Trial De Novo: The Case for Legislative Authority to Act

Editor’s Note: Following is an August letter to Assembly Speaker Robert M. Hertzberg detailing the authority of the California Legislature to enact a statute, as proposed in Mr. Hertzberg’s AB 934, to grant judicial de novo review of local property tax appeals. The letter responds to a contrary opinion from the Legislative Counsel’s Office. The authors of this letter are Eric J. Miethke and Richard D. Martland of the law firm of Nielsen, Merksamer, Parrinello, Mueller and Naylor.

Dear Mr. Speaker:

You have asked the following question:

Is there any provision in the California Constitution limiting the power of the Legislature to provide for de novo review of decisions by local boards of equalization?

This letter supplants and updates our response to you of June 20, 2001 on that issue taking into consideration the opinion of the Legislative Counsel of July 16, 2001. In our letter of June 20 we concluded that there is no provision of the California Constitution limiting the power of the Legislature to provide for de novo review of decisions by local boards of equalization. We are still of that view.

At the outset, we note that our conclusion and analysis differs from that of the Legislative Counsel because Counsel’s opinion starts from an erroneous premise: that because local boards of equalization are themselves established in the Constitution (Art. XIII, section 16), there must be a specific constitutional provision affirmatively granting the Legislature the power to enact a trial de novo statute. In short, Counsel’s opinion construes that constitutional provision as limiting the Legislature’s power to address standards of judicial review in the property tax context. As set forth below, we disagree with the premise and the analysis.

ANALYSIS

The California Constitution, unlike the federal Constitution, vests all legislative power in the Legislature (Article IV, section 1) except the powers of initiative and referendum, which are reserved to the people. The remainder of the Constitution therefore is a limitation on the power of the Legislature, not a grant of authority to it. Thus, unless otherwise limited by the state or federal constitutions, the Legislature has the power to act. Further, the power of the Legislature in the area of taxation is paramount, and any constitutional restriction on that power must be strictly construed. (See Franchise Tax Bd. v. Superior Court of Los Angeles County (1989) 212 Cal.App.3d 1343, 1347 and cases cited therein.) We therefore think that Legislative Counsel has the burden reversed. Instead of asking proponents of AB 934 to identify a specific provision empowering the Legislature to enact a trial de novo bill, they instead should be asked to identify a specific constitutional provision which says the Legislature is precluded from enacting such a statute. In the absence of such a specific preclusion, the Legislature has the general power to enact a trial de novo statute.

From our initial conversation, we understand counsel’s position is that trial de novo does not fall within the parameters for legislation under Article XIII, section 33. Counsel misunderstands the purpose of section 33. It provides:

The Legislature shall pass all laws necessary to carry out the provisions of this article. (Art. XIII, sec 33; emphasis added.)

Section 33 both preserves the Legislature’s full powers to implement those provisions of Article XIII and mandates that the Legislature exercise those powers. While section 33 probably does not empower the Legislature to alter any provisions of Article XIII that are self-executing (Hewlett-Packard Co. v. County of Santa Clara (1975) 50 Cal.App.3d 74, 81), Article XIII, section 16, does not even address judicial review, let alone the standard of judicial review, of decisions issued by local boards of equalization. Pursuant to the mandate of section 33, suitable laws have been passed by the Legislature prescribing the duties and directing the mode of exercise of the powers of the boards of equalization. Napa Sav. Bank v. County of Napa (1911)17 Cal.App. 545, 548.) While the Legislature has provided for judicial review of decisions by the local boards of equalization, it has not specified in statute the standard for judicial review. (Rev. & Tax. Code sec. 5140.)

In the absence of any legislation, a court-made standard has evolved. Initially, the courts held that a local board’s factual findings were “conclusive and final.” This standard was ultimately supplanted by the “substantial evidence test." Plaza Hollister Limited Partnership v. County of San Benito (1999) 72 Cal.App.4th 1, 23 fn. 15.) In these cases, provided to us by Legislative Counsel, the courts have noted that de novo review of decisions by local boards of equalization is not available. However, the courts were never confronted with a statute setting forth the standards for judicial review of decisions by local boards of equalization. Thus, these cases are not relevant, let alone dispositive of the Legislature’s power in this area. (See Franchise Tax Bd. v. Superior Court of Los Angeles County, supra, at 1348 rejecting cases cited by the Franchise Tax Board that did not involve the type of statute before the court.)

The Legislature clearly has the inherent power to enact statutes to address standards of judicial review, and has done so in areas that already touch local property taxation as evidenced by Code of Civil Procedure section 1094.5¹ . As noted in Bixby v. Pierno (1971) 4 Cal.3d 130 at page 140:

“Following this historic approach to the judicial review of administrative decisions, the Legislature in 1945 adopted the above principles in Code of Civil Procedure section 1094.5 to authorize the reviewing court to exercise its independent judgment in those cases in which it deemed that it was authorized by law to exercise such judgment. Thus, section 1094.5 empowers this court to establish standards for determining which cases require such independent judgment review and which call for only a substantial evidence review of the entire record. Merrill v. Department of Motor Vehicles (1969) 71 Cal.2d 907, 914-915 [80 Cal.Rptr. 89, 458 P.2d 33].) In view of this judicial history, the court would now assert a doubtful prerogative if it were to rule that no cases at all require an independent judgment review and that the Legislature created an empty category in section 1094.5.” (Emphasis added.)

Even when the Legislature has restricted judicial review (raising potential constitutional issues such as due process and separation of powers), the courts have upheld its power to do so. In Tex-Cal Land Management, Inc. v. Agricultural Relations Board (1979) 24 Cal.3d 335 the Legislature limited review of orders of the Agricultural Labor Relations Board to substantial evidence. The court acknowledged that prior decisions dating back to 1936 suggested that the standard of review for ALRB type orders might be independent judgment, but the court stated that none of those cases had before it an express “legislative command” that findings be supported by substantial evidence. As noted by the court:

“The language in those cases that described constitutional limitations on legislative power was unnecessary to the holdings, which could as easily have been grounded in judicially fashioned rules of procedure or in interpretation of section 1094.5.” (page 345)

It has been posited that de novo review usurps the constitutional powers of local boards of equalization. Given some of the significant limitations placed on the local boards by the Legislature, this proposition is lacking in any reasonable support. For example. Revenue and Taxation Code section 167 creates a presumption in favor of the taxpayer’s property valuation in administrative hearings involving the valuation of owner-occupied single-family dwellings and escape assessments. Revenue and Taxation Code section 1604(c) provides that local boards of equalization, which fail to hear evidence and fail to make a final determination within two years of the filing of an appeal, must accept the taxpayer’s evidence of market value.

The constitutionality of section 1604(c) was challenged on the basis that (1) it unconstitutionally deprived local boards of equalization of their authority to determine assessed value, and 2) that it violated the constitutional requirement of separation of powers. Both contentions were rejected. Mission Housing Development Co., v. City and County of San Francisco (1997) 59 Cal.App.4th 55.) Quoting from Brydonjack v. State Bar (1929) 208 Cal. 439, the court stated (at pages 80-81):

“Of necessity the judicial department as well as the executive must in most matters yield to the power of statutory enactments, [citations] The power of the [L]egislature to regulate criminal and civil proceedings and appeals is undisputed.

Thus, the Legislature has enacted a complex procedural scheme to govern equalization proceedings.... The City argues that the effects of section 1604, subdivision (c) is analogous to a statute that requires a trial court to enter a judgment for the plaintiff if the court fails to render a judgment within a specified period of time after filing of the complaint. This is too simplistic.

We note first that in Napa Savings Bank v. County of Napa (1911) 17 Cal. App. 545, the court held that an assessment order by the county board of equalization was void for want of jurisdiction because the order was not made within the time prescribed by the Legislature for such acts. . . . Although in that opinion there was no issue concerning the constitutionality of the statutes, we find the opinion persuasive with respect to the extent of the Legislature’s power to regulate equalization proceedings.”

In 1989 the Superior Court of Sacramento County rejected a constitutional challenge to Revenue and Taxation Code section 5170 requiring de novo review of decisions by the State Board of Equalization with respect to state-assessed property. AT&T Communications of California, Inc. v. State Board of Equalization (Sacramento Superior Court No. 500802, 1989.) The Board’s writ to the Third District Court of Appeal was denied, and thus the trial court’s opinion stands. Prior to this decision, the courts held that the standard of review for decisions reached by the State Board of Equalization under Article XIII, section 19 is the same as that applicable to decisions reached by local boards of equalization. Georgia-Pacific Corporation v. County of Butte (1974) 37 Cal. App. 3d 461, 473-474; County of Amador v. State Board of Equalization (1966) 240 Cal. App. 3d 205, 218; Brett Harte Inn, Inc. v. City and County of San Francisco (19 76) 16 Cal. 3d 14, 22-23 - citing both Georgia-Pacific and County of Amador for this principle.) Thus, the court recognized the power of the Legislature to change that standard as to the State Board of Equalization.

The court based its decision on Article XIII, section 32 which provides:

“No legal or equitable process shall issue in any proceeding in any court against this State or any officer thereof to prevent or enjoin the collection of any tax. 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 may be provided by the Legislature.”

Section 32 was added in 1910 as Article XIII, section 14(g) and is limited to state-assessed taxes. (Eisley v. Mohan (1948) 31 Cal. 2d 637, 640-641.) It has been posited that section 32 is the only authority for the Legislature to establish a judicial standard of review under Article XIII, and that such authority is limited to state-assessed property. The proposition is insupportable because nothing in section 32 or Article XIII even purports to qualify section 33’s express preservation of the Legislature’s power and the mandate to “pass all laws necessary to carry out the provisions of this article.”

Moreover, there is no basis for distinguishing between the intrusion caused by Revenue and Taxation Code section 5170 on the State Board of Equalization’s constitutional charge under Article XIII, section 19 to assess property owned or used by public utilities and the intrusion caused by a trial de novo statute on local boards of equalization’s charge under Article XIII, section 16. Put another way, to the degree trial de novo is deemed inconsistent with a constitutionally-based administrative board’s charge to value property, section 32 did not “permit” the Legislature to adopt a statute in conflict with the State Board of Equalization’s authority to assess property. To the degree it is somehow deemed to have done so, there already have been other statutes passed by the Legislature which could be said to do the same that either have existed for many years without challenge, or have been challenged unsuccessfully; e.g., Revenue and Taxation Code sections 167 and 1604(c), discussed previously.

Further, there is certainly no constitutional sanctity to a local board of equalization’s factual findings. The courts rejected this notion when, in the absence of any governing legislation, they adopted a substantial evidence test. Last, de novo of local boards of equalization hearings is not a novel or legally suspect concept. De novo review is statutorily required in such states as Texas, New York, Florida, Illinois, Michigan, Washington, Oregon, Arizona and Colorado.

The principal difference between Counsel’s opinion and that of this opinion lies in Counsel’s interpretation of Covert v. State Board of Equalization (1946) 29 Cal.2d 125 in which the court reviewing the then constitutional powers of the Board of Equalization over the sale of alcoholic beverages concluded the Legislature was precluded by those provisions from authorizing de novo review of the Board’s decisions. From this decision Counsel’s opinion makes the sweeping conclusion: “Although Covert was decided in an alcoholic beverage control context, its reasoning appears to be one of general application and remains the rule of law.” The conclusion is fundamentally flawed.

First, the decision reached in Covert was reached after the court made a detailed analysis of the constitutional provisions then applicable to the State Board of Equalization in section 22 of Article XX, which have no relation to the taxation provisions under Article XIII applicable to local boards of equalization. Had the court been of the view the constitutional status of a quasi-adjudicatory board was all that is necessary to preclude the Legislature from setting judicial standards of review, the court would have had no purpose in discussing the specific constitutional provisions applicable to the Board. Second, stating that this flawed conclusion “remains the rule of law” implies that some court has adopted Counsel’s interpretation of Covert. In support of this interpretation the only non-alcoholic beverage case cited is Fukuda v. City of Angels (1999) 20 Cal. 4th 805.

Fukuda involved a City of Angels civil service issue. In that case the court set forth at length the history relating to judicial review of quasi-adjudicatory boards. As part of that history the court mentioned the holding in Covert. Nothing in Trial De Novo: The Case for Legislative Authority to Act purports to suggest that constitutional provisions applicable to other constitutionally created quasi-adjudicatory boards cannot empower the Legislature to establish standards of judicial review.

Having created a constitutional principle of “general application,” Counsel’s opinion dismisses the power conferred on the Legislature by section 33 of Article XIII, stating: “However, the language of that constitutional provision does not expressly authorize the Legislature to enact laws, in its own discretion, that change the scope or effect of any provision of that article.” (Emphasis added.) In substance, Counsel’s opinion interprets the scope of Article XIII by reference to a totally different Article governing a totally different body and then, having defined the scope of Article XIII, opines that section 33 is not sufficient authority for the Legislature to change the scope of Article XIII as
defined by Counsel.

If Covert is as all encompassing as Counsel’s opinion suggests, it was never mentioned nor barred the court in Mission Housing Development Co. v. City and County of San Francisco (supra) 59 Cal. App. 4th 55 from upholding the power of the Legislature to alter the appeals process of local boards of equalization or the trial court in AT&T Communications of California v. State Board of Equalization from concluding that the Legislature under section 32 of Article XIII could change the standard of review for decisions by the State Board of Equalization. Recognizing the vagaries of litigation, and only to point out that sweeping conclusions are not always embraced by the courts, the AT&T decision was contrary to a similar 1988 opinion issued by the Legislative Counsel on the power of the Legislature to change the standard of judicial review of decisions by the State Board of Equalization. That opinion cited Covert, as did the Board of Equalization’s briefs in the 1989 AT&T litigation. The trial court was not persuaded and the Board declined to perfect an appeal after its petition for writ of mandate to the Court of Appeal was denied.

In summary, given that there are: 1) no limitation in the constitution that expressly or impliedly would preclude the Legislature from establishing the standard for judicial review of decisions by local boards of equalization; 2) no judicial decisions that reject the power of the Legislature to establish a standard for judicial review of decisions by local boards of equalization; and 3) the express mandate in Article XIII, section 33 that the Legislature pass all laws necessary to carry out the provisions of Article XIII, there is no credible basis for concluding that the Legislature lacks the power to establish the standard for judicial review of decisions by local boards of equalization.

 “. . .unless otherwise limited by the state or federal constitutions, the Legislature has the power to act. Further, the power of the Legislature in the area of taxation is paramount, and any constitutional restriction on that power must be strictly construed.”

¹Assessors use this section of the code to seek judicial review of local board of equalization decisions.