Spring 2003

Table of Contents

Cal-Tax Home

Email Editor

Guest Commentary 

Cris K. O’Neall is an attorney with the Los Angeles law firm of Rodi, Pollock, Pettker, Galbraith & Cahill.  Mr. O’Neall, who specializes in property tax matters, represented the taxpayers in some of the cases referred to in this article.  Mr. O’Neall can be contacted at cko@rodipollock.com.

By Declining to Resolve Conflicting Decisions among Lower Appellate Courts in Recent Property Tax Cases, California’s Highest Court May Be Signaling the State Board of Equalization to Exert Its Authority to Enforce Uniformity in Local Assessment Practices

It’s happened again. The California Supreme Court has failed to resolve a direct conflict between opposing decisions issued by two Court of Appeal districts on the same issue.

This time the issue was the interpretation of State Board of Equalization Property Tax Rule 468, which sets forth the principles and procedures for assessment of oil and gas properties statewide. The Fifth District of the Court of Appeal held that Rule 468 could be read expansively to permit assessment of certain types of unproved oil and gas reserves, even though Rule 468 makes no mention of such reserves. Maples v. Kern County Assessment Appeals Board (Occidental of Elk Hills, Inc.).[1] 

In Maples, the Fifth District specifically ruled that a 1985 opinion issued by the Third District of the Court of Appeal in Lynch v. State Bd. of Equalization was not relevant.[2] The Third District’s decision in Lynch was seminal, holding that Property Tax Rule 468 was constitutional and supporting Rule 468’s use of proved reserves as the only measure of the taxable property interest for oil and gas properties.[3] In fact, the Third District’s decision specifically acknowledged, but found unassessable under Rule 468, the unproved oil and gas reserve categories that the Fifth District found assessable.[4] 

The Supreme Court denied a petition for review in Maples, thereby declining to address this direct conflict between the Fifth and Third Districts of the Court of Appeal. As a result, oil and gas property taxpayers, whose properties happen to be located within the geographical boundaries of the Court of Appeal’s Fifth District, may receive property tax assessments on their unproved oil and gas reserves. Meanwhile, oil and gas property taxpayers, whose properties are located in the Third District’s geographical boundaries, can assert that their unproved reserves are not assessable.[5] Oil and gas property taxpayers, whose properties are located within the First, Second, Fourth, and Sixth Districts of the Court of Appeal, will be at the mercy of their local assessor, who will have to decide whether to follow Lynch or Maples when assessing oil and gas properties.

The dilemma faced by oil and gas property taxpayers is similar to that which California’s defense contractors have recently experienced. In 1996, the Second District of the Court of Appeal held that low-value supplies and equipment, which California defense contractors were using in their performance of contracts for the U.S. Government, were assessable to the defense contractor and were not exempt or immune from property taxation. TRW Space & Defense Sector v. County of Los Angeles.[6] The Court of Appeal’s decision addressed specific language in the Federal Acquisition Regulations (FAR) to reach its decision that low-value equipment was not government-owned and could be taxed.

Six years later in 2002, the Court of Appeal’s Fourth District reached exactly the opposite conclusion, holding that low-value supplies and equipment, used by a defense contractor in performance of U.S. Government contracts,, was government-owned and therefore immune from property taxation. Hughes Aircraft Co. v. County of Orange.[7] Amazingly, the Fourth District’s decision interpreted the same provisions of the FAR that the Second District had, yet came to the opposite conclusion. Further, the Fourth District criticized the Second District’s opinion in TRW in a half dozen places.[8]

To the surprise of property taxpayers and practitioners, the California Supreme Court declined to grant review of the Fourth District’s opinion in order to resolve the direct conflict between Hughes and TRW.[9] Consequently, local assessors in the Second District’s geographical boundaries can assess defense contractors for low-value supplies and equipment used in performing U.S. Government contracts, but defense contractors located within the Fourth District do not pay property taxes on low-value supplies and equipment used to perform federal government contracts.[10] Once again, defense contractors whose property is not situated in either appellate district may or may not be assessed on their low-value supplies and equipment, depending on which precedent their local assessor chooses to follow.

Direct conflicts between Court of Appeal districts, when they arise, are to be resolved by the California Supreme Court by reviewing the appellate court decision which creates the conflict.[11] Unfortunately, recent experience shows that the Supreme Court is not inclined to review conflicts between appellate court districts in property tax cases. Given these circumstances, what can property taxpayers do?

One alternative is further litigation. A third property taxpayer may choose to file suit in a third district of the Court of Appeal, seeking to create another precedent supporting one of the prior decisions in order to petition the California Supreme Court for review again. This approach has many drawbacks as it is time-consuming, expensive, and not necessarily likely to achieve the desired result. A related alternative is for the taxing authority to bring declaratory relief litigation to resolve an issue of law. However, local assessors have been reluctant to bring such lawsuits in recent years.[12]

A second, and more feasible, alternative is for the California State Board of Equalization (BOE) to use its authority to mandate statewide uniformity in local assessments.[13] By promulgating regulations, revising portions of the Assessors’ Handbook, issuing Letters to Assessors, and through other similar means, the BOE can prevent the lack of uniformity in assessment practices that now plagues oil and gas and defense contractor property taxpayers.

Fairness is a critical element in any system of taxation. By turning down opportunities to resolve conflicting lower court decisions in property tax matters, the California Supreme Court appears to be calling upon the BOE to exercise its constitutional duty to insure uniformity in property taxation statewide. If that is the case, the BOE should use all of the tools at its disposal to resolve the conflicts between California’s appellate court districts so that California’s local property taxpayers are uniformly and fairly assessed.

[1] The Fifth District Court of Appeal’s Opinion was issued on October 29, 2002 (103 Cal.App.4th 172; 126 Cal.Rptr.2d 585); the taxpayer’s Petition for Rehearing was denied by the Fifth District on November 25, 2002; the taxpayer’s Petition for Review was denied by the California Supreme Court on January 15, 2003.

[2] Lynch v. State Bd. of Equalization (3rd District, 1985) 164 Cal.App.3d 94; 210 Cal.Rptr. 335. In Maples, the Fifth District stated “[W]e must view the Lynch court’s discussion of the concept of proved reserves as dicta. We find that reevaluation of the concept of proved reserves on the record and in the context presented in the present case requires us to reach a different conclusion than that reached in Lynch.” (Maples, supra, 103 Cal.App.4th at 197.)

[3] Lynch, supra, 164 Cal.App.3d at 117.

[4] Lynch, supra, 164 Cal.App.3d at 106 (“[T]he proved reserve concept deliberately understates future production in favor of capture through reassessment when probable and possible [unproved] production becomes proven beyond a reasonable doubt.”)

[5] The Fifth District includes the Counties of Fresno, Kern, Kings, Madera, Mariposa, Merced, Stanislaus, Tulare and Tuolumne. The Third District encompasses the Counties of Alpine, Amador, Butte, Calaveras, Colusa, El Dorado, Glenn, Lassen, Modoc, Mono, Nevada, Placer, Plumas, Sacramento, San Joaquin, Shasta, Sierra, Siskiyou, Sutter, Tehama, Trinity, Yolo and Yuba.

[6] TRW Space & Defense Sector v. County of Los Angeles (2nd District, 1996) 50 Cal.App.4th 1703; 58 Cal.Rptr.2d 602.

[7] Hughes Aircraft Co. v. County of Orange (4th District, 2002) 96 Cal.App.4th 540; 117 Cal.Rptr.2d 601.

[8] The Fourth District’s opinion in Hughes stated at one point “As we previously explained, we find [the Second District’s] opinion to be baseless, and choose not to follow TRW” and at another place “We … find the TRW court’s reasoning misplaced.” (Hughes, supra, 96 Cal.App.4th at 556 and 557.)

[9] The California Supreme Court denied Orange County’s Petition for Review in Hughes on May 15, 2002.

[10] The Counties located within the Second District are Los Angeles, San Luis Obispo, Santa Barbara and Ventura. Those Counties encompassed by the Fourth District are Imperial, Inyo, Orange, Riverside, San Bernardino and San Diego.

[11] California Rule of Court 29(a) states in part: “Review by the Supreme Court of a decision of a Court of Appeal will be ordered (1) where it appears necessary to secure uniformity of decision or the settlement of important questions of law.”

[12] See Rev. & Tax. Code, § 538.

[13] The State Board of Equalization’s authority to insure statewide uniformity in the assessment of property derives from the California Constitution and the Revenue and Taxation Code.  See Cal. Const., art. XIII, § 1(b); Gov’t Code, § 15606(c) and (e). See also Xerox Corp. v. County of Orange (1977) 66 Cal.App.3d 746 at 753.