Trial de Novo: Fairness For California Property Taxpayers

By Eric Miethke

The assessor's biggest and most unfair advantage over taxpayers can be expressed in four words: No trial de novo. This term describes the amount and type of evidence a court may consider in a particular proceeding.

Courts are now free to take new evidence in property tax cases on issues of law, such as the legality of a particular method of valuation. Courts may not, however, take new evidence and make their own judgment on issues of fact, such as the value of property. This occurs even if there is compelling new evidence that the Assessment Appeals Board (AAB) made a mistake as to the value of property. The court is limited to determining whether the AAB's decision was supported by any evidence, no matter how flimsy, in the administrative record. A taxpayer's inability to gain a de novo review in Superior Court of an AAB decision tilts the playing field in favor of the assessor.

Fallacy of the "Impartial" AAB Hearing

There is no requirement that a county appoint an AAB to hear property tax appeals. In 21 of 58 California counties, the Board of Supervisors, whose budget depends on property tax revenues, hears property tax appeals. They have no special training in or knowledge of property taxes or property appraisal.

In 1966, the Assembly Revenue and Taxation Committee, chaired by then-Assemblyman Nicholas C. Petris, published an interim study entitled "Problems of Property Tax Administration in California." The report called into question California's traditional method of reviewing property tax decisions in light of several assessor scandals and great inequalities in assessment results. On page 52, the report noted, "One of the major factors contributing to the breakdown in property tax administration in California has been the lack of an effective means for administrative appeal and judicial review of assessments." The report went on to recommend trial de novo in counties where the county board of supervisors acts as the AAB. (page 57).

Revenue and Taxation Code Section 1624 contains the requirements for appointment to an AAB if one is appointed. While the qualifications listed for appointment include certification as an accountant, a lawyer, a real estate broker or a property appraiser accredited by a national organization, there is a big loophole in the statute. An appointee may be qualified if "the nominating member of the Board of Supervisors has reason to believe [the person] is possessed of competent knowledge of property appraisal or taxation." This, in practice, is a license to appoint virtually anyone to an AAB. This problem surfaced in testimony before the state's Little Hoover Commission (formally called the Milton Marks Commission on California State Government Organization and Economy) in 1979. The following discussion was in the government watchdog agency's report, "The Tax Appeals System in California:"

"Members of county Boards of Equalization are not necessarily adequately qualified to sit in judgment of property valuation questions. Although the law sets out some minimum qualifications criteria for AAB members, it also authorizes nomination of a person to an AAB '...who the nominating member of the Board of Supervisors has reason to believe is possessed of competent knowledge of property appraisal and taxation.' This loophole leaves open the possibility of appointments to assessment appeals boards being made upon political considerations rather than technical qualifications.

Furthermore, the board of supervisors sits as the Board of Equalization in more than half of the counties. Supervisors tend not to be experienced in property valuation and are inherently susceptible to political influences which may bias their decisions." (Emphasis added)

There is no requirement that AAB members possess any training in property tax appraisal, property tax law or administrative practice. Thus there is no guarantee that an AAB will be able to perform a competent and thorough investigation of factual issues in an appeal; yet, under current law, taxpayers are precluded from receiving judicial review of those AAB decisions.

Lack of Trial de Novo May Yield Bad Results From AABs and County Boards of Supervisors, and is Unfair to Taxpayers

In 1985, the Governor's Tax Reform Advisory Commission recommended that trial de novo be provided for local property tax cases:

". . .the Commission recommends that when property tax matters reach the Superior Court, the Superior Court be allowed to weigh the evidence 'de novo' presented in the local board of equalization rather than be subject to the existing very narrow standard of review. Presently, local board of equalization decisions in property tax cases are upheld generally if there is any evidence to do so, rather than the Superior Court judge weighing the evidence. Because of the possibility of nonexpert, politically biased decisions of local boards of equalization referred to in the Little Hoover Commission report, it is important that there be a trial de novo in property tax cases." (Emphasis added, pages 33-34.)

The 1985 Tax Reform Advisory Commission was referring to a second complaint commonly encountered by the 1979 Little Hoover Commission:

"Essentially, there is no appeal of a property valuation decision beyond the county board of equalization because the court does not afford a trial de novo to such decisions. The court's limited review of a board decision is not likely to reveal board biases or errors which are less than gross in character. This is especially distressing because the impartiality and expertise of the board may be questionable for the reasons cited above (page 20)."

Trial de novo is the cornerstone of a fair tax appeals system. It is a way of ensuring that property taxpayers receive a fair and adequate hearing which protects their due process rights. Such a need was recognized also in the treatise Taxing California Property, generally viewed as the authoritative work on California property taxation:

"Much criticism of the California property tax system has focused on the limited scope of judicial review of equalization proceedings [footnote omitted]. . .Taxpayers continue to be largely at the mercy of local boards, with only a very limited court review of determinations that are frequently justified by a small quantum of evidence. Practitioners must generally win their cases at the board level unless a question of law is involved or the board has acted so outrageously that a court can be persuaded to act." (Ehrman and Flavin, Taxing California Property, Section 30:10, Page 32)

Trial de Novo is Constitutional

Opponents of trial de novo often question its constitutionality. Admittedly, the authority of local AABs to set the value of property is in the state Constitution (Art. XIII, Sect. 16). There is no authority, however, for the proposition claimed by opponents that the judicial standard of review in local property tax cases cannot be modified by statute.

The state Legislature has previously enacted trial de novo for property assessed by the State Board of Equalization (BOE). (Revenue and Taxation Code Section 5170, added by Chapter 1372, Statutes of 1988, (SB 2601-Garamendi). While that legislation was pending, opponents raised the very same constitutionality issue. After SB 2601 passed, its constitutionality was challenged directly in AT&T Communications of California v. State Board of Equalization, Case No. 500802 Sacramento Superior Court (1989). In its ruling the Superior Court found that the Constitution granted authority to the Legislature to enact trial de novo:

"The Legislature shall pass all laws necessary to carry out the provisions of this article." (Cal. Const. Art. XIII, Sect. 33)

The state BOE sought a writ from the Court of Appeal to overturn this finding, and the writ was denied. Since that time, trial de novo for state-assessed property has been repeatedly applied by California trial and appellate courts (see, e.g., Southern Pacific Pipe Lines, Inc. v. State Board of Equalization, 14 Cal App. 4th 42, 54-55 (1993)).

Moreover, California Constitution Article XIII, section 32 says, in pertinent part:

"After payment of a tax claimed to be illegal, an action may be maintained to recover the tax paid, with interest, in such manner as provided by the Legislature." (Emphasis added.)

There is legal authority for the proposition that the standard of review applicable to a particular proceeding is a procedural matter) Beals v. Superior Court (1934) 137 Cal. App. 559, 563-564). Thus, since the Constitution gives control of the procedural aspects of tax refunds to the Legislature, and since the standard of review has been deemed by the courts to be a procedural matter, there is no constitutional problem with a statute guaranteeing a de novo review in local property tax cases.

There is other evidence that a statutory modification of the standard of review would pass constitutional muster. The Legislature has modified other aspects of property tax administration without incident, despite the fact that the presumption that a property tax assessor has faithfully discharged his or her duty emanates from the constitution (see, e.g, Revenue and Taxation Code Section 167, shifting the burden of proof to an assessor disputing the value of an owner-occupied dwelling.).

Moreover, in 1968 the Legislature amended what was then Revenue and Taxation Code section 1605.5 to state:

"At the hearing, the final determinations by the board shall be supported by the weight of the evidence."

This touched off an intense judicial debate over whether the Legislature had altered the standard of review of AAB proceedings by the Superior Court from the "substantial evidence" test to the "weight of the evidence" test. Ultimately, it was concluded that the standard had not been altered. However, the relevant point for this debate is if the Legislature were constitutionally precluded from legislatively altering the standard of review, the debate would never have occurred (See Hunt-Wesson Foods, Inc. v. County of Alameda 41 Cal App.3d. 163, 171 (1974)).

Trial de Novo Would Not Allow Sophisticated Taxpayers to 'Test-Run' One Set of Arguments, and Allow a 'Second Bite of the Apple' in Superior Court.

Opponents of trial de novo also argue that it would allow taxpayers to file inconsistent claims at the administrative and judicial levels. However, it is not possible for taxpayers to change their arguments between the AAB and the Superior Court under existing law, and trial de novo would not change that. Revenue and Taxation Code section 5142 states:

"No recovery shall be allowed in any refund action upon any ground not specified in the refund claim." (Emphasis added.)

There is an equivalent section for property taxpayers assessed by the State Board of Equalization (Revenue and Taxation Code section 5148(e), and state-assessed property taxpayers are entitled to trial de novo under current law. There has been no accusations of state-assessed taxpayers "gaming" the system, and they are among the most sophisticated of all property taxpayers in the state.

Thus, when the taxpayer files a claim seeking a refund of their property taxes, they are bound to the grounds specified in their claims not only for the AAB hearing but for subsequent litigation. Commentators have noted that this sometimes operates as a harsh rule against taxpayers in the property tax context:

"The action must be based upon the grounds asserted in the claim for refund [footnote omitted] This sometimes causes a procedural problem, because a taxpayer who has made his application for reduction a claim for refund may not know all the grounds until the board of equalization has acted, since one ground could be the actions of the board itself." (Ehrman and Flavin, Taxing California Property, Chapter 30:02, page 11).

This limitation, however, is also the rule in other California taxes (see, e.g. Revenue and Taxation Code Sections 6933 (Sales and Use taxes) and 26104 (Bank and Corporation taxes)). Taxpayers may not currently "game" the system by "test marketing" arguments at the administrative level and bringing new ones in court, and trial de novo in local property tax cases does nothing to change that.

The Judiciary is Well-equipped to Review Property Tax Cases on a de Novo Basis.

Opponents of trial de novo have also claimed that the California judiciary lacks the special expertise needed to resolve property tax disputes. AABs, these opponents argue, are uniquely well suited to review property tax cases. Notwithstanding that many AABs are actually county Boards of Supervisors without expertise in property tax and have a conflict of interest as described above, such a claim lacks common sense. For any Superior Court that is currently asked to review unitary tax cases, cases applying the sales and use tax law to complex corporate reorganizations or the application of the Employees Retirement Insurance and Security Act of 1974 to insurance gross premiums taxpayers, the inference that property tax cases are somehow "too difficult" is unsupported and borders on the insulting. There is nothing unique about property tax cases, nor about the process of valuing property. California courts may be already asked to value property de novo in the inverse condemnation or income tax context (such as in cases involving the value of donated property), and the techniques for so determining are virtually no different than in property taxes.

In the 1996 Legislature's debate over SB 1903 (Maddy), the counties raised this argument as it pertained to issues of "changes of ownership." In 1986, the Legislature added Revenue and Taxation Code Section 1605.5, which specifically provided that local AABs, where created, would hear cases involving "changes of ownership" (which triggers a reappraisal at fair market value under Proposition 13). However, Section 1605.5(e) states:

"This section shall not be construed to alter, modify or eliminate the right of an applicant under existing law to have a trial de novo in Superior Court with regard to the legal issue of whether or not that property has undergone a change in ownership or has been newly constructed so as to require reassessment." (Emphasis added.)

Thus, not only do courts currently have the right to review changes of ownership de novo, but they do so after a full administrative hearing and findings of fact by the AAB.

Trial de Novo Will Not Increase Workload for the Courts

The hard evidence involving other California taxes suggests that opponents' claims that trial de novo would flood the courts with new property tax matters is unfounded. Table One shows major California state and local taxes currently in effect. Local property taxes are the only taxes which are denied de novo reviews. Even state-assessed property taxes, which involve valuation of California's most complex companies, are given de novo review by the Superior Court.

The Local Property Tax is the Only California State or Local Tax Without Trial de Novo Table 1
Tax Program	Trial de Novo: Yes	Trial de Novo: No
1. State Taxes
Personal Income Tax	X	&nbsp
Bank and Corporation Tax	X	&nbsp
Franchise Tax	X	&nbsp
Sales and Use Tax	X	&nbsp
Insurance Gross Premiums Tax	X	&nbsp
Cigarette/Tobacco Products Tax	X	&nbsp
Energy Resources Surcharge	X	&nbsp
Emergency Telephone Users Charge	X	&nbsp
Alcoholic Beverage Tax	X	&nbsp
Integrated Waste Management Tax	X	&nbsp
Use Fuel Tax	X	&nbsp
Motor Vehicle Fuel License Tax	X	&nbsp
Aircraft Jet Fuel Tax	X	&nbsp
Hazardous Substance Tax	X	&nbsp
State Assessed Property Tax	X	&nbsp
Private Rail Car Tax (Property Tax)	X	&nbsp
2. Local Taxes
Bradley-Burns Local Sales and Use Tax	X	&nbsp
District Transactions and Use Tax	X	&nbsp
Business License Tax	X	&nbsp
Transient Occupancy Tax	X	&nbsp
Utility Users Tax	X	&nbsp
LOCAL PROPERTY TAX	&nbsp	X

Of more than 10 million payers of the personal income tax, 400,000 bank and corporation or franchise taxpayers, and 800,000 payers of sales and use taxes in California, only 52 cases went to trial statewide in 1994-95. Nor has trial de novo substantially affected the number of state-assessed property tax cases going to trial. For the 1988 tax year, the last year before trial de novo for state assessees became effective, 54 cases were filed. For the 1992 year, the last year for which full data is available, 51 cases were filed. This includes suits filed by the same taxpayer in multiple counties, as required by law.

There are many reasons why this data is not surprising, and why trial de novo in local property tax cases would not be expected to change it. First, going to trial is expensive. If the easiest property tax case costs $20,000 to litigate, that is equivalent to a reduction in value of $2 million (the constitutional property tax rate of one percent applied to a $2 million dispute in property value) even if the odds of prevailing were 100 percent. If the odds drop to 50-50, to justify a suit would require $4 million of property value in dispute. Although the counties have not been forthcoming with the number of appeals filed in this value category, it can be assumed that they are very few in number.

Second, many cases settle before going to trial. For example, the state Board of Equalization reported in 1994-95 about 26 percent of the cases resolved in court were by settlement before trial. We could expect at least the same pattern of settlement to reduce the number of additional trials required by trial de novo.

Third, it should be remembered that expensive, complex property tax cases already go to trial because the dollars involved and the importance of the issues compel their litigation. Trial de novo doesn't change that basic fact, but only determines what evidence the court can consider in those trials.

Finally, even if the number of trials is increased, opponents overstate the impact such an increase would have. Property tax trials are conducted without a jury, reducing time and expense. Moreover, the cases can be shortened substantially because the Superior Court may take judicial notice of the full administrative record of the proceedings before the AAB (Ehrman and Flavin, Taxing California Property, Chapter 30:10-page 29). Therefore, there is no need to completely repeat the case before the trial court even if trial de novo were allowed for factual issues. The court would admit the previous record, and would only have to examine any new evidence submitted at trial. This is cost-effective for taxpayers and the court, and will not change under trial de novo.

What Competitors are Doing

Table Two summarizes the treatment of property tax appeals in 11 major states. California and Massachusetts are the only two states surveyed that continue to deny taxpayers trial de novo in local property tax cases. California's competitors have a much better climate for taxpayers who must appeal overassessments of property tax. There have been no reports of the judicial systems in these states crumbling under the burden of property tax cases.

California and Massachusetts are the Only Major States Without Trial de Novo For Local Property Tax Cases Table 2
State	Trial de Novo: Yes	Trial de Novo: No
Texas /1	X	&nbsp
New York /2	X	&nbsp
Florida /3	X	&nbsp
Illinois /4	X	&nbsp
Michigan /5	X	&nbsp
Washington /6	X	&nbsp
Oregon /7	X	&nbsp
Arizona /8	X	&nbsp
Colorado /9	X	&nbsp
Massachusetts /10	&nbsp	X
California	&nbsp	X
/1 [Commerce Clearing House p. 4289, 21-238], Section 42.23, Tax Code 110-310 /2 [CCH p. 30,926, 94-946] New York Real Property Tax Law Ch. 50-a, Art. 7, Sec. 720(2): "If it appears to the court that testimony is necessary for the proper disposition of the matter, it shall take or appoint a referee to take such evidence as it may direct. /3 [CCH p. 9365, 91-064] Florida Law Sec. 194.036 (3): "The circuit court proceeding shall be de novo, and the burden of proof shall be upon the party initiating the action." /4 [CCH p. 3718,21-219] Property Tax Code, Sec.23-15 (35 ILCS 200/23-15,111-610) /5 [CCH p. 3671, 21-214] Sec. 205.735, M.C.L. 103-560 /6 [CCH p. 2373-5, 22-501] "Judicial review of a decision of the board of tax appeals shall be de novo in accordance with the provisions of RCW 82.32.180 or 84.68.020 as applicable. . ." /7 [CCH p. 10,373-8, 91-858a] 305.425(1): "All proceedings before the judge of the tax court shall be original, independent proceedings, and shall be tried without a jury and de novo." /8 [CCH p. 9570, 92-677] 42-178: "At the hearing, both parties may present evidence of any matters that relate to the classification or to the full cash value of the property in question as of the date of its assessment." /9 [CCH pp. 2210, 22-204; 2212,22-400] The Taxpayer may appeal to the Board of Assessment Appeals or to district court for a trial de novo or may submit to arbitration. /10 Mass. Gen. Laws Ch. 58A, Sec 13: "The decision of the Appellate Tax Board is final as to findings of fact."

Conclusion: A Fairness Standard

Trial de novo is the standard of fairness for tax cases. It is the standard used in every other California state and local tax, including state-assessed property taxes, and it is the standard used by most of the nation's major states for local property taxation.

County assessors and county counsels have provided no evidence that trial de novo would cause anything but better decisions being reached in disputes over the fair market value of property. The current law virtually guarantees the assessor a victory by restricting the evidence a court can consider, and assessors have vigorously opposed having to give up their advantage. The available evidence, however, suggests that trial de novo will have little if any impact on the number of new lawsuits for property tax refunds, but only will make the adjudication of existing lawsuits more fair. The lack of trial de novo in the judicial review of property tax cases is one of the last major vestiges of unfairness within the California tax appeals system, and should be eliminated by legislation in the current session.