predict the market's reaction to developing trends in the national economy and regional gaming competition. It is the court's obligation, however, to determine which of the expert opinions offered at trial, if any, provides the most credible evidence of the subject property's value on the relevant valuation dates. 24

25 Borgata Court found Defendant s expert completely lacking in credibility. Court concluded to a value of $870 million for 2009 and $880 million for Assessment reduction of $1.399 Billion for 2009 and $1.299 Billion for Tax refund, plus statutory interest, as of date of decision was approximately $56 million. Including 2011 and 2012 tax years (Freeze Act) AC owes Borgata over $114 million. 25

26 Borgata Post Script New Jersey does not permit the inclusion of intangibles in an assessment whatsoever. How can one truly argue that a hypothetical management fee removes all intangibles of the business value? Aetna Life Insurance Co. v. Newark, 10 N.J. 99, (1956). (NJ Supreme Court declared that any approach to value that is based in whole or part upon the sales volume of the business being conducted upon the property was neither competent not sufficient to establish the full and fair value of the property. ) Somers v. City of Meriden, 174 A. 184 (Conn. 1934). (Connecticut Supreme Court held that profits or losses of a business are so commonly dependent upon causes other than the value of the premises in which it is conducted that, except in some instances as to public utilities, they are not evidence of that value. ) 26

27 Borgata Post Script Assessor of Quincy v. Boston Consol. Gas Co., 309 Mass. 60, 34 N.E. 2d 623 (Mass. 1941), (Supreme Judicial Court of Massachusetts noted that the general rule is that the profits from a business located upon the land are not a fair measure of the value of the land because the financial returns from a commercial undertaking are dependent upon so many material factors having no real relation to the land itself that the profits cannot be said to be derived from the land. ) Transcontinental Gas v. Bernards Tp., 111 N.J. 507 (1988) (the valuation of a gas transmission pipeline, based upon the income derived from the business of transferring gas through the line, was problematic and its application as a method of property tax valuation is inappropriate for several reasons. One of those reasons was that it defeats the purpose of the income approach of property taxation, which attempts to capitalize the income of the real property separate from the value of the business using the property. ) 27

28 Borgata Post Script Humble Oil & Refining Co. v. Englewood Cliffs Bor., 135 N.J. Super. 26, (App. Div. 1975), aff d per curium 71 N.J. 401 (1976). (held that the valuation of a gasoline service station, based upon how much gas the business operated thereon sold represents a business valuation of the station, not the real property value for local taxation purposes.) American Hydro Power Partners v. Clifton, 11 N.J. Tax 12, (Tax Ct. 1990) The Tax Court in that case rejected the taxpayer s income approach because it employed the income from the business, not the real property [r]eal property valuation, for local property tax purposes, cannot be based solely upon gross sales from a business conducted on the real property involved. ) 28

29 Borgata Post Script Coastal Eagle Point Oil Co. v. West Deptford Tp., 13 N.J. Tax 242 (Tax Ct. 1993), ( In the present case the theory asserted is a formula based on sales volume and therefore is subject to the variables of goodwill and management practices which are factors entirely foreign to the true value of the real estate as such.?) Livingston Mall v. Livingston Tp., 15 N.J. Tax 505, 521 (Tax Ct. 1996) (As a matter of law, economic rent for property tax purposes may not be determined on the basis of a percentage of gross sales.) 29

30 Borgata Post Script Scripps Howard Cable Comp. v. Hamill, 665 So.2d 1071 (Fla. Dist. Ct. of Apls. 1996) ( a tax upon tangible property requires a valuation of the rights in that property, rather than a valuation of business or franchise rights in connection with which said property is used. The Florida Supreme Court noted that the County s appraiser valued the taxpayer s business enterprises by estimating the future net operating income therefrom and then applying a capitalization rate to arrive at a value. [f]rom the single value arrived at by the income approach, it is virtually impossible to segregate specific items and identify their values.) Gregg County Appraisal Dist. V. Laidlaw Waste Systems, 907 S.W. 2d 12 (Ct. of Apl. 1995). (The income approach in that case commingled the value of the business with the value of the property. It was, according to that Court, income generated not only by the manner in which Laidlaw used the land in question, but by the use of its capital, trucks, equipment, machinery, trained personnel, contracts and business acumen in running the waste disposal enterprise. ) 30

31 Borgata Post Script In 2012 the Revel Casino opened after spending $2.4 Billion to construct. In 2014 it closed and recently sold in bankruptcy for $84 million. What impact did business value have on this sale? From an obsolescence standpoint, what do you attribute the drop in value to be? How can the new buildings suffer so greatly from a value standpoint? AC is on the verge of bankruptcy is the valuation of real estate that is tied to the business value a good idea for stabilization of a tax base? 31

32 Methode Electronics, Inc., v. Township Of Willingboro, 2015 N.J. Tax Lexis 2 (Tax Ct. 2015) Industrial property, in operation since 1969, was found to have ground water and soil contamination. In 1995 the taxpayer and NJDEP entered into an agreement to install 57 wells to pump water into the ground and 134 soil vapor extraction wells. In 1999 company ceased operation and demolished all buildings. They became subject to NJ ISRA. More wells were installed. Plaintiff s expert who offered the opinion that the subject property cannot be developed in any meaningful fashion in its present state, has no realistic possibility of being fully remediated at any identifiable future date, and poses the threat of liability to any potential purchaser from the property's continued capacity to produce toxic vapors. As a result of these conclusions, the expert opined that the property has no true market value and should be assessed for the nominal amount of $1. 32

33 Methode Electronics, Inc., The municipality also presented an expert real estate appraiser. He offered the opinion that the current use of the property -- being held for potential development once fully remediated -- is its highest and best use. Court noted that- The contamination on the subject property is a critical factor in the determination of its true market value. Our Supreme Court has unequivocally held that environmental contamination has an impact on property valuation for local property tax purposes. Inmar Assocs., Inc. v. Borough of Carlstadt, 112 N.J. 593, 549 A.2d 38 (1988). 33

34 Methode Electronics, Inc., Problem with Inmar decision and those that came after it was that they did not provide any guidance as to how to quantify the contamination. The exact role that contamination plays in the assessment valuation process, however, was not established by the Court in Inmar. The court discussed various options to account for the contamination but in the end concluded that since there is no foreseeable end to the remediation on this property, that it had no value and thus set the value at $1. Court noted - presently indefinite duration of the remediation and monitoring efforts at the subject property, the limited amount of land at the subject not encumbered by remediation equipment or the concrete cap, and the continuing emission from the property of toxic vapors which threaten both the subject and neighboring property, the subject property had no utility on the valuation dates. 34

35 Methode Electronics, Inc., In 2012, P.L. 2012, c. 19 was enacted in NJ directing that if a property is subject to a plan of remediation pursuant to ISRA, then any reduction in taxes due to the contamination must be paid over by the town (if there is a refund) or the taxpayer (if there is a reduction in assessment) to the NJ DEP to hold until they release the property as clean. The money is allegedly being held to secure cleanup, however, to enter into an ISRA plan there must be a secure funding source, so the law was really designed to discourage taxpayer s from seeking reductions because of the contamination. The NJ court s will not permit a dollar for dollar reduction due to cost to clean property, what method do you think should be employed? 35

36 ETC Marketing, Ltd., V. HARRIS COUNTY APPRAISAL DISTRICT, 2015 Tex. App. LEXIS 225 (Tx Ct. Appl. 2015) Gas supply company stored gas in Harris County and claimed that the gas is not taxable since it is in interstate commerce. For the purpose of its decision, the Court assumed that the gas was in interstate commerce. Court held that even if ETC Marketing's stored gas was in interstate commerce, it has presented no compelling legal argument that the gas was immune from local taxation. The Commerce Clause grants Congress the power to regulate interstate commerce and it has been interpreted by the United States Supreme Court to include a "dormant" Commerce Clause, an implicit prohibition on a state's imposition of discriminatory burdens on interstate commerce. 36

37 ETC Marketing The burden is on the taxpayer to prove that a tax is invalid under the Dormant Commerce Clause, but to do so the taxpayer need only prove that the tax fails one prong of the Complete Auto test. Under the Complete Auto standard, a state tax on interstate commerce ordinarily "will not survive Commerce Clause scrutiny if the taxpayer demonstrates that the tax: (1) applies to an activity lacking a substantial nexus to the taxing State; (2) is not fairly apportioned; (3) discriminates against interstate commerce; or (4) is not fairly related to the services provided by the State. 37

38 ETC Marketing Court found ETC had substantial nexus because it has office, employee, has contract to store gas, stores it for long time, etc., in Texas. The Commerce Clause requirement of a substantial nexus with the taxing state is satisfied for purposes of an ad valorem tax by the taxpayer's physical presence in the state in the form of physical storage of tangible personal property. 38

39 ETC Marketing To determine "whether a tax is fairly apportioned" we examine "whether it is internally and externally consistent." A tax is internally consistent when it is "structured so that if every State were to impose an identical tax, no multiple taxation would result." In this case, property was in only Texas on valuation date and thus could not be taxed by another state. "The external consistency test asks whether the State has taxed only that portion of the revenues from the interstate activity which reasonably reflects the in-state component of the activity being taxed." ETC argued that it was impossible to determine what molecules of gas were present on the valuation date. Court rejected that argument and held that the tax is only on the storage of the gas in state. 39

40 ETC Marketing A tax is nondiscriminatory under Complete Auto when it "places no greater burden upon interstate commerce than the state places upon competing intrastate commerce of like character." HCAD taxed only that quantity of gas stored in Harris County on the date of taxation and as to which ETC Marketing acknowledged its ownership. Same tax rate whether the property in interstate commerce or not, thus not discriminatory. 40

41 ETC Marketing The fair relation prong of Complete Auto requires no detailed accounting of the services provided to the taxpayer on account of the activity being taxed, nor, indeed, is a State limited to offsetting the public costs created by the taxed activity." ETC owns the gas while it is stored at Bammel, and it enjoys the benefit of public services which facilitate gas storage, which in turn allows it to accomplish its business objective of buying natural gas and holding it for sale at some later point in time. 41

42 ETC Marketing It was important to this Court the ETC retained ownership of the gas while stored, the storage of the gas was not temporary or transient (months at a time) and that ETC would use the stored gas to play the market. When market conditions dictated, they would sell the gas into interstate commerce. There is a distinction between gas being stored for extended periods and oil products being stored simply awaiting distribution. 42