Case Number: 20STCP01190    Hearing Date: February 11, 2021    Dept: 85

 

Jeffrey Prang, Los Angeles County Assessor v. Los Angeles County Assessment Appeals Board No. 2, 20STCP01190

Tentative decision on petition for writ of mandate:  denied

Petitioner Los Angeles County Assessor Jeffery Prang (“Assessor”) seeks a writ of mandate ordering Respondent Los Angeles County Assessment Appeals Board No. 2 (“Board”) to vacate its action of reducing the assessments of Real Party-in-Interest Southwest Airlines Co. (“Southwest”) for the 2012 tax year.

The court has read and considered the moving papers, opposition, and reply, and renders the following tentative decision.

  1. Statement of the Case

Petitioner Assessor commenced this proceeding on March 27, 2020, alleging a cause of action for administrative mandamus.  The Petition alleges in pertinent part as follows.

Southwest is a commercial airline which operates a fleet of certificated aircraft at Los Angeles International Airport (“LAX”) and Hollywood Burbank Airport (“BUR”).  Because the situs of this fleet is Los Angeles County (“County”), it is subject to property tax in the County.  Southwest applied to the Board for a tax assessment reduction for its fleet of certificated aircraft in the 2012 tax year.  The application was based on Southwest’s assertion that Assessor improperly assessed non-assessable intangible property: the value of software related to aircraft avionics.

Prior to Southwest’s application, Assessor’s assessed value for Southwest’s taxable fleet for the 2012 tax year was $321,511,132.  The Board held an equalization hearing on Southwest’s application, which occurred on April 24-26, 2018 and February 11 and 20, 2019.  On October 1, 2019, the Board issued its Findings of Fact (“Findings”).  The Board’s Findings reduced the assessed value of Southwest’s fleet at LAX by 7.18% and at BUR by 7.14% to account for non-taxable software.

Assessor alleges that the Board erred as a matter of law by failing to apply the appropriate burden of proof for Southwest to demonstrate that Petitioner’s assessment includes non-taxable software and the value of that non-taxable software.  The Board applied the Property Tax Rule 321, the general standard of proof by a preponderance of the evidence, without consideration of how that standard is affected by the more specific Property Tax Rule 152(f), which requires that the taxpayer identify the non-taxable property and services and supply sale prices, costs or other information that will enable the assessor to make an informed judgment concerning the proper value to be ascribed to taxable and nontaxable components of the contract.

The Board’s erred in (a) accepting expert testimony about vendor representations without any foundational evidence that the vendors understood California property tax treatment of computer software and (b) applying vendor-determined percentages to allocate avionics system costs between software and hardware to determine value under the market value valuation method.

The Board erred by shifting the burden of proof and/or persuasion on Assessor to rebut Southwest’s evidence of non-taxable software and its value and erred when it applied Revenue & Taxation (“R&T”) Code sections 995 and 995.2 without consideration of how it is affected or qualified by R&T Code section 401.17, which specifically addresses the taxation of certificated aircraft, because the relevant appraisal unit in this dispute is a commercial aircraft, not a computer.

The Board erred when it relied on Civil Code section 3531’s reference to impossibilities after noting that information from vendors was not readily available.

The Board erred by holding that Southwest demonstrated that auto pilot software, electronic instrumentation systems software, flight management systems software, propulsion control system software, and satellite data unit software was non-taxable.

The Board erred in failing to provide a road map in its decision for determining that Assessor improperly assessed non-taxable software.  The Findings fail to identify which programs identified by Southwest were non-taxable and which programs were taxable, and how it determined whether particular software was taxable or not.

  1. Standard of Review[1]

CCP section 1094.5 is the administrative mandamus provision which structures the procedure for judicial review of adjudicatory decisions rendered by administrative agencies.  Topanga Ass’n for a Scenic Community v. County of Los Angeles, (“Topanga”) (1974) 11 Cal.3d 506, 514-15.

CCP section 1094.5 does not in its face specify which cases are subject to independent review, leaving that issue to the courts.  Fukuda v. City of Angels, (1999)20 Cal.4th 805, 811.  In cases reviewing decisions which affect a vested, fundamental right the trial court exercises independent judgment on the evidence. Bixby v. Pierno, (1971) 4 Cal.3d 130, 143.  See CCP §1094.5(c).  In other cases, the substantial evidence test applies.  Mann v. Department of Motor Vehicles, (1999) 76 Cal.App.4th 312, 320; Clerici v. Department of Motor Vehicles, (1990) 224 Cal.App.3d 1016, 1023.

The validity of the Board’s valuation method is a question of law reviewed de novo.  Elk Hills Power, LLC v. Board of Equalization, (2013) 57 Cal.4th 593, 606.  The Board’s factual findings and determinations of value using a proper valuation method are reviewed under the substantial evidence standard.  Ibid.  “Substantial evidence” is relevant evidence that a reasonable mind might accept as adequate to support a conclusion (California Youth Authority v. State Personnel Board, (“California You Authority”) (2002) 104 Cal.App.4th 575, 585) or evidence of ponderable legal significance, which is reasonable in nature, credible and of solid value.  Mohilef v. Janovici, (1996) 51 Cal.App.4th 267, 305, n.28.  The petitioner has the burden of demonstrating that the agency’s findings are not supported by substantial evidence in light of the whole record.  Young v. Gannon, (2002) 97 Cal.App.4th 209, 225.  The trial court considers all evidence in the administrative record, including evidence that detracts from evidence supporting the agency’s decision.  California Youth Authoritysupra, 104 Cal.App.4th at 585.

Where a litigant claims the board made a methodological error, the court applies the de novo standard of review to that issue.  Bret Harte Inn, Inc. v. San Francisco, (1976) 16 Cal.3d 14, 23.)  If the petitioner claims only that the board “erroneously applied a valid method of determining full cash value, the decision of the Board is equivalent to the determination of a trial court, and the trial court reviews for substantial evidence.  Ibid.  “Neither [the appellate court] nor the superior court may reweigh the evidence where [an assessor] is challenging the factual determinations of the board.”  Dennis v. County of Santa Clara, (1989) 215 Cal.App.3d 1019, 1026, 1032.  The trial court has no power to exercise independent judgment on the evidence and is not permitted to independently weigh the evidence.  Kaiser Ctr. v. County of Alameda, (1987) 189 Cal.App.3d 978, 982-83.  In conducting a substantial evidence review, the court must examine the entire record to determine if the Board’s findings are supported by substantial evidence.  American Sheds, Inc. v. County of Los Angeles, (1998) 66 Cal.App.4th 384, 396.

The agency’s decision must be based on the evidence presented at the hearing.  Board of Medical Quality Assurance v. Superior Court, (1977) 73 Cal.App.3d 860, 862.  The hearing officer is only required to issue findings that give enough explanation so that parties may determine whether, and upon what basis, to review the decision.  Topangasupra, 11 Cal.3d at 514-15.  Implicit in CCP section 1094.5 is a requirement that the agency set forth findings to bridge the analytic gap between the raw evidence and ultimate decision or order.  Topanga, 11 Cal.3d at 515.

An agency is presumed to have regularly performed its official duties (Evid. Code §664), and the petitioner therefore has the burden of proof.  Steele v. Los Angeles County Civil Service Commission, (1958) 166 Cal.App.2d 129, 137.  “[T]he burden of proof falls upon the party attacking the administrative decision to demonstrate wherein the proceedings were unfair, in excess of jurisdiction or showed prejudicial abuse of discretion.  Afford v. Pierno, (1972) 27 Cal.App.3d 682, 691.

  1. Governing Law
  2. Pertinent Revenue & Tax Code Sections
  3. Section 110

“Full cash value” or “fair market value” means the amount of cash or its equivalent that property would bring if exposed for sale in the open market under conditions in which neither buyer nor seller could take advantage of the exigencies of the other, and both the buyer and the seller have knowledge of all of the uses and purposes to which the property is adapted and for which it is capable of being used, and of the enforceable restrictions upon those uses and purposes.  R&T Code[2] §110(a).

Except as provided in section 110(e), the value of intangible assets and rights relating to the going concern value of a business using taxable property shall not enhance or be reflected in the value of the taxable property for purposes of determining the “full cash value” or “fair market value” of any taxable property.  §110(d)(1).

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.  §110(e).

  1. Section 401.17

For the 2005-06 fiscal year to the 2016-17 fiscal year, inclusive, it shall be rebuttably presumed that the pre-allocated fair market value of each make, model, and series of mainline jets, production freighters, and regional aircraft that has attained situs within this state is the lesser of the sum total of the amounts determined under (a) a statutory cost approach under Section 401.17(a)(1)(A) (“Statutory Cost Approach”); or (b) the value referenced in the “Used Price of Avg. Aircraft Wholesale” column of the Winter edition of the Airliner Price Guide (“APG”) by make, model, series, and year of manufacture, less ten percent from that value for a fleet discount” under Section 401.17(a)(2)(A) (the “Statutory Market Approach”).  §401.17(a).

The value of an individual aircraft assessed to the original owner of that aircraft shall not exceed its original cost from the manufacturer.  The pre-allocated fair market value of an aircraft may be rebutted by evidence including, but not limited to, appraisals, invoices, and expert testimony.  §401.17(a).

  1. Section 995

Storage media for computer programs shall be valued on the 1972 lien date and thereafter as if there were no computer program on such media except basic operational programs.  Otherwise, computer programs shall not be valued for purpose of property taxation.  Storage media for computer programs may take the form of, but are not limited to, punched cards, tapes, discs or drums on which computer programs may be embodied or stored.  A computer program may be, but is not limited to, a set of written instructions, magnetic imprints, required documentation or other process designed to enable the user to communicate with or operate a computer or other machinery.  §995.

  1. Section 995.2

The term “basic operational program,” as used in Section 995, means a computer program that is fundamental and necessary to the functioning of a computer.  A basic operational program is that part of an operating system including supervisors, monitors, executives, and control or master programs that consist of the control program elements of that system.

The terms “control program” and “basic operational program” are interchangeable.  A control program, as opposed to a processing program, controls the operation of a computer by managing the allocation of all system resources, including the central processing unit, main storage, input/output devices and processing programs.  A processing program is used to develop and implement the specific applications that the computer is to perform.  Its operation is possible only through the facilities provided by the control program.  It is not in itself fundamental and necessary to the functioning of a computer.

Excluded from the term “basic operational program” are processing programs, which consist of language translators, including, but not limited to, assemblers and compilers; service programs, including, but not limited to, data set utilities, sort/merge utilities, and emulators; data management systems, also known as generalized file-processing software; and application programs, including, but not limited to, payroll, inventory control, and production control.  Also excluded from the term “basic operational program” are programs or parts of programs developed for or by a user if they were developed solely for the solution of an individual operational problem of the user.

A control program includes the following functions: selection, assignment, and control of input and output devices; loading of programs, including selection of programs from a system resident library; handling the steps necessary to accomplish job-to-job transition; controlling the allocation of memory; controlling concurrent operation of multiple programs or computers; and protecting data from being inadvertently destroyed as a result of operator program error.  §995.2.

  1. Property Tax Rules
  2. Rule 321

Subject to exceptions set by law, it is presumed that the assessor has properly performed his or her duties. The effect of this presumption is to impose upon the applicant the burden of proving that the value on the assessment roll is not correct, or, where applicable, the property in question has not been otherwise correctly assessed. The law requires that the applicant present independent evidence relevant to the full value of the property or other issue presented by the application.  18 CCR §321(a).

If the applicant has presented evidence, and the assessor has also presented evidence, then the board must weigh all of the evidence to determine whether it has been established by a preponderance of the evidence that the assessor’s determination is incorrect. The presumption that the assessor has properly performed his or her duties is not evidence and shall not be considered by the board in its deliberations.  18 CCR §321(b).

  1. Rule 152

The term “basic operational program” refers to a “control program,” as defined in section 995.2, that is included in the sale or lease price of the computer equipment.  A program is included in the sale or lease price of computer equipment if: (1) the equipment and the program are sold or leased at a single price, or (2) the purchase or lease documents set forth separate prices for the equipment and the program, but the program may not be accepted or rejected at the option of the customer.  18 CCR §152(d).

In valuing computer equipment that is sold or leased at a single price not segregated between taxable property and nontaxable programs as defined in section 995.2, the assessor, lacking evidence to the contrary, may regard the total amount charged as indicative of the value of taxable tangible property.  18 CCR §152(e).

A person claiming that a single-price sale or lease includes charges for nontaxable programs and services should be required to identify the non-taxable property and services and supply sale prices, costs or other information that will enable the assessor to make an informed judgment concerning the proper value to be ascribed to taxable and nontaxable components of the contract.  18 CCR §152(f).

  1. Statement of Facts[3]
  2. Initial Assessment and Application[4]

In 2012, Southwest’s Certificated Fleet of Aircraft (the “Subject Property”) allocated to the County at LAX and BUR was appraised for ad valorem property tax purposes and enrolled by the Assessor at a total cash roll value of $321,511,132 for the year 2012, allocated as follows (AR 1952):

Assessor 2012 Values LAX-40784654 BUR-40784656
Personal Property – Other 6,322,731 1,134,103
LA County Allocated Fleet Value 195,668,917 118,119,881
     
Personal Property – Total 201,991,648 119,253,984
Fixtures 223,987 41,513
Total Enrolled Value 202,215,635 119,295,497

Southwest filed an application with the Board, requesting a reduction of $14,043,153 from LAX and $8,437,134 from BUR assessments for non-taxable software.  AR 1953.  Southwest’s opinion of value for tax year 2012-13 was $188,172,482, allocating $187,948,495 to Aircraft and Other Personal Property and $223,987 to Fixtures for property at LAX and $110,858,363 allocating $110,816,850 to Aircraft and Other Personal Property and $41,513 to Fixtures for property at BUR.  AR 1952.

The Assessor and Southwest agreed on the valuation of all classes of property except the fleet of Certificated Aircraft.  AR 1954.  Southwest’s primary issue was the valuation of non-taxable (non-BIOS) software that it requested be removed from the assessment of its Aircraft.  Id.  The taxable software program known as BIOS (Basic Input/Output System) is defined as basic operational program or control program that provides basic common services for the application software (non-taxable programs).  Id.  Southwest’s requested reduction is as follows (AR 1953):

  As Assessed FCV Southwest’s Request Southwest’s Opinion of FCV
  LAX BUR LAX BUR LAX BUR
Bill No. 40784654 40784656 40784654 40784656 40784654 40784656
TOTAL $205,215,635 $119,295,497     $188,172,482 $110,858,363
Aircraft $195,668,917 $118,119,881 ($14,043,153) ($8,437,134) $181,625,764 $109,682,747
Other Personal $6,322,731 $1,134,103     $6,322,731 $1,134,103
Fixtures $223,987 $41,513     $223,987 $41,513
NT SW% of AC 0.00% 0.00% -7.18% -7.14% -7.18% -7.14%
Personal $202,991,648 $119,253,984     $187,948,495 $110,816,850
Fixtures $223,987 $41,513     $223,987 $41,513
Total $202,215,635 $119,295,497     $188,172,482 $110,858,363

  1. The Hearing

            The Board held a hearing on April 24, 25, and 26, 2018 and February 11 and 20, 2019, before Board members Anita Marie Lopez, Chairperson, Howard Katz, and David Lau (who replaced retired Member Henry Tapia).  AR 1951.

            The Board defined the issue as whether there was non-taxable software embedded on avionic hardware equipment (a component onboard the Aircraft) and if it had been identified as being included in the Aircraft assessment.  AR 1954.  If proven to be a part of the Aircraft’s assessed value, the value of the segregated non-taxable software must be determined in order for it to be removed from the Fleet of Aircraft valuation.  AR 1954.

Pertinent testimony from the hearing is as follows.

  1.  John Thompson

            John Thompson (“Thompson”) testified on behalf of Southwest.  He is the former Chief of the State Board of Equalization (sometimes “BOE”) Assessed Properties Division, which values and deducts non-taxable software for property assessed by BOE.  AR 1080-81.

Thompson opined that sections 995 and 995.2 and Rule 152 apply equally to all property in the state, regardless of whether the property is locally-assessed or state-assessed.  AR 118.  Unless the statute specifically excludes state-assessed versus locally-assessed properties, sections 995, 995.2 and Rule 152 would apply.  AR 118.

Thompson noted that more and more property has become computer-operated with the software included.  AR 117.  BOE believes that loadable software — such as operational program software, operational program configuration, and database and airline modifiable information — are types of software that are exempt under sections 995, 995.2 and Rule 152.  AR 166.  BOE interprets Rule 152 as applicable to equipment other than just computers.  AR 116.

When a software exemption is requested and backed up by evidence, the BOE allows the exemption.  AR 117.  The exemption has been applied to exempt the value of software controlling telecommunications switches, smart locomotives, and electric generation facilities.  AR 117.  The order of magnitude of a telephone switch software exemption would be up to 50% and in the range of 40 to 60% for smart meters.  AR 117.

             The vendor representation method — one of the four different approaches BOE uses to determine the exempt amount of non-taxable software — involves interviews or reading documents submitted by software engineers or employees of the vendor.  AR 138.  The method is problematic because the vendor has to understand the definition of BOE’s definitions in property tax law which are not always the vernacular or the definitions they use in their ongoing business practices.  AR 138.

  1.  Vance Hilderman

            Vance Hilderman (“Hilderman”) testified on behalf of Southwest as a software/systems avionics engineering expert with 25 years plus of industry experience costing out avionics software projects and developing and certifying avionics aircraft software.  AR 269-70, 1118-19.

            Hilderman prepared an independent analysis and report addressing the value of software included in 12 different fleet types, including the 737-700 fleet type, using a Percent of Cost Method similar to the Vendor Representation Method (AR 1140), a Cost per Line of Software Code Analysis for non-BIOS software (AR 1141-47), and an “Avionics Software Engineer Cost Method”, which is the cost of the actual engineering effort to create the software.  AR 1148-50.

Hilderman’s conclusions were conservatively based upon the lowest value determined by his three approaches.  AR 277, 1154.  Hilderman obtained a range of 3.53% to 8.71% using the lower of Percent of Cost and Cost per Line of Code for non-taxable software replacement cost as a percentage of the average new price per aircraft for the 12 different fleet types reviewed.  AR 1154.  His conclusion for the 737-700 was 7.14%.  AR 277, 1154.  His opinions of value were based on his report, the supporting data, and his 35 years of experience.  AR 299.

  1.  David Perkins

            David Perkins (“Perkins”) is Director of Tax Services at Duff and Phelps (“D&P”), and the Tax Agent for Southwest.  AR 1289.  In its capacity of working with airlines over the years, D&P has gone through the process of identifying all the part numbers making up the avionics systems for which Southwest seeks the software exemption.  AR 413.  D&P contacted the vendors (Honeywell and Rockwell) to obtain their estimates for those portions of software.  AR 413.

            Southwest agreed with the Assessor’s rebuttably presumed pre-allocated fair market value under section 401.17.  AR 419.  Perkins presented a detailed Vendor Representation Method analysis that quantified the value of non-taxable software.  AR 1270, 1272-73, 1275-76.  In the analysis, D&P examined all the fleet types of relevance to Southwest aircraft types: the 737-300, 737-500, and 737-700.  AR 425.  He had input from Southwest and other airlines.  AR 425, 1082-115.

For the purposes of D&P’s estimates, hardware was defined as the physical unit inclusive of the basic operating programming to boot the system on and look for an operating system or other programming instructions necessary for the functioning of the unit for its desired purpose.  AR 432.  Software was defined as all other programming inclusive of the operating system.  AR 432.

Each aircraft has an autopilot system, electronic flight instrumentation, a flight management system, and a propulsion control system.  AR 425, 1101, 1104-08.  The 700 series also has a satellite data unit.  AR 425.  The analysis focused specifically on these four or five major avionics systems.  AR 425, 1101, 1104-08.

            D&P’s analysis identified the manufacturer of the computer system and the hardware part number and the software part number.  AR 428.  The part numbers are important because the vendor needs a software part number to do a critical update even though it is not sold separately.  AR 442.  D&P identified the number of units needed for that aircraft and the cost of the unit to the carrier.  AR 428.  The system cost times the total number of units gives total cost.  AR 428.  See AR 429.

Perkins had two different source years of catalog: 2001 and 2015.  From these, he derived the percentage change over time so he could index to the relevant assessment dates.  AR 428, 1418.  The analysis used that price index to adjust the replacement cost to the 2012 lien date.  AR 1273-74, 1291.

            He quantified the cost of non-taxable software for each fleet type of aircraft as the lower of his Vendor Representation Method or Hilderman’s conclusion of value.  AR 726 (Column L), 562-64.  Perkins applied a percent good factor indicated by a comparison of the Statutory Market Value to the Original Cost (AR 726 (Column N), 562-64), and then deducted the cost of the non-taxable software from the Assessor’s Statutory Market Value to arrive at Southwest’s opinion of the fleet’s taxable value, which excluded non-taxable software values.  AR 726, column P, 562-64.

Perkins determined the value based on what the vendor was paid.  AR 562.  Essentially, he took the cost of the product – what they paid for it – and derived the percentage of that cost for software through vendor representation.  AR 563.  The took the dollar amount value of the software to calculate the dollar amount value of the aircraft.  AR 563.

The outcome was an overall 7.18% reduction from the Assessor’s rebuttably presumed pre-allocated fair market value for all three fleet types operated at LAX.  AR 726 (Column P).  For BUR, only one fleet type (737-700) was in use in 2012, for which Southwest found a 7.14% reduction from the Assessor’s rebuttably presumed pre-allocated fair market value.  AR 726 (Columns I, J and L).  Southwest allocated the reduced taxable values to LAX and BUR in the same manner as the Assessor.  AR 727-28.

  1. Rikard de Jounge

Rickard de Jounge (“de Jounge”) testified as an asset valuation expert and an aeronautical engineer.  AR 1243-46.  The International Society of Transport Aircraft Training’s (“ISTAT”) definition of current market value or market value as used in blue books guides is similar to the definition of full cash value or fair market value in section 110.  See AR 1963.  The value included in the blue book guides includes software.  See AR 1963.  Blue books do not reference avionics or software, but it is in the assumption that the aircraft is airworthy.  See AR 1963.

 

  1. Theodore Khodaverdian

Theodore Khodaverdian (“Khodaverdian”), the Assessor’s Supervising Appraiser, defended the enrolled assessed value.   AR 1967, 1980.  Khodaverdian assessed Southwest’s fleet of aircraft under section 401.17 using the Statutory Market Approach, which established the rebuttably presumed pre-allocated fair market value of the fleet because it was the lesser of the two statutory valuation methods under section 401.17.  AR 585-86.

He did not believe that Southwest provided enough evidence for the cost of avionics and avionics software to determine the actual cost and value of the software.  See AR 1967.  The issue with the vendor estimates provided to Khodaverdian were that they were not specific to the property in question.  AR 589.  They were specific to an aircraft, but they were not specific to the 558 aircraft in question.  AR 589.  The timing of the vendor estimates, using years 2000 and 2015, and the vagueness of the estimates did not have any real backup or sufficient evidence.  AR 589.

When Khodaverdian spoke with the software vendor, Honeywell, he wanted to know what the backup was for the software/hardware percentages.  AR 591.  He did not receive a clear explanation of the discounts involved and found that Honeywell was reporting its internal costing for Honeywell of its avionics.  AR 591.  He got a sense that the vendor employee supplying vendor data who was not a software engineer and had no knowledge of taxable software versus non-taxable software.  AR 592.

The only way to get the software percentage is to look at the cost and price.  AR 592.  This means the labor hours to engineer the software which could easily have been included in the actual price of the aircraft.  AR 592.  Khodaverdian did not feel that the vendor’s internal revenue-related type of classification was sufficient support for the vendor estimates.  AR 591.  The rounded off estimates (90%, 10%) seemed very generic.  AR 592.  For Khodaverdian to remove the software from the assessment, he would need sufficient evidence directly related to the actual assets in question.  AR 592-93.

Khodaverdian was not sure that the actual cost of the software was included in the vendor estimates.  AR 593.  The exhibit invoices from American Airlines had no carveout for software, only for air frame and engines, biofurnished equipment, and seller-purchased equipment, none of which was identified as avionics or avionics software.  AR 593.

Khodaverdian did not agree with Hilderman’s cost or value determination.  AR 593.  Hilderman used a number of aircraft (300-500) to get to a breakeven point for the Line of Code method of valuation and concluded that the vendor’s cost of the software should be included in the breakeven point.  AR 593.  Khodaverdian did not see a connection between the 300 breakeven point and the upwards of 2000 aircraft that are in production, already built, and in the hands of the airlines.  AR 593.

Had Khodaverdian accepted the software information provided by Southwest, he would have applied it to the cost and not the eventual market value as prescribed by the blue book.  AR 600.  The blue book does not give any mention of software or any add for/subtraction of software or avionics.  AR 600.  Section 401.17 does not give either party, the assessor or the taxpayer, the ability to subtract software.  AR 600-01.  There is no provision for subtracting the software cost or the value from the section 401.17 prescribed value.  AR 601.

Despite the fact that an Assessor representative in one instance asserted that sections 995 and 995.2, and Rule 152 apply to the property, Khodaverdian asserts that they do not.  AR 643.  Khodaverdian agreed that aircraft — the subject property in the matter — have operational software onboard.  AR 643.  He agreed with Southwest’s identification of the five systems, the autopilot, electronic flight instrumentation system, flight management system, propulsion control systems, and satellite communication computers, have software in them.  AR 643-44, 660.  The software has some value.  AR 644, 661.

Khodaverdian agreed that section 401.17 establishes that the lower of the two values calculated is rebuttably presumed to be the pre-allocated fair market value of the aircraft.  AR 647.

  1.  Proposed Findings of Fact

            Southwest and the Assessor both submitted Proposed Findings of Facts addressing legal arguments raised at the hearing.  AR 1965, 1970.

  1. Southwest

Southwest’s proposed findings asserted that sections 995 and 995.2, Rule 152, and Cardinal Health 301, Inc. v. County of Orange, (“Cardinal”) (2008) 167 Cal.App.4th 219 provide a framework for the treatment of exempt software for purposes of California property tax.  AR 1965-66.

  1. Assessor

            The Assessor’s proposed findings asserted that the legislative history from section 401.17 shows that the issue of software has long been raised by airlines, but the legislature ultimately left the disagreement of taxable and non-taxable software to future appeals and litigation.  AR 1970.  Southwest has not rebutted the Assessor’s valuation of the aircraft under section 401.17.  AR 1970.  It is really rebutting the value of avionic equipment that happens to be onboard aircraft, which they cannot prove is included in the aircraft valuation.  AR 1970.

Sections 995 and 995.2, and Rule 152, are specific statutes for software.  AR 1970.  Hardware components are very specific to aircraft and are built to withstand high temperatures, altitude, radiation, the elements, etc.  AR 1970.  Avionics equipment are third party complex systems that are assembled onto aircraft.  AR 1970.

The legislative intent from Sections 110 and 995 is clear – to avoid the taxing of intangible assets.  AR 1970.  However, in all instances the law requires the assessment of property at its full cash value and if the intangible asset cannot be identified, the Assessor may regard the total charged as indicative of the value of taxable tangible property as long as the Assessor is not directly taxing that intangible asset or right.  AR 1970.

Cardinal is distinguishable.  AR 1971.  In Cardinal the subject property was automated medicine dispenser equipment (medicine storage cabinets with a built-in computer).  AR 1971.  The assessor and the applicant agreed a percentage of the value was attributable to software (90%), however, the assessor included it in the assessment because the software was “embedded/bundled.”  Id.  The court ruled that just because it’s bundled does not automatically make the software taxable.  Id.  The court remanded the application to the taxing jurisdiction for a determination as to classification of taxable vs. nontaxable and the valuation of the nontaxable software portion.  Id.

The difference is that in this case the Assessor does not believe it has been proven that a portion of the aircraft value includes an amount attributable to software (taxable or nontaxable).  AR 1971.

Southwest referred to Elk Hills Power. LLC v. Bd. of Equalization, (“Elk Hills”) (2013) 57 Cal.4th 593.  AR 1971.  That case involved two valuation methods, cost approach and income approach, which included the assessment of intangibles.  Id.  The court held the board was not required to deduct a value with the income approach.  There was no credible showing that there is a separate stream of income related to or attributable to the intangible.  Id.  In relation to the cost approach, the court held the board was required to remove the value of the intangible because they added a cost component for it to their valuation.  Id.

Although intangible assets and rights are not subject to taxation, the second fundamental principal states that tangible property should nonetheless be assessed and valued by assuming the presence of those intangible assets and rights that are necessary to put the tangible property to beneficial or productive use.  AR 1972.  The Assessor is assessing a Certificated Aircraft, not directly taxing the avionic equipment component parts of the aircraft and is therefore not directly taxing the software that may or may not exist on the avionic equipment component part.  AR 1972.

Mary V. Rose v. State of California, (“Rose”) (1942) 19 Cal.2d 713 discusses some constitutional provisions and states that a general provision is controlled by one that is special, the latter being treated as an exception to the former.  AR 1972.  A specific provision relating to a particular subject will govern in respect to that subject, as against general provision, although the latter, standing alone, would be broad enough to include the subject to which the more particular provision relates.  AR 1972.

The Assessor contends the valuation methods outlined in section 401.17 are more specific and controlling over sections 995 and 995.2, and Rule 152.  AR 1972.  Additionally, if the Board were to find an amount should be reduced from the aircraft for non-assessable software, the identified cost should cost should be removed from the Cost Approach.  Id.

 

  1. The Board’s Decision

The Board issued its Findings and decision on October 1, 2019.  AR 1984.  The Board summarized the evidence and testimony presented at the hearing.  AR 1955-64, 1967-69.  The Board explained that the burden of proof rested with Southwest under Rule 152 (e), (f), and (g).  AR 1974.

The Board summarized the legislative history evidence.  AB 964-Horton (2005), AB 311-Ma and AB 384-Ma addressed the assessment of certificated aircraft under a “fleet” concept or the value of all aircraft of each fleet type by make and model.  AR 1975.  According to the Senate Overview & Taxation Committee, the bill outlined a methodology for determining the value of the aircraft for property tax purposes, based on the lesser of (1) historical cost basis, as specific in statute, or (2) prices listed in the Airliner Price Guide (“APG”), a commercial value guide for aircraft, and adjusted as specified.  Id.

The Taxation Committee in its June 9, 2010 hearing indicated that changes to the valuation section of law state that the value of the certificated aircraft is rebuttably presumed to be the value described under the methodology above, instead of stating that the value is what the methodology produces.  AR 1975.  The taxpayer may rebut the presumption with evidence including, but not limited to appraisals, invoices, and expert testimony.  Id.  The bill additionally caps the value of any aircraft to its original cost from the manufacturer.  Id.  These changes take effect for lien dates on or after January 1, 2011.  Id.  These changes as to “fleet value” express the intent of the Legislature.  Id.

The Board’s analysis and Findings state in pertinent part as follows.  The bundled avionic software found in the avionics equipment of the subject property is non-taxable.  AR 1980.  Sections 995 and 995.1, and Rule 152, provide a framework for the treatment of exempt software for purposes of property taxation and define the differences between basic operational programs (taxable property) and non-taxable application software programs included in the bundled package, which are exempt.  AR 1980.  The Cardinal case found that bundling by itself is not dispositive whether application software included in a bundled programming package is taxable.  Id.  There is no disagreement between the parties that non-taxable software exists as a part of the avionic hardware equipment and is not subject to property taxation.  Id.  However, the Assessor questions whether this non-taxable software value has been identified as being included in the aircraft assessment.  Id.

The Assessor testified that an audit of the Southwest’s books and records of property costs has been conducted and it was found to be a non-deficient audit; this was confirmed by Khodaverdian.  AR 1980.  Based on the findings of the audit that acquisition costs did not go unreported, the Board determines that non-taxable avionic software is embedded in the computer hardware of the avionic systems and is subsumed within the Assessor’s assessment of the total acquisition costs of the certificated fleet of aircraft reported by Southwest; that the software costs are bundled into the price of the avionics equipment.  Id.  The assumption is that the Aircraft has a certificate of airworthiness by the FAA that could not be obtained without recognition that the avionic software is embedded in the avionic hardware equipment, a component part of the aircraft.  Id.

Southwest presented sufficient, reliable, and persuasive evidence by way of expert witness testimony and substantial detailed documents to demonstrate that the five identified primary systems: specifically, Autopilot, Electronic Flight Instrumentation System (“EFIS”), Flight Management System (“FMS”), Propulsion Control System (“PCS”) and Satellite Date Unit (“SATCOM”) are all comprised of identified avionic software that qualifies as exempt from property taxation and should be removed from the acquisition cost of each aircraft pursuant to sections 995 and 995.2, and Rule 152.  AR 1981.

Although the Assessor argued that an invoice with an itemized breakout of the non-taxable avionic software costs is required, the Board noted that section 401.17 speaks to the difficulty in obtaining data and states in subsection (b)(4)(B)(d) that: “The taxpayer shall, to the extent that information is reasonably available to the taxpayer, furnish the county assessor with an annual property statement that includes the aircraft original costs as defined in subparagraph (A) of paragraph (1) of subdivision (a).  If an air carrier that has this information reasonably available to it fails to report original cost and improvements, as required by Sections 441 and 442, an assessor may in that case make an appropriate assessment pursuant to Section 501.”  AR 1982.

The Board also recognized the challenge of quantifying and removing non-taxable embedded software from the acquisition costs.  AR 1982.  The problem faced by Southwest is the lack of available information that segregates non-taxable software costs from the bundled software packages purchased at a single price, due to the legal protections of intellectual property, proprietary information, and non-disclosure agreements that remain confidential.  Id.  For these reasons, invoice breakouts of software costs and other documentation are not readily available to the airlines.  Id.  To this point, the Board looked to Civil Code section 3531 (Impossibilities), which states that the law never requires impossibilities.  Id.

Since section 401.17(a)(2) and Rule 152 provide for the introduction of appraisals, expert testimony, and other information, the Board determined that Southwest met its burden of proof by identifying and quantifying the value of the non-taxable or exempt avionic software through the testimony and supporting documentation, including engineer software estimates, provided by its avionics expert witnesses.  AR 1982.

The Board accepted the experts’ valuation methodologies and opinions based on evidence of sufficient probative value to support its conclusion of value.  Id.  The value of the non-taxable software was quantified in Southwest’s use of a Vendor Representation Method, supported by the Board of Equalization as one of the approaches to value and is the only guidance currently available on how to quantify non-taxable software.  Id.  The information provided by the respective vendors for purposes of estimating the amount of non-taxable avionic software was validated by Hilderman’s independent assessment using a Percentage of Cost Method and Lines of Software Code Analysis for the aircraft types and models of property under appeal.  Id.

The Board accepted the Percentage of Cost Methodology applied to the cost of the equipment as the best measure of the two methodologies developed by Southwest to quantify the value of the bundled non-taxable avionic software.  AR 1983.  The fleet costs and trended values were detailed according to aircraft type and model, as well as the amount of non-taxable software costs to be removed based on respective 6.95% and 7% reductions from Southwest’s calculated allocated taxable Fleet values for the LAX and BUR locations.  Id.  This resulted in the Fleet of Aircraft assessable values of $181,625,764 for the LAX Airport and $109,682,747 for the Burbank Airport after the removal of exempt software from the full cash value of the Fleet.  Id.

The Board gave substantial weight to the testimony, evidence and extensive reports offered by Hilderman and de Jounge as leading experts for many years in the aircraft industry, as specialists in avionics software development and costs.  AR 1983.  Their emphasis on the proprietary and confidential nature of avionic software costs and the shortage of available data was a significant point.  Id.  The Assessor did not question the professional qualifications or the creditability of these witnesses.  Id.

Southwest sufficiently identified the non-taxable avionic software needed to operate the systems for certification by the FAA and also substantiated the cost of this software.  AR 1983.  The Board found this oral and documentary evidence to be convincing, particularly in light of the limitations of access to applicable proprietary and confidential data.  Id.

The Board concluded that Southwest met its burden of proof to rebut the Assessor’s presumption of correctness by a preponderance of the evidence, pursuant to section 401.17(b)(4)(B)(d), Rule 152(e), (f), (g), and Rule 321(a).  AR 1983.  The Board approved Southwest’s request for reductions of the value of the avionics software from the assessment of the Subject Property.  AR 1983-84.

  1. Analysis

Although Petitioner Assessor’s brief confusingly presents the issues, they may summarized as challenging the Board’s decision on the following bases: (1) the Board wrongly applied sections 995 and 995.2 and not section 401.17, (2) the Board failed to apply the burden of proof in Rule 132 and instead applied the burden in Rule 152, (3) the Findings are not supported by substantial evidence, and (4) the Findings do not provide the analytical roadmap required by Topangasupra, 11 Cal.3d 506.  Real Party Southwest opposes.

The sufficiency of the evidence — including the sufficiency of Southwest’s evidence to rebut the applicable presumptions and the Board’s determination of value — is reviewed under the substantial evidence standard.  Whether the Board applied the correct statute, burden of proof, and the adequacy of the Findings under Topanga are questions of law reviewed de novo.  See Farr v. County of Nevada, (2010) 187 Cal.App.4th 669, 679-80.

 

  1. Section 401.17

Section 401.17 creates a rebuttable presumption that the value of commercial aircraft is the lower of two values calculated under that section:

(a) For the 2005-06 fiscal year to the 2016-17 fiscal year, inclusive, it shall be rebuttably presumed that the pre-allocated fair market value of each make, model, and series of mainline jets, production freighters, and regional aircraft that has attained situs within this state is the lesser of the sum total of the amounts determined under (a) a statutory cost approach under Section 401.17(a)(1)(A) (“Statutory Cost Approach”); or (b) the value referenced in the “Used Price of Avg. Aircraft Wholesale” column of the Winter edition of the Airliner Price Guide (“APG”) by make, model, series, and year of manufacture, less ten percent from that value for a fleet discount” under Section 401.17(a)(2)(A) (the “Statutory Market Approach”).  The value of an individual aircraft assessed to the original owner of that aircraft shall not exceed its original cost from the manufacturer.  The pre-allocated fair market value of an aircraft may be rebutted by evidence including, but not limited to, appraisals, invoices, and expert testimony.  §401.17(a).

Section 401.17 creates a distinctive methodology for valuation of commercial aircraft:

“It is the intent of the Legislature in enacting this act to establish a unique methodology for the assessment of certificated aircraft in light of the special circumstances that befell this property and the airline industry following the September 11, 2001, incident. Specialized procedures, including the unique valuation methodology enacted herein, are justified by the multijurisdictional use of certificated aircraft property, and the manner in which valuations of this property are allocated. Therefore, in order to facilitate resolution of the disputes over the assessment of certificated aircraft, it is the intent of the Legislature to codify recommendations produced by a county and airline industry working group, to establish a uniform valuation methodology specifically designed and adopted for the unique circumstance of certificated aircraft property.” (emphasis added).  Assembly Bill (“AB”) 964 §(1)(b) (October 7, 2005) (adding §401.17) Pet. RJN Ex. 1.

The Assessor contends that the Board failed to apply section 401.17 and instead applied sections 995 and 995.2.  The Assessor argues that the Board’s Findings improperly simultaneously apply sections 401.17, 995, and 995.2, and Rule 152.  AR 1979, 1982-83.  Pet. Op. Br. at 4, 7.

This presents an issue of statutory interpretation.  In construing a legislative enactment, the court must ascertain the intent of the legislative body which enacted it so as to effectuate the purpose of the law.  Brown v. Kelly Broadcasting Co., (“Brown”) (1989) 48 Cal.3d 711, 724; Orange County Employees Assn. v. County of Orange, (“Orange County”) (1991) 234 Cal.App.3d 833, 841.  The court first looks to the language of the statute, attempting to give effect to the usual, ordinary import of the language and seeking to avoid making any language mere surplusage.  Brownsupra, 48 Cal 3d at 724.  Significance, if possible, is attributed to every word, phrase, sentence and part of an act in pursuance of the legislative purpose.  Orange Countysupra, 234 Cal.App.3d at 841.  The various parts of a statute must be harmonized by considering each particular clause or section in the context of the statutory framework as a whole.  Lungren v. Deukmejian, (1988) 45 Cal.3d 727, 735.  The enactment must be given a reasonable and commonsense interpretation consistent with the apparent purpose and intent of the lawmakers, practical rather than technical in nature, and which, when applied, will result in wise policy rather than mischief or absurdity. To that end, the court must consider, in addition to the particular language at issue and its context, the object sought to be accomplished by the statute, the evils to be remedied, and public policy.  Lungren v. Deukmejiansupra, 45 Cal. 3d at 735.

Unless there is ambiguity in a statute, the plain meaning of a statute controls its interpretation. Poole v. Orange County Fire Authority, (2015) 61 Cal. 4th 1378, 1385; River Garden Retirement Home v. Franchise Tax Bd., (2010) 186 Cal. App. 4th 922, 942.  Exemptions from taxation are strictly construed and should not be enlarged nor extended beyond their plain meaning.  Fellowship of Friends, Inc. v. County of Yuba (1991) 235 Cal.App.3d 1190, 1195-96.  Nonetheless, even a strict construction must be a fair and reasonable interpretation.  Id.  If the statute is ambiguous, the question for the court is whether the agency’s interpretation is based on a permissible construction of the statute.  RCJ Med. Services, Inc. v. Bonta, (2001) 91 Cal.App.4th 986, 1005.  An agency’s interpretation of an ambiguous statute consisting only of the agency’s litigating position, without promulgation of formal regulations, is entitled to no deference.  Culligan Water Conditioning, Inc. v. State Bd. of Equalization, (1976) 17 Cal. 3d 86, 92-93.

If a statute is ambiguous and susceptible to more than one reasonable interpretation, the court may resort to extrinsic aids, including principles of construction and legislative history.  MacIsaac v. Waste Management Collection & Recycling, Inc., (2005) 134 Cal.App.4th 1076, 1082 (quoting Riverview Fire Protection Dist. v. Workers’ Comp. Appeals Bd., (1994) 23 Cal.App.4th 1120, 1126).  Where ambiguity still remains, the court should consider “reason, practicality, and common sense.”  Id. at 1084.  This requires consideration of the statute’s purpose, the evils to be remedied, public policy, and contemporaneous administrative construction.  MCIsupra, 28 Cal.App.5th at 643.

  1. Plain Meaning

The Assessor notes that section 401.17 is extraordinarily detailed and provides exhaustive requirements for determinations of value, including adjustments for (a) depreciation (§401.17(a)(1)(B)(i)) and (b) obsolescence (§401.17(a)(1)(C), (D)) in the cost based methodology described in the section, and (c) a 10% fleet discount from the market value methodology (§401.17(a)(2)(A), except with respect to certain aircraft less than two years old concerning which another discount is provided ((§401.17(a)(2)(B)).  Pet. Op. Br. at 5.

The Assessor argues that section 401.17’s unique valuation methodology sets a presumed value for aircraft to avoid disputes relating to the complicated issues surrounding the valuation of commercial aircraft.  The presumed value is intended to be exclusive of any adjustments other than set forth in section 401.17.  Section 401.17(a) states that the “preallocated fair market value of an aircraft may be rebutted by evidence including, but not limited to, appraisals, invoices, and expert testimony.”  The Assessor argues that a party can rebut the value determined by the detailed formula set forth in section 401.17, but the party may not make deductions other than those set forth in the section.  Only where there is a fair market value determination under section 110 (not a determination of a presumed value under section 401.17) is it appropriate to deduct the cost of intangible assets.  Pet. Op. Br. at 5.

According to the Assessor, no deductions under sections 995, 995.2 and Rule 152 are appropriate under section 401.17.  Such deductions apply to typical fair market value valuations under section 110.  Section 995 was fashioned to address the situation where a fair market value determination under section 110 concerns a piece of taxable property, not a determination of a presumed value.  Where a fair market valuation is performed, section 995 permits a deduction of non-taxable software from a cost method valuation, as is anticipated under section 110.  Section 995 creates a rule that a valuation of property under section 110 should deduct the value of non-BIOS software from the value of the property if the non-taxable software can be identified and a value established. However, section 995 deductions for non-taxable software are not intended to be applied to a presumed value determined under section 401.17.[5]  Pet. Op. Br. at 7.

The Assessor asserts that the distinction between a fair market value determination under section 110 and a presumed fair market value determination under section 401.17 is important. The fair market value of certificated aircraft under section 401.17 is presumed to be the lesser of the values determined under the two methodologies in that section.  The result of this calculation may not be the actual fair market value of the aircraft—actual fair market value is calculated by criteria found in section 110.  Thus, these two sections represent different ways to value property—one reaches a presumed value and the other makes an actual determination of value.  Pet. Op. Br. at 6-7.

The Assessor notes that sections 995 and 995.2 were enacted in 1972 and 1973, respectively, while section 401.17 was enacted much later in 2005. If the Legislature had intended that a deduction in aircraft value could be made for the value of non-taxable software, it could have referenced sections 995 and 995.2 and included a deduction for such software in section 401.17.  Pet. Op. Br. at 6.  The Assessor also notes that section 401.17 does not preclude a party from ignoring the presumption and making a fair market value determination under section 110 which provides, among other things, for removal of the value of intangible property interests from the value of property.  Pet. Op. Br. at 7, n. 2.

Southwest correctly distills the Assessor’s position as meaning that section 401.17 permits him to tax software that is deemed non-taxable by section 995 and 995.2, and Rule 152.  Opp. at 11-12.  That is not the case.  The Assessor incorrectly asserts that section 401.17 establishes a presumed value that is not the same as fair market value and which cannot be rebutted.  For this reason, the Assessor distinguishes the presumed value determined under section 401.17 from fair market value determined under section 110.

There is no statutory basis to make that distinction.  Section 401.17 rebuttably presumes the fair market value as the lesser of two calculations.  This presumed fair market value can be rebutted by evidence of actual fair market value, “including but not limited to, appraisals, invoices, and expert testimony.”  §401.17(a).  This evidence may consist of anything that shows taxable fair market value and may exclude non-taxable items such as software under sections 995, 995.2, and Rule 152.

Contrary to the Assessor’s use, the term “presumed value” is not used in 401.17, which refers to “pre-allocated fair market value”.  The Assessor’s witness admitted at the hearing that section 401.17’s “pre-allocated fair market value” refers to “fair market value.” AR 647.  Yet, the Assessor now claims that section 401.17 does not allow for deductions to determine an accurate fair market value other than those specifically set forth in that provision.  Only a fair market value determination under section 110, not a determination of a presumed value under section 401.17, can be made to deduct the cost of intangible assets.

The Assessor is incorrect.  Nothing in section 401.17 limits a taxpayer’s rebuttal of presumed fair market value to specific issues.  In fact, section 401.17(a) permits rebuttal of the presumed fair market value through a non-exclusive list of evidence: appraisals, invoices, and expert testimony.  Nothing in the provision limits the scope of this testimony or documentation, so long as it is relevant to determining fair market value.

Southwest correctly contends that the Assessor’s argument is inconsistent with the fact that both sections 401.17 and 110 use the term “fair market value” and it is inconsistent to say that non-taxable software deductions can be made for a fair market value determination section 110 using sections 995 and 995.2, and Rule 152, but they cannot be made for a fair market value determination under section 401.17.

The Assessor replies that the term “fair market value” is not used in the same way in sections 401.17 and 110.   Section 401.17 does not result in the determination of fair market value of aircraft; it creates a presumed value that can be rebutted.  Section 110 has nothing to do with a rebuttable presumed value; it defines “fair market value” generally for the purposes of determination of the value of property for property tax purposes and defines how that value is to be calculated.  The Assessor concludes that these are two different valuation methodologies and there is nothing inconsistent in saying that sections 995 and 995.2, and Rule 152, may be used under section 110, but not under section 401.17.  Reply at 5.

This argument is nonsensical.  The term “fair market value” is commonly used in the business world and in the R&T Code.  Nothing in section 401.17 suggests that its use of the term “fair market value” means anything different than in other R&T Code provisions, including section 110.  Section 401.17’s “presumed value” is only a presumed fair market value which can be rebutted by evidence.  This evidence may include evidence of aircraft value reduced by the value of non-taxable software under sections 995 and 995.2, and Rule 152.  The Assessor points to nothing in section 401.17 that says otherwise, or that supports his position that presumed fair market value has a different meaning in sections 401.17 and 110.

The Assessor also argues that rebuttal of section 401.17’s presumed fair market value is precluded because the “unit of value” under section 995 and 995.2 is a computer, not an aircraft.  As Southwest points out, section 995 is not limited to computers.  It defines exempt computer programs as those “designed to enable the user to communicate with or operate a computer or other machinery.”  Opp. at 16-17.

The court in Cardinal considered the valuation of the Pyxis Medstation 2000, a medicine storage cabinet, by applying sections 995 and 995.2, and Rule 152.  167 Cal. App. 4th at 219.  The court described the product as a “series of standup medicine storage cabinets, each called a ‘MedStation,’ with a built-in computer.”  Idat 223; AR 1090 (picture of MedStation).  It is equipment that incorporates a computer.  John Thompson (“Thompson”) testified that the Board of Equalization applies the software exemption to telecommunications switches and smart locomotives, which are equipment.  AR 117.  Even though the equipment sells as a unit with software embedded within it, the software exemption still applies.  Thompson also testified that sections 995 and 995.2, and Rule 152, apply equally to all property within the state.  There is no basis to treat aircraft differently.  Opp. at 16-17.

In sum, section 401.17’s presumed fair market value may be rebutted by evidence that includes evidence of non-taxable software which must be excluded from the value under sections 995, 995.2, and Rule 152.

 

  1. Legislative History

The court need not resort to legislative history because nothing in section 401.17 precludes the use of sections 995 and 995.2, and Rule 152, to rebut the presumed fair market value by evidence of fair market value excluding non-taxable software programs.  If arguendo there is ambiguity in section 401.17’s language, the legislative history does not favor the Assessor’s position.

The Assessor points to section 401.17’s legislative history and argues that, if the legislature intended for a deduction or other adjustment for non-taxable software to be made from values determined under section 401.17, it would have expressly done so.  The Assessor notes that one version of section 401.17 contained a provision specifically addressing software issues, but it was deleted prior to passage.  Pet. RJN Ex. 2, p. 4 (Senate Revenue and Taxation Committee, AB 964, Property Tax: Assessment of Airline Property (discussing a version of section 401.17 including a provision addressing software issues)). Thus, the Legislature considered a specific provision addressing embedded software issues, but it ultimately declined to address the issue.  See Pet. RJN Ex. 3, pp. 1, 5 (Draft BOE Staff Legislative Bill Analysis, AB 964, (August 22, 2005)).  Pet. Op. Br. at 5-6.

As Southwest argues, the Assessor’s argument is based upon only part of the legislative history of section 401.17.  Opp. at 14.

Section 401.17 was adopted by AB 964 (2005-2006 Reg. Sess.) and enacted as Stats. 2005, ch. 699.  Pet. RJN Ex. 1.  An uncodified statement of section 401.17’s legislative intent states: “To facilitate resolution of the [existing] disputes over the assessment of certificated aircraft, it is the intent of the Legislature to codify recommendations produced by a county and airline industry working group…” Pet. Ex. 1, §1(b).  The referenced working group was comprised of assessors and airlines that entered into a “Settlement Agreement” which resulted in section 401.17.  AR 752-82.

The Settlement Agreement provided: “WHEREAS, in order to further implement this settlement, the parties agree to support legislation to add Revenue and Taxation Code section 401.17, in substantially the form set forth in Exhibit A, which is attached hereto and incorporated herein by reference.”  AR 753, 776.  The Settlement Agreement also reflected that the assessors and airlines negotiated a limited détente of challenges seeking to remove the value of non-taxable software.  It provided that the airlines agreed, through the 2010-2011 year, “not to pursue aircraft value reductions for California property tax purposes on the grounds that a portion of the original cost, or adjusted original cost, of an aircraft includes the cost of Embedded Software.”  AR 754, 761 (¶10).

The 2005 version of section 401.17 enacted pursuant to the Settlement Agreement did not provide for a rebuttable value presumption.  Instead, the statutory value was preclusive: “(a) For the 2005-06 fiscal year to the 2010-11 fiscal year, inclusive, the preallocated fair market value of each make, model, and series of mainline jets … is the lesser of the sum total of the amounts determined under paragraph (1) or the sum total of the amounts determined under paragraph (2).”  Pet. RJN Ex. 1, §2(a).  Opp. at 14-15.

The Assessor’s characterization of the legislative intent in deleting embedded software provisions from AB 964 is incorrect.  AB 964 did not originally require the assessment of embedded software.  On July 14, 2005, the Senate amended AB 964 to add a requirement that the statutory “value also reflect the value of embedded software, as defined.”  South. RJN Ex. A, pp. 5, 7.  The provision requiring the inclusion of embedded software values was removed from AB 964 on August 22, 2005.  South. RJN Ex. B, pp. 21, 23.  The Senate Revenue & Taxation Committee report for August 25, 2005 dispels any notion that the amendment expressed any intention about rebuttable presumptions or the taxability of software:

“Prior to the latest amendment, the bill specifically addressed the taxation of this type of software, by clarifying that ‘embedded software’ (‘software installed in the manufacture and outfitting of commercial aircraft that is reasonably related to its ordinary, safe and effective operation’’) is included in “acquisition cost” of commercial aircraft.  However, airlines and assessors have agreed to leave this issue to future appeals or legislation. As currently drafted. the bill makes no mention of, and does not define aircraft-related software.”  South. SRJN Ex. C, p. 40 (emphasis added).

The Board of Equalization’s Staff Legislative Bill Analysis for AB 964 as amended August 22, 2005 also states:

“As amended July 14, the bill specifically addressed the taxation of this type of software which the August 22 amendment deletes. Thus, absent a specific statute or regulation on this matter as it relates to aircraft, this leaves the taxability of the software programs in question to which the Board, an appeals board, or a court could reach different decisions.”  Pet. RJN, Ex. 3, p. 5 (emphasis added).

As adopted in 2005, section 401.17 and the portion of the Settlement Agreement barring airlines from seeking value reductions attributable to embedded software both expired in 2010.  AR 761, 776.  The Settlement Agreement restrictions were not renewed.  Opp. at 15-16.

In 2010, section 401.17 was amended to allow airlines to rebut the statutory presumption of fair market value.  The Legislature adopted AB 384, enacted as Stats 2010, ch. 228, which is the version of section 401.17 in effect for the 2012 assessments.  Stats 2010, ch. 228 amended subdivision (a) of Section 401.17 to read as follows, with changes indicated in redline:

“(a) For the 2005-06 fiscal year to the 2010-11 2015-16 fiscal year, inclusive, it shall be rebuttably presumed that the preallocated fair market value of each make, model, and series of mainline jets, production freighters, and regional aircraft that has attained situs within this state is the lesser of the sum total of the amounts determined under paragraph (1) or the sum total of the amounts determined under paragraph (2). The value of an individual aircraft assessed to the original owner of that aircraft shall not exceed its original cost from the manufacturer. The preallocated fair market value of an aircraft may be rebutted by evidence including, but not limited to, appraisals, invoices, and expert testimony.”  South. RJN Ex. C, p. 44.

Section 401.17 as amended both provides for the rebuttable presumption of fair market value and indicates the types of evidence that could be used by a taxpayer to rebut the presumption.   The analysis in the Assembly Concurrence in Senate Amendments to AB 384 (as amended May 5, 2010) states:

This bill allows taxpayers and assessors to appeal a value established by following a legally prescribed methodology. The practical result of “rebuttably presumed” language is that it clearly recognizes that an assessment appeals board has the discretion to set a fair market value where the facts presented clearly overcome the presumption of correctness in any given methodology.”  South. RJN Ex. D, pp. 55, 57 (emphasis added).

Clearly, the Assessor’s argument that the Legislature intended to preclude value adjustments attributable to software is wrong.

The Assessor only weakly replies that the legislative history for section 401.17 does not expressly state that a taxpayer can rebut the presumed fair market value by evidence presented under sections 995 and 995.2; it only says that the issue of taxability of software programs is to be left to the Board and the courts.  Reply at 6.  True, and the Board has decided that the presumed fair market value determined under section 401.17 is subject to the computer software provisions of sections 995, 995.2 and Rule 152.

 

  1. Canons of Construction

The Assessor relies on three canons of statutory construction.  The Assessor argues that his conclusion that the Legislature did not intend any deductions for software from section 401.17’s presumed value is buttressed by the canon of statutory construction expressio unius est exclusion alterius (the statement of one thing implies the exclusion of others). Arizona v. United States, (2012) 567 U.S. 387, 432.  The fact that the Legislature made specific adjustments in section 401.17 for depreciation and obsolescence in its cost methodology, and for discounts from its market value methodology, implies that there are to be no other deductions or adjustments to the presumed value under that section.  As a result, section 401.17’s language precludes the deduction of the value of any software from the presumed value.  Pet. Op. Br. at 6.

The Assessor also contends that his interpretation is supported by the rule of construction that specific statutory provisions control over general ones.  See Rose v. State of California, (1942) 19 Cal.2d 713, 723-24 (interpretation of constitutional provisions); Woods v. Young(1991) 53 Cal.3d 315 (malpractice procedure); People v. Moroney, (1944) 24 Cal.2d 638 (obligation of governmental entities to pay filing fees).  Pet. Op. Br. at 7-8.

Finally, the Assessor notes that the Legislature used the words “presumed value” in section 401.17 and there is no such language in section 110, which defines “fair market value.”  “Ordinarily, where the Legislature uses a different word or phrase in one part of a statute than it does in other sections or in a similar statute concerning a related subject, it must be presumed that the Legislature intended a different meaning. [citation omitted]’” Roy v. Superior Court, (2011) 198 Cal. App. 4th 1337, 1352.  The Assessor argues that a presumed fair market value is calculated within the confines of section 401.17 and a fair market value is calculated under section 110.  It is only in the latter case that deductions under sections 995 and 995.2, and Rule 152, are appropriate.  Reply at 5-6.

Apart from the fact that none of these construction principles apply if the meaning is plain, they do not affect the interpretation of section 401.17.  Section 401.17 does not use the words “presumed value” as the Assessor suggests.  Rather, it uses the words “preallocated fair market value”, which the Assessor’s witness agreed meant fair market value.  Moreover, the Assessor’s construction ignores the fact that the “presumed fair market value” in section 401.17 is rebuttable.  That presumption can only be rebuttable by evidence proving fair market value.  Fair market value excludes non-taxable software if the requirements of sections 995, 995.2 and Rule 152 are met.

The Assessor points to nothing in section 401.17 that attempts to list the adjustments that may be made to determine fair market value such that expressio unius est exclusion alterius (the statement of one thing implies the exclusion of others) would apply. The adjustments in section 401.17 for depreciation and obsolescence in cost methodology, and for discounts from its market value methodology, do not purport to be a list.

The canon of construction that the use of different words within the same statute must have different meaning has no application to two different statutes, section 401.17 and section 110.  In fact, the use of the same words (fair market value) in the two different statutes must be interpreted to have the same meaning.  The various parts of a statute must be harmonized by considering each clause in the context of the statutory framework as a whole.  Lungren v. Deukmejian, (1988) 45 Cal.3d 727, 735.

Finally, the Assessor is correct that a specific statute controls over a general one, and section 401.17 certainly is a specific statute for aircraft valuation.  However, nothing in section 401.17 conflicts with the definition of fair market value in section 110 and the use of non-taxable software deductions under sections 995 and 995.2, and Rule 152.

  1. Burden of Proof
  2. Rules 152(f) and 321

The Assessor argues that there are two possible burdens of proof that could apply to this case. The first is the general burden of proof applicable to property tax cases set forth in Rule 321.  The second is Rule 152(f), which applies to valuation of computer programs and requires a party challenging the value of computer programs to identify the nontaxable portion of the software and to provide price, cost or other information allowing the assessor to make an “informed judgment” on the value of the taxable and nontaxable portion of the property.  Reply at 1.

The Assessor argues that There are two ways Rule 152(f) could apply: (1) Sections 401.17, 995, and 995.2, and Rule 152, all apply together; or (2) Rule 152(f) is a general standard applicable to identifying and providing evidence to assessors regarding allegedly non-taxable software. In this latter alternative, Rule 152(f) would apply in any case where one was looking at non-taxable software, whether under sections 995 and 995.2 or under sections 110 or 401.17.  The Assessor argues that Southwest did not meet its burden of proof even if sections 401.17, 995, and 995.2, and Rule 152, all apply at the same time.  Pet. Op. Br. at 9.

The Assessor concludes that the Board focused on Rule 152(f)’s requirements that Southwest had the burden (1) show the identity of the nontaxable programs and (2) provide “sales prices, costs or other information” enabling the Assessor “to make an informed judgment concerning the value of the nontaxable property.”  AR 1974, 1981-83.  The Board should have performed a valuation under section 401.17, presumed the accuracy of the value, and imposed a preponderance of the evidence burden on Southwest to show the existence of non-taxable software and the value of that software.  Pet. Op. Br. at 8.

The Assessor argues that the presumption of accuracy of the value obtained under section 401.17 may only be overcome by a preponderance of evidence showing that the valuation is inaccurate.  See Rule 321(b).  In its Legislative Bill Analysis for AB 1157, the Board of Equalization stated the following about section 401.17: “Only the assessor would enjoy the presumption of correctness in any appeal. The burden of proof would rest with the airline challenging assessed values.”  Pet. RJN ,Ex.  4.  Pet. Op. Br. at 8-9.

Rule 321 provides:

“(a) Subject to exceptions set by law, it is presumed that the assessor has properly performed his or her duties.  The effect of this presumption is to impose upon the applicant the burden of proving that the value on the assessment roll is not correct, or, where applicable, the property in question has not been otherwise correctly assessed.  The law requires that the applicant present independent evidence relevant to the full value of the property or other issue presented by the application.

(b) If the applicant has presented evidence, and the assessor has also presented evidence, then the board must weigh all of the evidence to determine whether it has been established by a preponderance of the evidence that the assessor’s determination is correct.  The presumption that the assessor has properly performed his or her duties is not evidence and shall not be considered by the board in its deliberations.”

Rule 321(a) creates a presumption that the assessor has properly performed his duties.[6]  The effect of this presumption is to impose upon the taxpayer the burden of proving that the value on the roll is not correct.  The taxpayer must present at least a prima facie case that the assessor’s valuation is incorrect: “To sustain this burden, the taxpayer must at least make a prima facie showing….That is, he must introduce some evidence of [value] before there is any burden on the Assessor.”  Griffith v. County of Los Angeles, (1968) 267 Cal.App.2d 837, 842.[7]  Otherwise, the assessor could stand on the presumption that the assessment is fair and equitable.  Id.  Once the taxpayer satisfies his burden of production, the board is then required to decide whether the taxpayer has met its burden of proof by a preponderance of the evidence presented at the hearing.  Rule 321(b).  The board does so without reliance on the initial presumption in the assessor’s favor.[8]

Rule 152(f) provides that a person claiming that a single-price sale or lease includes charges for non-taxable programs and services should be required to identify the non-taxable property and services and supply sale prices, costs or other information that will enable the assessor to make an informed judgment concerning the proper value to be ascribed to taxable and nontaxable components of the contract.  18 CCR §152(f).

Rule 152(f) requires that to establish a reduction in value based on inclusion of non-BIOS software in a valuation, the taxpayer has the burden of showing: (1) identification of the nontaxable software and (2) price, cost or other information enabling the assessor to make an informed judgment on value.  Cardinalsupra at 232 (“The burden [under Rule 152(f)] is on the taxpayer to do the work of segregating out the value of nontaxable application software from the otherwise taxable value of the computer”).  If the taxpayer fails to meet this burden, the assessor “may regard the total amount charged as indicative of the value of taxable tangible property.” Rule 152(e); Cardinalsupra at 232-33.  A leading treatise on property taxes in California expresses this burden: “Such burden could be satisfied if the prices of the nontaxable elements were separately itemized and the customer had the option to reject the nontaxable ones. Alternatively, the taxpayer could produce evidence of the prices charged at either the wholesale or retail level for hardware only or hardware and basic operational software.” Sean Flavin, Taxing California Property, (2020) § 4.4.  Pet. Op. Br. at 9-10.

Southwest contends that the evidence of value it submitted, including the testimony of Perkins, Hilderman, and Exhibits E, H and P, was sufficient to satisfy its Rule 321 burden of producing evidence to dissolve the presumption.  This required the Assessor to present evidence if he wished to prevail.  Otherwise, the only evidence would be the taxpayer’s prima facie case.  The Board was then required to weigh the evidence and make its determination whether Southwest had met its burden by a preponderance of the evidence.  Southwest contends that is exactly what the Board did.  Opp. at 11.

There is no reason to distinguish between Rules 152(f) and 321.  Section 401.17 required the Board to determine whether Southwest satisfied its burden of producing evidence that the taxable value of its aircraft fleet differed from the Assessor’s pre-allocated fair market value under section 401.17.  Rule 152(f) required the Board to determine whether Southwest identified the non-taxable property and services and supply sale prices, costs or other information sufficient to remove non-taxable software values from the assessment.  Both factual issues were committed to the Board, which concluded that Southwest met its preponderance of evidence burden of proof under Rule 321.  AR 1954, 1983.

The Board did exactly what the Assessor says it should.  The Assessor performed a valuation under section 401.17, the Board presumed the accuracy of the value and imposed a preponderance of the evidence burden on Southwest to show the existence of non-taxable software and the value of that software, and Southwest met that burden.

 

  1. Prejudice

It is insufficient to show that the Board applied a wrong burden of proof.  The Assessor also must show prejudice.  This means that the Board abused its discretion in not following the manner required by law.  Such failure is shown if the Board reasonably might have reached a different result.  Southwest argues that the same result maintains if the burden proof of Rule 152(f) is applied.  Even if the Board applied the wrong standard of proof, it would be a harmless error because Southwest carried the burden of proving the assessment was incorrect under Rule 321.  Opp. at 11.

The Assessor notes that a party claiming that the value of intangible property must be removed from a valuation is required to establish the value of intangible assets subsumed in the value of the property.  Elk Hillssupra at 615.  The only evidence cited by the Board to identify non-taxable software in the fleet is a vague reference to expert testimony and documents.  AR 1981.  Moreover, Rule 152(f) requires information on price, cost, or otherwise information giving the assessor sufficient information to make an informed judgment regarding value.  Sean Flavin, Taxing California Property, § 4.4 (2020). The Board’s findings do not cite such information and the AAB appears to make its decision based on its absence.  AR 1982. The Board added that the law does not require “impossibilities,” citing Civil Code section 3531.  Thus, the Board stated that the information is not readily available, not that it is impossible to obtain.  AR 1982.[9]

In addition, when providing information relating to vendor representations, the party must show that vendors providing this information understand what non-taxable software is and be knowledgeable in California property tax law.[10]  Southwest did not show that its vendors had this knowledge and there was evidence that at least one of them did not.  AR 592.  As a result, Southwest failed in providing requisite vendor knowledge of California property tax law as required and, thus, failed to meet its burden of proof in establishing the value of alleged nontaxable software as required by Rule 152.  Pet. Op. Br. at 10-11.

The Assessor misunderstands his obligation under the harmless error standard.  He must show that, if the Board had applied the proper burden of proof, there is a reasonable prospect that he would have prevailed.  This means that he must cite the evidence — favorable and unfavorable – that would be affected by the burden of proof and explain why he would have prevailed.

The Assessor does not do so.  He argues that Southwest did not meet its burden because the Board failed to cite evidence that identified non-taxable software, failed to cite evidence in the form of prices, costs or the like showing the value of the non-taxable software, and instead concluded that Southwest did its best under the circumstances.  The Assessor also does not show the evidence on whether Southwest’s vendors understood what non-taxable software is and were knowledgeable in California property tax law.  As a result, the Assessor fails to show any prejudice from the Board’s alleged improper use of Rule 152(f).

 

  1. Substantial Evidence

The Assessor argues that the Board’s decision is not supported by substantial evidence. Assessor’s opening brief fails to present a full and fair statement of facts, or any statement of facts at all.  Instead, the Assessor argues only that (a) the Board’s Findings are conclusory and fail to identify testimony and documents on particular issues, and (b) the Assessor presented substantial evidence through the testimony of Khodaverdian.  Pet. Op. Br. at 12-14.

This is wholly inadequate.  When a petitioner challenges an administrative decision as unsupported by substantial evidence in light of the record as a whole, it is the petitioner’s burden to demonstrate that the administrative record does not contain sufficient evidence to support the agency’s decision.  State Water Resources Control Board Cases, (2006) 136 Cal.App.4th 674, 749.  A recitation of only the part of the evidence that supports the petitioner’s position is not the “demonstration” contemplated by this rule.  According, if a petitioner contends that some issue of fact is not sustained, he is required to set forth in his brief all the material evidence on the point and not merely his own evidence.  Unless this is done, the error is deemed to be waived.  Id. (quoting Foreman & Clark Corp. v. Fallon, (1971) 3 Cal.3d 875, 881).

Assessor’s failure to set forth the pertinent evidence, relying only on his own, waives his claim that the Board’s Findings were not supported by substantial evidence.  Additionally, his argument about the conclusionary nature of the Board’s Findings is not an issue of substantial evidence, but rather of the adequacy of the findings under Topanga.  See CCP §1094.5(b).

In reply, the Assessor attempts to present actual evidence.  This is too little, too late.  New evidence/issues raised for the first time in a reply brief are not properly presented to a trial court and may be disregarded.  Regency Outdoor Advertising v. Carolina Lances, Inc., (1995) 31 Cal.App.4th 1323, 1333.

Even if arguendo the court should consider the Assessor’s evidence, it is insufficient.  The Assessor argues that the Board did not rely on the evidence identified by Southwest’s opposition.  This is a Topanga argument.  See post. 

The Assessor further argues that the Board explicitly stated that it did not have evidence relating to prices of software or the segregation of non-taxable and taxable software costs in avionics, which is the central issue in this case.  AR 1982. The Board claimed that it would be an impossibility to obtain such information even though it previously stated that such information was “not readily available.” AR 1982.  The Assessor argues that “it is clear” this information can be obtained and Southwest just failed to obtain and present it.  Reply at 8.

It is not clear that such information can be obtained and there is nothing inconsistent in the Board’s two statements of impossibility and not readily available.  More important, the Assessor continues to cite to the Board’s decision and not to evidence in the record.

The Assessor notes that the Board’s Findings rely on letters identifying the percentages of taxable and non-taxable software in bundled aircraft software from the years 2000 and 2015. AR 1281 (Letter to Thomas Will, November 27, 2000); AR 1289 (Letter to David Perkins, October 16, 2015); AR 1286 (Letter to David Perkins, October 27, 2015).  The Assessor contends that these letters are irrelevant because the tax year at issue is 2012.  Yet, the calculations of the percentages based on these letters was a crucial part of the valuation accepted by the Board.  Given that these letters were of no relevance to the valuation, this is an irretrievable defect in the values accepted by the Board.  Reply at 8.

The Assessor also contends that there is a fundamental error in the value calculation presented by Southwest. There are two valuation methodologies that must be applied under section 401.17: (1) a cost method valuation (§401.17(a)(1)); and (2) a market value method valuation (§401.17(a)(2)).  Southwest’s appraiser erred in calculating the value of non-taxable software using cost method data and then deducting the cost-based software value from the software’s market price calculation.  AR 726 (table showing deduction of cost-based software data (Column O) from the section 01.17 fair market value of the aircraft (Column E)).[11] This is a fundamental error.  Cost-based data is appropriately used only in cost-based valuations and cannot appropriately be imported into a market value calculation.  This is made clear in Rule 3 summarizing authorized methods of valuation for assessors describing five distinct valuation methods, several of which are then individually described in Rules 4-8.  These methods are not described as subject to combination and typically are separately applied in appraisal practice.  Reply at 8-9.

Aside from presenting this argument about the evidence for the first time in reply, the Assessor neither cites to expert testimony supporting his position, provides Rules 4-8 for the court’s review, or explains what the testimony of Southwest’s experts was on this subject.  The Assessor cannot blandly state that these methods are not subject to combination and typically are separately applied in appraisal practice without supporting evidence.  The issue is not whether the Assessor presented substantial evidence, but whether the Board had substantial evidence to decide in Southwest’s favor.

The Assessor argues that Southwest assumed that software depreciates at the same rate as the aircraft, an assumption that is not supported or justified. AR 562-64, 726.  Yet, Southwest’s own evidence states that software does not depreciate.  AR 564, 1151, 1152. This erroneous depreciation of software was incorporated in the valuation of the fleet by the Board.  Reply at 9.

Finally, the Assessor criticizes software engineer Hilderman’s Lines of Software Code valuation which determined the cost of the software and then divided this cost by round numbers in the low hundreds (100, 200, 300) to represent the breakeven point for a manufacturer in producing this software and installing it on aircraft of the relevant model.  The Assessor contends that Hilderman should have divided the cost of the software by the total number of relevant model aircraft sold, which would be approximately 3,000 aircraft.  AR 593. This figure represents the actual cost of the software per aircraft.  Hilderman’s inappropriate use of a breakeven point as the divisor caused the cost of software per aircraft to be much higher than its actual per airplane cost.  AR 1959, 1145, 1154. This error was included in data that determined the 7.14% software percentage for the fleet’s B 737-700 aircraft and was erroneously adopted by the Board.  AR 1145 (Table); AR 1984.  Reply at 9-10.

Again, the Assessor cites only its own witness’ testimony and fails to cite all pertinent testimony, including the reason why Hilderman performed the lines of code analysis.  The Assessor also fails to recognize that Southwest relied on two different methodologies: Vendor Representation Method and the Percentage of Cost Method.  See AR 1982.  The Board accepted the Percentage of Cost Methodology as the best measure of the two methodologies to quantify the value of the bundled non-taxable avionic software.  AR 1983.  The information provided by the respective vendors for purposes of estimating the amount of non-taxable avionic software was validated by Hilderman’s independent assessment using a Percentage of Cost Method and Lines of Software Code analysis.  Id.  The Assessor does not explain how his criticism fits into this analysis.

  1. Topanga

The Assessor argues that the Board’s Findings are inadequate because there is no analytic route between the raw evidence and the findings as required by Topanga.  As stated, the Assessor argues the Board’s Findings state a conclusion that Southwest provided “sufficient, reliable and persuasive evidence by way of expert witness testimony and substantial detailed documents to demonstrate that the five identified primary [non-taxable software] systems” are exempt from taxation.”  AR 1981.  Yet, the Findings fail to identify the testimony and documents on which the Board relies.  Pet. Op. Br. at 12.

Moreover, the Findings cite no evidence that any one of the identified types of software is exempt from taxation.  They simply identify these five types of software without providing evidence that they are non-taxable application programs rather than taxable BIOS programs.  They also do not identify any programs in the avionics that are taxable.  Any distinction between these two types of software is left a mystery.  Pet. Op. Br. at 12.

The Assessor concludes that the roadmap required by Topanga is absent.  There is no bridge between the evidence and the identification of non-taxable software.  The Board relies on the Value Representation Method and Percentages of Cost Method to calculate the value of this software, but it does not show the logical path justifying the percentages of cost as its conclusion of value.  AR 1983.  The percentages were chosen by simply stating them in conclusory terms without justifying them.  Pet. Op. Br. at 15.

In reply, the Assessor adds that there is a gapping rut in the road from the evidence to the conclusions.  The Board explicitly states that it does not have evidence relating to prices of software and the segregation of non-taxable and taxable software costs in avionics.  AR 1982.  This data was necessary for the Board to determine the percentages of the total value of aircraft that was attributable to non-taxable software.  Without this information, the aircraft simply cannot be valued with non-taxable software deducted from the value of the fleet.  Reply at 10.

The scope of the Assessor’s Topanga argument concerning the Findings is limited to the two issues raised in the opening brief: (a) failure to show that the five types of programs are not taxable application programs and not BIOS programs and (b) failure to justify the percentages of value.  See Bullock v. Philip Morris USA, Inc., (2008) 159 Cal.App.4th 655, 685 (petitioner “must affirmatively demonstrate error through reasoned argument, citation to the appellate record, and discussion of legal authority.”); Solomont v. Polk Development Co., (1966) 245 Cal.App.2d 488 (point made which lacks supporting authority or argument may be deemed to be without foundation and rejected).

The Board adequately analyzed these two issues under Topanga.  The Board set forth in detail the nature of the evidence presented by Southwest.  AR 1981-83.  It then explained that it was adopting Southwest’s position in toto by accepting its experts’ valuation methodologies and opinions.  AR 1983.  Specifically, the Board accepted the value of non-taxable software in Southwest’s use of the Vendor Representation Method, including the information provided by vendors and validated by Hilderman’s independent assessment.  AR 1982.  The Board accepted the Percentage of Cost Method as the best of the two methodologies and provided its acceptance of percentage reductions.  AR 1983.  The evidence relied upon by the Board included Hilderman’s identification of the non-taxable software and that it was loadable (non-BIOS) software.  AR 1957-58.  The Board therefore addressed the Assessor’s Topanga issues.

Southwest is correct (Opp. at 18) that the reduction granted by the Board was the exact reduction that Southwest requested.  AR 1953, 1984.  The Board clearly accepted Southwest’s analysis and valuation evidence, explained that Southwest met its burden of proof, stated that it relied on Southwest’s Vendor Representation Method (AR 1982), and set forth the amount of non-taxable software costs to be removed based on Southwest’s Exhibit E (AR 725-28).  This is all the Board was required to do.  See Craik v. County of Santa Cruz, (2000) 81 Cal.App.4th 880, 891–92 (rejecting plaintiff’s argument that the findings were scattered throughout the record, and there was no explanation as to a number of issues because findings need not be stated with judicial formality, they need only expose the mode of analysis).  The Board’s Findings are sufficient under Topanga.

 

  1. Conclusion

The Petition is denied.  Southwest’s counsel is ordered to prepare a proposed judgment, serve it on the Assessor’s counsel for approval as to form, wait ten days after service for any objections, meet and confer if there are objections, and then submit the proposed judgment along with a declaration stating the existence/non-existence of any unresolved objections.  An OSC re: judgment is set for March 18, 2021 at 9:30 a.m.

[1] Petitioner Assessor failed to set forth the standard of review as required by Local Rule 3.231(i)(3).

[2] All further statutory references are to the R&T Code unless otherwise stated.

[3] The Assessor requests judicial notice of: (1) Assembly Bill (“AB”) 964 (Ex. 1); (2) Senate Revenue and Taxation Committee analysis of AB 964, Property Tax: Assessment of Airline Property (Hearing Held August 17, 2005) (Ex. 2); (3) Draft Board of Equalization Staff Legislative Bill Analysis, AB 964 (August 22, 2005) (Ex. 3); (4) State Board of Equalization, Legislative Bill Analysis AB 1157 (Feb. 25, 2015) (Ex. 4); and (5) Declaration of Anna Maria Bereczky-Anderson, an employee of Legislative Intent Service, Inc., the entity that researched and compiled a legislative history for Petitioner, certifying that Exhibits 1-3 are legislative history to R&T Code section 401.17 (Ex. 5).  The requests are granted as to Exhibits 1-4.  Evid. Code §452(b), (c).  The declaration (Exhibit 5) is not subject to judicial notice and the request is denied.  However, the declaration is separately admissible.

In support of his reply, the Assessor requests judicial notice of an email dated January 15, 2021 from John Louden, Auditor-Appraiser, Property Tax/State-Assessed Properties Division of the Board of Equalization to David Marsh, Appraiser Specialist I, Los Angeles County Assessor’s Office (Ex. 6).  Southwest objects on multiple grounds. The email is not an official act and the request is denied.

Real Party Southwest requests judicial notice of: (1) AB 964 (2005-2006 Reg. Sess.) as amended July 14, 2005 (Ex. A); (2) AB 964 (2005-2006 Reg. Sess.) as amended Aug. 22, 2005 (Ex. B); (3) Senate Revenue and Taxation Committee, Analysis of AB 964 (2005-2006 Reg. Sess.) as amended Aug. 22, 2005 (Ex. C); (4) Final version of AB No. 964, 2010 Stats., ch. 228 (Ex. D); and (5) Assembly Concurrence to Senate Amendments of AB 384 (2009-2010 Reg. Sess.) as amended May 5, 2010 (Ex. E).  The requests are granted.  Evid. Code §452(b), (c).

In a second request filed after the reply, Southwest requests judicial notice of (1) State Board of Equalization, Assessment Appeals Manual (May 2003, Reprinted January 2015) pages 84-85 (Ex. A); (2) Law Revision Commission Comments to Evidence Code Section 606 (Ex. B); and (3) 1 Ehrman & Flavin, Taxing California Property (2020-2021 ed.) (“Taxing California Property”), Conduct of hearing – Burden of proof, section 27.10, pages 689-92 (Ex. C).  The requests are untimely and are denied.

[4] Neither party presents a full and fair statement of facts with citations to the Administrative Record.  As the facts are not in dispute, the court presents undisputed evidence in the Board’s decision.

[5] The Assessor states that this conclusion is evident from section 995’s reference to programs being “valued” under valuation methods described in Rule 3 for full valuations of property.  The Assessor fails to quote or provide a copy of Rule 3.

[6] This presumption exists for all official duties in Evidence Code section 664.

[7] The Assessor correctly notes that Southwest is wrong in contending that the quantum of evidence a taxpayer must present is “slight.” Opp. at 10-11.  “Slight” is not the same as “prima facie”.  A prima facie case means that the party has sufficient evidence to support a finding if no evidence to the contrary is presented.  Black’s Law Dictionary, (4th ed. 1968) p. 1353.

[8] Southwest argues that there are two types of rebuttable presumptions: a presumption affecting the burden of producing evidence and a presumption affecting the burden of proof.  Evid. Code §601.  According to Southwest, Rule 321(b)’s presumption is a presumption affecting the burden of producing evidence.  A presumption affecting the burden of producing evidence is dispelled by the production of evidence casting doubt on the truth of the presumed fact.  Evid. Code §604; Rancho Santa Fe Pharmacy, Inc. v. Seyfert, (1990) Cal.App.3d 875, 882.  A presumption affecting the burden of proof requires the party opposing the presumed fact to prove its non-existence by the applicable standard of proof.  Evid. Code §606; Haycock v. Hughes Aircraft Co., (1994) 22 Cal.App.4th 1473, 1491.

The Assessor correctly replies that the Rule 321 presumption is not for the burden of producing evidence, but rather burden of proof.  He notes that the Evidence Code defines presumptions affecting the burden of proof and enumerates those presumptions that are statutorily determined to be presumptions affecting the burden of proof.  Evid. Code §§ 604, 660-70.  As with Evid. Code section 664’s presumption that official duties of government officials are regularly performed, Rule 321’s presumption affects the burden of proof.  Farr v. Cty. of Nevada,  (2010) 187 Cal. App. 4th 669, 682.  Reply at 2-3.

[9] Without citation, the Assessor contends that Southwest could have obtained cost and other information required by Rule 152.  Pet. Op. Br. at 10.

 

[10] The Assessor cites a letter that is not part of the record and has not been considered.  Pet. Op. Br. at 10-11.

[11] The Assessor argues that he presented a proper use of software cost data in a cost-based valuation to the Board in a PowerPoint presentation. AR 1908-10.