County of Amador v. State Board of Equalization

The tax assessors of Amador and Calaveras Counties fixed the assessed value of water rights held by East Bay Municipal Utility District at Pardee Dam. The dam is located on the Mokelumne River, which forms the boundary between the two counties. The counties placed an aggregate assessed value of $8,342,000 on these rights, each entering one-half that amount on its assessment roll for 1961-62. Dissatisfied with these assessments, the utility district

These appropriative rights were subordinate to certain preexisting, downstream riparian rights. One Lloyd Thayer had acquired 207 acres of land with accompanying riparian rights below the site of the project dam. Thayer organized the Colorado Power Company, which in 1929 conveyed the land and riparian rights to the City of Lodi for the limited purpose of establishing a hydroelectric project. In order to make full use of its state-granted appropriative rights and to free it from potential lawsuits, East Bay Municipal Utility District had to acquire superseding interests in the downstream riparian rights of the City of Lodi and Colorado Power Company. This acquisition was accomplished by a condemnation action, which culminated in this court’s decision of February 1932 in East Bay Mun. Util. Dist. v. City of Lodi, 120 Cal.App. 740 [ 8 P.2d 532 ],

The counties charge the State Board of Equalization with several errors of law and one error of valuation, contending: (1) That the Board of Equalization had no power to classify the state-issued appropriative rights as exempt and no power to eliminate them from the assessment. (2) In any event the board erred in so classifying these rights. (3) The board

Appropriative Water Bights Held Under Direct State Permits

The counties’ jurisdictional attack is aimed at a closed question. When taxable and nontaxable interests of a public agency are included in a single assessment figure, segregation between exempt and nonexempt values is part of the Board of Equalization’s constitutional function of assessment “adjustment.” Such was the holding in City & County of San Francisco v. County of San Mateo, 36 Cal.2d 196 , 201 [ 222 P.2d 860 ].

The counties attempt to distinguish City & County of San Francisco v. County of San Mateo, suggesting that the segregation there was one between land and improvements, rather than a separation between taxable and exempt interests. The suggestion is negated by the following statement in the opinion in that case: “An adjustment is sought by virtue of an erroneous inclusion of exempt improvements with taxable lands. ... We therefore have a problem of equalization and adjustment’ confided by the Constitution to the State Board of Equalization. It is the province of the board to ‘adjust’ the assessment so that the exempt and the nonexempt portions of the property be properly segregated.” (City & County of San Francisco v. County of San Mateo, supra, 36 Cal.2d at p. 201.) In view of this rule, the State Board of Equalization had authority to delete any tax-exempt values included in the present assessments. We turn to the substantive question of exemption.

Two pertinent points were established by County of Tuolumne v. State Board of Equalization, supra, 206 Cal.App.2d 352 . First, state-granted appropriative water rights in the hands of the taxpaying public entity are exempted by article XIII, section 1, when these rights are based upon applications filed by the public entity itself or its representatives. (206 Cal.App.2d at pp. 357-360.) Second, when these state-issued rights emanate from filings purchased by the public entity from private individuals, they fall within

The counties contend that East Bay’s appropriative rights are more comparable to those held taxable in the Tuolumne case than to those exempted. Here—so runs the argument—East Bay’s own appropriative filings had been preceded by the competing applications of private persons; the latter, upon filing, had acquired taxable possessory interests ; when the state rejected the applications of the private persons and granted those of the utility district, the latter succeeded to the private filers’ property interests; these had been taxable at the time of their acquisition, hence are taxable in the district’s hands. The counties invoke by analogy the “replacement” principle applicable to the taxation of publicly owned physical improvements.

Article XIII, section 1, has been construed to permit taxation not only of physical improvements in existence at the time the public entity acquired ownership, but also replacements and substitutes for those improvements. (City of Los Angeles v. County of Mono, 51 Cal.2d 843 , 848 [ 337 P.2d 465 ]; City & County of San Francisco v. County of San Mateo, 17 Cal.2d 814 , 819 [ 112 P.2d 595 ].) The taxpayer’s unilateral replacement of one physical asset by another bears no analogy to the successive and utterly distinct interests of competing applicants for state-granted water rights. There is no identity nor even privity between the holders of these successive rights. The replacement doctrine prevents the public, taxpayer from avoiding taxation by constructing exempt improvements to replace taxable improvements. This policy objective is usually irrelevant where the municipal entity seeks original appropriative water rights in competition with the private filer and indeed utilizes its statutory preference to nullify the latter’s time priority.

The possessory interests of the private filers and the appropriative rights issued to East Bay had separate identity, separate origin and separate characteristics. In no sense

The counties argue that the exemption violates the objective of article XIII, section 1. As pointed out by Justice Stone in the Tuolumne case (206 Cal.App.2d at pp. 364-365), the constitutional provision seeks to safeguard the tax revenues of small counties by preventing removal of taxable property from their tax rolls. (See also Rock Creek Wat. Dist. v. County of Calaveras, supra, 29 Cal.2d at p. 9; City & County of San Francisco v. County of Alameda, supra, 5 Cal.2d at pp. 245-246.) It does not impose taxation on the water rights created by East Bay’s appropriative permits, which were never taxable and never on the counties’ tax rolls. In our view the trial court correctly sustained the exemption decision of the State Board of Equalization.

Downstream Riparian Rights Acquired by Condemnation

The downstream riparian rights acquired by condemnation are concededly taxable. At this point the question is

A brief description of the taxable property interests will aid in an understanding of the valuation problem. The opinion in East Bay Mun. Util. Dist. v. City of Lodi, supra, 120 Cal.App. 740 , points out that Thayer’s 207 acres were rocky and unfit for agriculture; that neither Thayer’s firm nor the City of Lodi had ever made beneficial use of the Mokelumne River flow; that, under varying circumstances, Thayer’s land was suitable for a power project with a head of water between 43 and 57 feet. (120 Cal.App. at p. 743.) The final decree of condemnation did not transfer these riparian rights in toto to East Bay. Rather, it awarded the district an easement subordinating the Lodi-Colorado Power Company rights to the utility district’s rights to divert up to 310 cubic feet per second at Pardee Dam for domestic and municipal water supply and to divert for hydroelectric purposes and return to the river at the base of the dam “up to” 750 cubic feet per second. For this easement the condemnation decree awarded the defendants $25,000.

The counties contend that the apparent market value and assessed value of taxable rights as found by the board are arbitrary and without substantial evidentiary support. At the hearings the counties’ expert witness, Mr. C. O. Henning, gave the district’s water rights at Pardee Dam a market value of approximately $33,000,000. Mr. Jack Parle, an appraiser for the Board of Equalization, expressed a market value opinion of $25,000,000. Mr. Henning calculated that

More compelling is the counties’ attack on the findings of the State Board of Equalization. Findings on material issues delineate the basis for an administrative agency’s decision. Inadequate findings impede the parties’ recourse to the courts and thwart the latter in the performance of their review obligations. “The more general the findings, the more difficult it is for the reviewing court to ascertain the principles relied upon by the reviewing agency.’’ (California Motor Transport Co. v. Public Util. Com., 59 Cal.2d 270 , 274 [ 28 Cal.Rptr. 868 , 379 P.2d 324 ].) Aside from their aid to the litigants, findings are needed to aid the courts in determining whether there is sufficient evidence to support them and to enable the courts to determine whether the decision is based on lawful principles. (Swars v. Council of City of Vallejo, 33 Cal. 2d 867 , 871 [ 206 P.2d 355 ].) Insufficiency of the findings to permit fair review may entail a remand to the administrative agency. (Temescal Water Co. v. Department of Public Works, 44 Cal.2d 90 ,102 [ 280 P.2d 1 ].)

In reviewing valuation decisions reached by the State Board of Equalization under article XIII, section 1, the courts have adopted the same criteria prevailing when actions of local boards of equalization are under judicial review. The board’s valuation figure and the method of valuation employed by it are reviewable only for arbitrariness, abuse of discretion or failure to follow the standards prescribed by law. (City of Los Angeles v. County of Mono, supra, 51 Cal.2d at p. 851; County of Tuolumne v. State Board of Equalization, supra, 206 Cal.App.2d at p. 372.) However limited, judicial review extends to (a) the valuation figure found by the board of equalization and (b) its method of valuation. (DeLuz Homes, Inc. v. County of San Diego, supra, 45 Cal.2d at p. 564; Utah Constr. Co. v. Richardson, 187 Cal. 649 , 655 [ 203 P. 401 ].) If a board of equalization is called upon for a decision of law, the .taxpayer has recourse to the courts for a determination of that question. (Flying Tiger Line, Inc. v. County of Los Angeles, 51 Cal.2d 314 , 322 [ 333 P.2d 323 ].)

In assessing a multipurpose water project under article XIII, section 1, a number of special problems arise. An appropriative water right is theoretically eternal, differing from a leasehold in this respect. It has been pointed out that in capitalizing the net income from a nonwasting asset, income is not discounted but simply divided by the appropriate capitalization rate. (Cal. State Board of Equalization, Assessors’ Handbook, General Appraisal Manual (1962 Rev.) pp. 501-502.) Prospective net income is frequently attributable to a combination of exempt and taxable assets. Here, for example, income is produced by exempt physical structures, exempt water rights and taxable water rights. Such a combination of elements may call for capitalizing imputed rather than actual net income. (County of Riverside v. Palm-Ramon Development Co., 63 Cal.2d 534 , 538-539 [ 47 Cal.Rptr. 377 , 407 P.2d 289 ] ; DeLuz Homes, Inc. v. County of San Diego, supra, 45 Cal.2d at pp. 565, 572; see 1 Bonbright, Valuation of Property, pp. 493-494.) Where the project is an income-producing segment of' an integrated operation extending over a number of counties, income attributed to taxable assets within the county may be estimated or may be calculated by the “unit rule” evolved for assessment of privately owned utilities. (County of Tuolumne v. State Board of Equalization, supra, 206 Cal.App. 2d at p. 367.) Such special difficulties are superimposed upon other variants attending the capitalization of income method. As Justice Stone noted in the Tuolumne ease (206 Cal.App. 2d at p. 366) : “Placing a value on the usufructuary right to divert water separate and apart from the structures which are necessary to divert it, presents a knotty problem which does not admit to an entirely satisfactory solution.”

In the present eases the state board’s valuation

As a practical matter, omissions in findings may sometimes be filled by such relevant references as are available. (Swars v. Council of City of Vallejo, supra, 33 Cal.2d at pp. 872-873.) The Attorney General has requested us to take judicial notice of the ratios of assessed-to-market value prevailing in the various counties as published by the board on September 2, 1961, under Revenue and Taxation Code section 1819. (See infra.) Applying these ratios in reverse, the Attorney General’s brief presents the following inferred findings of market value:

Amador Calaveras County County Assessed value ................. .. $ 275,000 $ 300,000 Ratio ......................... . .172 -f- .188 Inferred full cash (market) value .. 1,598,837 1,595,744 Rounded ...................... .. 1,600,000 1,600,000 Add $1,600,000 1,600,000 Total $3,200,000

Assessment equalization boards are seldom called upon to explain their decisions. (See Carr, Property Assessments— Protest, Appeal and Judicial Review, 39 State Bar J. 877, 883.) As a practical matter, the unfolding of the administrative process preceding tax litigation usually supplies enough explanatory material to fulfill the needs of judicial review. An action for the collection or refund of local property' taxes usually takes place after the local board has denied an equalization petition, in effect adopting the valuation reached by the tax assessor. The latter’s assessment method is revealed by his transcribed testimony before the local board or by his testimony in the trial court. In the most recent reported decision, Apple Valley Ranchos Water Co. v. County of San Bernardino, 63 Cal.2d 870 [ 48 Cal.Rptr. 627 , 409 P.2d 707 ] (filed Jan. 25, 1966), the local board had entered extensive findings (including a description of its valuation method) in its minutes. Any of these procedural devices supplies the reviewing court with an authoritative statement of the assessment, the' market valuation and the method employed to reach it. The court may then measure the assessment method by appropriate standards, confirming it as in the Apple Valley Ranchos and Palm-Ramon cases,

In theory article XIII, section 1, empowers the State Board of Equalization to review assessments originally reached by the county assessor. But the Constitution also authorizes the board to “adjust” the assessment. In adjusting the county assessor’s valuation by substituting its own, the board effectually makes a new assessment and itself becomes the assessor. The determination is subject to judicial review at the behest of the taxing agency as well as the taxpayer. (See People v. County of Tulare, 45 Cal.2d 317 , 319-320 [ 289 P.2d 11 ]; County of Tuolumne v. State Board of Equalization, supra, 206 Cal.App.2d at pp. 373-374.) Judicial review of assessments and assessment practices is impossible and purported review of specific valuations is meaningless when assessing agencies’ valuation methods are obscured by unexplained decisions. However limited judicial scrutiny of the assessment itself, even that partial inquiry is blocked when the valuation method is unrevealed. The Supreme Court remarked in Universal Consol. Oil Co. v. Byram, 25 Cal.2d 353 , 361 [ 153 P.2d 746 ] : “The concluding steps of the equalization proceeding are many times the most essential to the preservation of the taxpayer’s rights.” They are equally essential to the preservation of the taxing agencies’ powers.

The courts have reviewed a number of assessment decisions of the State Board of Equalization reached under article XIII, section 1. In those eases where valuation was in issue, the state board had adopted or confirmed the action of the local assessor. The latter had described the assessment, the market valuation and the method in the course of the transcribed administrative hearing. (City of Los Angeles v. County of Mono, supra, 51 Cal.2d at pp. 851-852; City of Pasadena v. County of Los Angeles, 37 Cal.2d 129 [ 230 P.2d 801 ]; County of Tuolumne v. State Board of Equalization, supra, 206 Cal.App.2d at pp. 365-368; Alpaugh Irr. Dist. v. County of Kern, supra, 113 Cal.App.2d at pp. 293-294.) The absence of formal findings in those cases did not prevent or impede judicial review because the assessor’s description of his valuation method supplied an acceptable (if unacknowledged) substitute. Here the state board has rejected the

In the Tuolumne case, supra, the exempt and taxable rights were located at five physically separate diversion points, each of which had been separately assessed. The state board reduced the four exempt assessments to zero and adopted the assessor’s valuation of the fifth. Since Tuolumne County’s valuation approach had been described in the administrative hearing, the court had no occasion to seek that approach within the four corners of the board’s written decision. Here, in contrast, the board was presented with a single unsegregated assessment covering commingled exempt and taxable interests. The board excised the former and placed its own valuation on the latter. In the absence of some authoritative statement of the valuation method adopted by the board, the court cannot ascertain whether its method was legally acceptable or arbitrary.

Mr. Henning, who had been employed by the counties and testified before the board, described the valuation method employed in reaching the counties’ original unsegregated assessment. Additionally, during the hearing he made a separate evaluation of the downstream rights. The Board of Equalization rejected both the original and the segregated assessment figures posited by Mr. Henning. Hence his evaluation approach can hardly be viewed as that of the board. Other witnesses, notably Mr. Parle for the board and Mr. John D. Russell for the utility district, supplied market value appraisals for the entire group of water rights, but did not offer a segregated valuation of the rights acquired by condemnation. It is impossible to say that the valuation method described by any of the witnesses was that adopted by the board.

It is true of course that the counties have the burden of demonstrating that the state board acted arbitrarily. (City of Los Angeles v. Counly of Mono, supra, 51 Cal.2d at p. 851.) In support of the board’s decision the Attorney General’s brief hypothesizes six different calculations, designed to demonstrate that the taxable rights could have a market value ranging between $1,992,000 and $4,224,000. The range is produced by substituting varying capitalization rates, water prices and plant costs in place of those used by the valuation witnesses, then applying a 22 percent factor

The board’s failure to make adequate findings leaves the valuation proceeding under article XIII, section 1, in an incomplete stage. Thus the matter should be remanded to the board for further proceedings. (Universal Consol. Oil Co. v. Byram, supra, 25 Cal.2d at p. 363; see also DeLuz Homes, Inc. v. County of San Diego, supra, 45 Cal.2d at p. 574.) Since application of the “intercounty equalization ratios” to the board’s market valuation would remain a source of controversy, we state our views on that subject.

Sections 1815 to 1825 of the Revenue and Taxation Code require the State Board of Equalization to make periodic surveys and to prepare annual tabulations showing the ratio of assessed to cash (market) value of locally assessed property in each county. Under section 1819, the tabulations must be published not later than August 23 (formerly not later than September 2) of each year. Section 1815 declares that the board’s surveys have the purpose of enabling it to perform its duties “under this article” and under article XIII, section 9 (directing inter county equalization of tax valuations) and under article XIII, section 14 (providing for the state board’s assessment of privately owned public utilities).

Acting under these statutes, the Board of Equalization on September 2, 1961, published statewide tabulations indicating that Amador County was assessing property at 17.2 percent of market value and Calaveras at 18.8 percent of market value. As we know, these ratios were applied by the board in assessing East Bay’s downstream water rights. The counties contend that neither article XIII, section 1, nor any statute authorized the board to apply these assessment ratios. They point out that application of these intercounty ratios permits

Without regard to the identity of the assessing agency, article XIII, section 1, of the Constitution requires that all property be taxed in proportion to its value. The constitutional goals are equality and uniformity. (Watchtower Bible & Tract Soc. v. County of Los Angeles, 30 Cal.2d 426 , 429 [ 182 P.2d 178 ]; County of San Bernardino v. Way, 18 Cal.2d 647 , 657 [ 117 P.2d 354 ].) In authorizing

the State Board of Equalization to review assessments of taxable, publicly owned assets, the constitutional provision implies that the board is not to disregard assessment practices in the particular locality; while its power of adjustment would indicate that the board may supersede the local assessment, utilizing its own method of achieving equality and uniformity. (County of Tuolumne v. State Board of Equalization, supra, 206 Cal.App.2d at pp. 368, 372.) Publicly owned utilities’ privilege of seeking reassessment at the hands of the state board could conceivably create lack of uniformity in relation to other owners of locally assessed property. The same privilege, however, contributes to uniformity between these utilities and privately owned utilities which the state board assesses under article XIII, section 14, of the state Constitution. Article XIII, section 1, does not require the state board to adopt and apply local assessment practices in assessing public agencies, but only to seek uniformity and equality.

Counsel for the counties do not suggest any ratio more appropriate than that used by the board, nor do they demonstrate that the board’s ratios would produce a dollar result any different than the counties’. At the hearing before the board Calaveras County’s assessor testified that he utilized a 25 percent assessment ratio. Amador County’s assessor did not describe his ratio. Neither was asked whether his level of market value appraisals coincided with the state board’s. Given different levels of market value appraisals, a ratio of 17.2 percent or 18.8 percent could produce the same result as a 25 percent ratio. As commanded by statute, the board had ascertained that, in terms of its own appraisals, the former ratios were those actually prevailing in the two counties. In the absence of demonstrated error in establishing

The East Bay District was organized in 1923 and adopted its Mokelumne River Project in September 1924.

Pursuant to the California Water Commission Act (now Wat. Code, § 1000 et seq.), the district filed, in 1924, an application for a permit to appropriate unappropriated water on the Mokelumne. In subsequent years 1925 and 1926 applications were filed for the diversion of water for the development of hydroelectric power.

At the time of the hearing in 1925 on the district’s first application by the Division of Water Rights Department, there were 22 applications, falling by reason of ownership into three distinct groups: The East Bay District, the J. W. Preston group, and Stephen E. Kieffer.

The Preston projects were initiated when it filed applications in 1919 and 1920 to divert water for irrigation purposes. The Kieffer project was initiated by filing applications in 1921 and 1923 to divert water for agricultural purposes, and for a municipal water supply for cities in Sacramento, San Joaquin Valley and San Francisco Bay. The East Bay District project was initiated by the filing of its application in 1924 for the main purpose of delivering municipal water supplies to the cities on the east side of San Francisco Bay.

The Division of Water Rights Department in its decision of 1926 noted that both Preston and Kieffer had filed their applications prior to the district. However, recognizing the mandate of section 20 of the Water Act (now Wat. Code, § 1460), which provides that the application for a permit by a municipality for the use of water for the municipality or its inhabitants for domestic purposes shall be considered first in right irrespective of whether it is first in time, the Water Rights Department issued the permit to the district.

With this background in mind it is necessary to turn to article XIII, section 1, of the California Constitution.

Prior to its amendment in 1914, article XIII, section 1, exempted from taxation all property belonging to the state, or to any county or municipal corporation within the state. Because impending disaster, however, would result to smaller counties by the removal from the local tax rolls of lands and water rights acquired and to be utilized in connection with the acquisition or extension of municipal water supplies such as were then in progress by the City and County of San Francisco and the City of Los Angeles, the amendment in

The fundamental question here is whether the water rights acquired by the district were “subject to taxation at the time of the acquisition. ’ ’

When Kieffer and the Preston group filed their applications to appropriate water, they secured a conditional right to the use of water. (Eaton v. State Water Rights Board, 171 Cal.App.2d 409 , 415 [ 340 P.2d 722 ]; Wat. Code, § 1450.) This right is an inchoate right, an incomplete right subject to defeasance, but it is a possessory interest in real property. (Madera Irr. Dist. v. All Persons, 47 Cal.2d 681 , 689-691 [ 306 P.2d 886 ] ; Yuba River Power Co. v. Nevada Irr. Dist., 207 Cal. 521 , 527 [ 279 P. 128 ]; Silver Lake etc. Co. v. City of Los Angeles, 176 Cal. 96 , 101 [ 167 P. 697 ].) As such the water rights which emanated from these filings are land in the sense that the word “land” is used in article XIII, section 1, and is assessable as such. (County of Tuolumne v. State Board of Equalization, 206 Cal.App.2d 352 , 364 [ 24 Cal.Rptr. 113 ]; Alpaugh Irr. Dist. v. County of Kern, 113 Cal.App.2d 286 , 293 [ 248 P.2d 117 ] ; Waterford Irr. Dist. v. County of Stanislaus, 102 Cal.App.2d 839 [ 228 P.2d 341 ].) It would be immaterial whether these appropriate filings were in fact taxed when acquired. (County of Tuolumne v. State Board of Equalization, supra.) Nor, in my opinion, would it be material whether the district acquired these water rights through Kieffer and the Preston group as transferee or because it was accorded a preferred priority pursuant to Water Code section 1460 (then section 20 of the Water Act).

To hold exempt from taxation a municipality that acquires its water rights because of its preferred priority which is granted it by legislative enactment is to hold that a statute takes precedence over the constitutional mandate of article

I cannot believe the Legislature so intended.

The petitions of the appellants and the defendants and respondents for a hearing by the Supreme Court was denied April 27, 1966. Traynor, C. J., and Burke, J., were of the opinion that the petition should be granted.