California Eminent Domain Report

I know our blog is called the California Eminent Domain Report -- implying we only cover eminent domain-related issues, but in actuality we cover anything valuation-related.  After all, our group of attorneys is known as the Eminent Domain & Valuation Practice Group.  With that said, an interesting value dispute has popped up, making its way to the California Supreme Court.  This one deals with whether intangible assets should be included in one's property tax assessments, and we're looking forward to the Court's decision.

The case, Elk Hills Power v. California State Board of Equalization, deals specifically with whether a power plant's Emission Reduction Credits (ERCs) are taxable for property tax purposes under Revenue & Tax Code 110.  According to both the trial court and Court of Appeal in Elk Hills Power, the answer is yes.  By way of background, Elk Hills had purchased about $10 million in ERCs to obtain the necessary permits to build its plant; when it came to assessment time, the State Board of Equalization valued the property under both the income approach and the replacement cost approach.  The cost to purchase the ERCs was included in the valuation, and Elk Hills challenged the assessment.  The lower courts concluded that the full value of Elk Hills' ERCs could be added to the value of its real property because the ERCs were "necessary" to put its power plant to a "beneficial or productive use."

While this may seem like a narrow issue, the Supreme Court's decision could have large-scale implications:  essentially all successful businesses have intangible assets (e.g., trademarks, patents, copyrights, franchises, goodwill, etc.) which are necessary to the productive use of the properties on which their businesses operate.  Are we now going to value all those intangible assets for property tax assessment purposes?  Check out the Petition for Review for a better understanding of the potential impact of this decision.

In reaching this decision, the lower courts are relying on section 110(e), which provides 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 or productive use."  To me, the provision reads pretty straight-forward; for example, a parcel of real estate can be valued for tax purposes by assuming it is being used productively.  But I don't see how the statute provides for the taxation of the intangible assets themselves.

And just so you know, I'm not alone; amicus briefs have been filed by a whole host of parties.  We'll do a follow-up post once the Supreme Court issues its decision, as it could have significant implications for many California property owners.   If any of our readers are appraisers who have done work in the property tax arena, please be sure to chime in and let us know your thoughts.