• Refund and Class Action Issues
  
  
• The Acquisition-Base Valuation Method and The Equal Protection Clause
  
  
• Valuation and Financial Issues
  
  
• The 2% Issue - How was it established?
  
  
• Information and Background for Proposition 13 and Proposition 8
  

Unlike some claims for class actions under the Civil Codes, in matters regarding property tax payments the California Constitution specifically provides for refunds in Article XIII, Section 32. This Section states that, "After a payment of tax claimed to be illegal, an action may be maintained to recover the tax paid, with interest, in such manner as may be provided by the Legislature." Following this section of the Constitution, the California Legislature enacted Civil Code Procedure Section 313 and Government Code Section 905, specifically and clearly to direct all claims and actions related to property tax governed by the California Revenue and Taxation Code.

The Revenue and Taxation Code, in Sections 5096 through 5180, provides a well-defined process for property owners to pursue claims on property taxes paid. In summary, this process includes:

1. The person or entity that paid the tax must file a claim for refund of taxes with the County Board of Supervisors within four years of the date of making payment.

2. If the claim is accepted, a refund will be issued to the claimant.

3. If the claim is rejected, the claimant has the right to file a petition in the Superior Courts within 6 months.

The process specified in the Revenue and Taxation Code treats each claim for property taxes individually and does not provide a mechanism for a "class" or group refund. The process directs individual treatment and has been challenged in the courts and was affirmed by the California State Supreme Court in 1992 (Woosley vs. State of California). The issue of "class" will be reviewed by our local court starting in mid-March.

The Assessor is not directly involved in the processes surrounding the payment of property tax bills, and the Assessor is not involved in the process of refunds.

However, the Assessor is committed to seeking clarification of the issues in this case, including the class action issue. Uniformity in the application of the property laws is critical to the work of the Assessor. The Constitution also requires the Assessor to pay attention to equal protection in property valuations. The valuation and taxing laws are state laws and they are applied statewide under the requirement of equal protection.

The court system will continue to review this case and its applicability inside and outside of Orange County. It is anticipated that, if the full judicial review eventually affirms the December 27, 2001 Order, the California Courts and/or the Legislature will devise a broadly applied mechanism to address every taxpayer who has been impacted.

March 11, 2002

The Acquisition-Base Valuation Method and The Equal Protection Clause

The ongoing judicial review by the Orange County Superior Court and the new Order issued on December 27, 2001, relates directly to one of the fundamental elements of Proposition 13 - acquisition-base valuation method.

The property valuation approach specified by Proposition 13 is an acquisition-base valuation method that establishes a tax base (now called a base year value). This value is established at the time of change of ownership or new construction, and it has acquisition cost as its base. Once a tax base is established, the future valuation is capped by a statutory formula related to the original tax base (now tracked as the adjusted base year value). This approach achieves two major objectives: (1) every homeowner has a clear picture of her or his future property tax liability estimated from the base year value, and (2) the increase of property tax collectable by the government is limited within a defined range. These two objectives were the key parts of the 1978 Proposition 13.

Immediately after the passage of Proposition 13 in June 1978, it was challenged in the California courts. On September 22, 1978, the California Supreme Court affirmed Proposition 13. Again in the early 1990's, Proposition 13 was challenged not only in the California courts, but also in the U.S. Supreme Court. On June 18, 1992, the U.S. Supreme Court affirmed the California Court of Appeal's decision of December 3, 1990, that Proposition 13 did not violate equal protection.

In those challenges to Proposition 13, one of the key opponents' arguments was that the acquisition-base valuation method resulted in significant disparity in the assessed values for similar properties; and, therefore, violated the constitutional clause of equal protection. Opponents argued that Proposition 13 does not reflect the current market value for all the properties at the time of annual valuation, favors long-term home ownership, and burdens new homeowners with disproportionately larger tax liabilities.

Reviewed in conjunction with the court challenges were the results of the valuation approach specified by the California Legislature in Revenue and Taxation Code Sections 50 and 51 in 1979 to implement Proposition 13. The value approach set up by the R&T Code was to protect and maintain the acquisition value as a base. The annual property value assessment is performed by establishing a base year value and, thereafter, calculating and maintaining an adjusted based year value as A CAP, while allowing the property value to be adjusted for market conditions.

It is clear that statewide enforcement and implementation of such tax laws and methodology helped to uphold the constitutional validity of Proposition 13 and the uniformity necessary to pass the review of "equal protection." Equal protection requires the laws of a state to treat an individual in the same manner as others in similar conditions and circumstances.

To apply the new Order of December 27, 2001, when reducing a property value due to a temporary market downturn, the "acquisition" base year value would be allowed to float. The new Order would use the lower "market" value the Assessor places on the roll as a new base, which is not currently provided or defined in the laws. This approach would deviate from the acquisition-base valuation method, which was a critical part of the Supreme Court's review.

In 1990, the California Court of Appeal, Justice Klein upheld Proposition 13, saying: "Because an acquisition value approach, by which a property owner's tax liability bears a reasonable relation to the acquisition cost, is neither wholly arbitrary nor irrational, Article XIIIA met the demands of the equal protection clause."

Therefore, important questions are raised:

1. Is the application of the new Order consistent with Proposition 13 if it directs a switch from an "acquisition" base year value to a floating "market" base value?

2. The new Order, if applied in Orange County, would raise issue of "equal protection" since the taxpayers in Orange County would be treated differently than the taxpayers in other counties.

3. Would the application of the new Order undermine the protection provided by Proposition 13? That protection is based on the acquisition-base valuation method applied uniformly statewide.

4. Could Orange County taxpayers lose their Proposition 13 property tax protection?

5. These questions have serious local and statewide implications. Has the door been opened for new attacks on Proposition 13 by this new Order?

6. So, should these questions be addressed by a state judicial review and the legislature?

This review note has some serious and critical implications; more discussion is necessary.

February 11, 2002

Valuation and Financial Issues

The ongoing judicial review by the Orange County Superior Court and the Court Order issued on December 27, 2001, relates to more than just the application of the laws by the Assessor Department. This ongoing court review also impacts the actions of the Orange County Board of Supervisors, the Auditor-Controller and the Treasurer-Tax Collector in a variety of ways and, overall, raises new issues to be considered in two distinct areas:

1. Valuation issues pertaining to discontinuing the use of the "recapture method" in assessing real properties in Orange County, and how this change impacts other parts of the Constitution and state rules; and
   
   
2. Financial issues involving class action for possible refunds of taxes paid on properties that were subjected to the "recapture method" in prior years. These issues related to the refund of taxes are the concern of the County, the Auditor-Controller, and the Treasurer-Tax Collector. The court has not decided this issue, which is a part of the existing case. This part of the court review has been extended to March 11, 2002.

Valuation Issues
The Assessor is charged with the responsibility of administering the laws governing the appraisal and assessment of property for taxation purposes. The body of property tax laws includes multiple layers of interrelated Constitutional provisions, statutes, regulations, rules, and court case laws. The new Court Order of December 27, 2001, held that the "recapturing" method of valuation followed by the Assessor, (and uniformly by the State Board of Equalization and all 58 counties) was unconstitutional.

The "recapture method" is only one element in the entire body of property tax laws and cannot be easily isolated from the complex structure of property tax administration. This situation was clearly pointed out in the 1979 Final Report of the Task Force on Property Tax Administration on the implementation of Propositions 13 and 8. Presenting a long list of legislative recommendations, including the "recapture method," the Task Force concluded, "These recommendations are deeply interrelated, and a change made in one recommendation might well require compensating changes to be made in several other recommendations." (Report of the Task Force on Property Tax Administration, presented to the Assembly Committee on Revenue and Taxation, January 22, 1979)

Therefore, in considering how to apply the new Order, the Assessor must consider a wide range of issues of potential conflict, and evaluate whether these potential conflicts can be harmonized within the jurisdiction of the Assessor. If it is determined that the potential conflicts cannot be harmonized within the Assessor's jurisdiction, then the Assessor must ask for guidance from the judicial and/or the legislative branches. Presented below are two examples of such potential conflicts based on real situations in Orange County.

Conflict Related to Proposition 90 (property value transfer between counties):
Problems will arise when the Orange County Assessor and Assessors from other counties are using different valuation methodologies. For example, persons over the age of 55 years may be able, under qualifying guidelines, to transfer the base year value of their residence in Orange County to a replacement residence in, for example, Los Angeles County. If the base year value for the Orange County property was reduced in accordance with the new Order, the new base year value could be substantially lower under this new methodology. Thus, the transfer of this new base year value would determine the taxes to be paid on the replacement property in Los Angeles County. Why would Los Angeles County accept a lower base year value based on a methodology that may be different than the state law and not acceptable in Los Angeles County?

Conflict Related to Calamity Assessment
A potential problem would exist within Orange County in situations of calamity. For example, if a residence with a value of $300,000 suffers $100,000 damage to the improvement caused by a hillside slippage, the homeowner may be entitled to a reduction in base value in the amount the property has been damaged, i.e., original value $300,000 less $100,000 damage establishes a new taxable value of $200,000. When the house is repaired or reconstructed, the previous taxable value of $300,000 is restored, as required by the Constitution Article XIIIA, Section 2(a) ($200,000 temporary value + $100,000 repair of improvements = $300,000 restored base value).

At the same time, the next-door neighbor's property, which has a similar value of $300,000, does not suffer any physical damage. However, the neighbor files an assessment appeal because he believes he has also suffered a $100,000 loss in value because of the "stigma" of living next door to the damaged home and hillside slippage. At the appeal hearing, the Assessment Appeals Board reduces his value by $100,000. If the new Order were applied, when the "calamity-damaged" property was repaired and the value restored to $300,000, the "stigma-damaged" property would continue to retain the reduced $200,000 value. It is apparent that this is not equitable treatment between these two homeowners. Such inequality appears to deviate from the "equal protection" principle in the U.S. and California Constitutions.

So, in just this area, two sections of the law would now direct different treatments and substantially different outcomes as they relate to uniformity for calamity assessments.

These are just two (2) valuation issues that are not resolvable within existing laws without judicial or state action. In addition, in reviewing how to apply the new Order, it is not clear whether the new Order is "retroactive" or "prospective" only? In either case, additional conflicts or issues related to uniformity and accuracy may arise. This is an ongoing review and discussion, and we will add to this section as we develop relevant information.

Financial Issues
The next action of the Superior Court will deal with the issues of class action for refund of taxes. In the Revenue and Taxation Code, the refund actions are addressed in Sections 5096 through 5180. The implementation of these sections is under the jurisdiction of the County Board of Supervisors, Auditor-Controller, and the Treasurer-Tax Collector.

As a part of the refund action, the property tax assessment Roll may need to be changed to derive and reflect the amount of refund. The Assessment Roll is initially prepared by the Assessor and, once completed, delivered officially to the County Board of Supervisors and Auditor-Controller. Any correction to the Roll must be conducted under Revenue and Taxation Code Sections 4831 through 4880, where the law gives the County Board of Supervisors and the Auditor-Controller the authority to make roll corrections.

Therefore, the Assessor can provide assistance, but the Assessor cannot lead or assume authority in financial matters of the county. This part of the case is still under judicial review.

Going Forward
Accuracy and uniformity are important parts of the many reviews under way. Since 1978/1979, about nine (9) voter approved initiatives and many new or clarification code sections have been added to the property valuation sections of laws and codes. Each time something changes, new rules and procedures have to be established to allow and provide for compliance. The property tax rules and procedures are set by the legislature and the State Board of Equalization, and are provided to all the Assessors on a statewide basis. Uniformity in the application of these laws and rules is what makes our system of property valuation work. The new Order would only apply to Orange County, therefore many problems may be created. Our review and discussions continue.

Legal Counsel
Counsel to the County Board of Supervisors has been asked to focus only on the financial issues and they have a declared conflict. To complete the Assessor Department review of the many interrelated laws and to make decisions about the Assessor's legal authority, the Assessor Department will seek separate counsel.

No decision has been made about a petition to the courts on the valuation issues at this time. Any such decision is still open, subject to various legal review and advice. The Assessor cannot pick and choose to follow only some parts of the laws. But, we will look to see what works and evaluate changes that would be required by the state. These laws and rules are "deeply interrelated, and a change made in one recommendation might well require compensating changes to be made in several other recommendations."

We will continue to provide discussion information, and answers to your questions as data is developed.

January 28, 2002

The 2% Issue - How was it established?

1. Did Orange County follow the law differently from other counties?
   
   
2. Can the Assessor interpret the laws independent from the state?
   
   
3. Is following this order or state law discretionary?

The following history is an excerpt from the publication: Property Tax Assessment - Implementation of Proposition 13, Volume I, No. 748, October 29, 1979, by the State Revenue Taxation Committee. This is the state direction provided to all 58 counties:

Declines in Value

Although the ballot arguments in favor of Proposition 8 indicate that the primary concern of the author was to prevent adverse treatment of persons rebuilding their homes and businesses after a disaster, the principal impact of the proposition has been to allow taxable values of any property to decline below the factored base values established under Proposition 13.

As enacted by AB 1488, Section 51 spells out the two ways an assessor may arrive at the taxable value of a given property. In order to ensure that no property be valued at a level higher than BEFORE Proposition 13 was enacted, the value of real property is the lesser of:

1. its factored base year value (Section 51(a)), or
   
   
2. its full cash value under Section 110, taking into account reductions due to damage, depreciation, or other factors causing a decline in value (Section 51(b)).

A decline in value does not necessarily result in a new base value.10 Under Section 51 and Board Rule 461(d), if the true full cash value of a property declines one year and then in subsequent years appreciates in value, the assessment must be increased to that higher level of full cash value. However, if the full cash value exceeds the factored base year value, then the actual assessment made cannot exceed that factored base year value.

This provision means that assessors must maintain two sets of values for such declining value properties: full cash and factored base. It also means that a property which declined in value one year may be increased in value the following year by MORE than two percent, up to the ceiling of factored base year value.11 Table IV shows an example of the variety of allowable changes in values for a sample property over a period of several years.

In determining the extent of a potential decline in value, the assessor must look to the net change in value of the appraisal unit which is commonly bought and sold in the market place, or which is normally valued separately (Section 51(c), 2d paragraph). This means that land and improvements are ordinarily treated as a unit,12 and that a taxpayer cannot claim a net decline in full cash value terms of an improvement due to depreciation, without also including any appreciation in the value of the land. If the building depreciation is offset by the increase in land value, then no reduction in assessment occurs. Fixtures, however, are normally appraised separately, thus owners may claim a decline based on depreciation of the fixture without regard to the value of the surrounding land or improvements.

With all the various possibilities for establishing a decline in value, the assessor's workload will be much greater than if Proposition 8 had not passed. The assessor will endeavor to identify all such declining value properties, but the law states that the assessor need not annually reappraise all parcels (Section 51(c), 3d paragraph), in recognition of the administrative demands involved. Thus, property owners who feel their property has declined in value should bring this to the attention of the assessor themselves if necessary.

10. A temporary base value may result in certain cases involving damaged property (Section 51(c)). See page 34.
11. See Task Force report (supra note 2 at pages 29-31).
12. For Valuation following a disaster land is a separate unit.

So, the answers to these questions are:

Did Orange County follow the law differently from other counties?

Answer: No.

Can the Assessor interpret the laws independent from the state?

Answer: No - the word "must" and "may" make important distinctions in this rule.

Is following this order or state law discretionary?

A: No - The Assessor must look to see if both can be made to work, and if not, then the laws require an additional review. The Assessor may not just pick parts of the laws to follow.

January 15, 2002

Information and Background for Proposition 13 and Proposition 8

On December 27, 2001, the Orange County Superior Court issued an Order declaring "The Court finds the "recapturing" method to be unconstitutional and violative of the Revenue and Taxation Code (RT hereafter) Section 51(a)(1)(D), and Article XIIIA Section 2(b) of the California Constitution,"

To help you better understand some of the important issues related to this ruling, The Assessor Department has developed the following information.

Proposition 13

- California Constitution Article XIIIA was the result of Proposition 13, an initiative constitutional amendment passed by the voters in June 1978. Proposition 13, among other things, places a limit on property tax rate and restricts the growth of the value of property used for taxation. The limits set by Proposition 13 are not changed by the court actions.

Proposition 8

- After the passage of Proposition 13, the California Legislature submitted Proposition 8 for voter approval in November 1978 to correct a problem - there was no provision in Proposition 13 to lower the value of a property. This change to lower values was important and it allowed the Assessor to reduce your property values in years when the market was down.

To implement the voter approved Propositions 13 and 8, the California Legislature convened a broadly based Task Force on Property Tax Administration. Based on the final recommendations from the Task Force, the Legislature enacted a number of provisions in the Revenue and Taxation Code to implement Propositions 13 and 8, which have been followed uniformly by all 58 counties and enforced by the California State Board of Equalization for the past 23 years.

In the years after Propositions 13 and 8, a number of other propositions were approved by the voters to address various property tax issues that are tied to the implementation of Propositions 13 and 8, such as Proposition 58 that addresses the assessment of real property transfers between parents and children, and Propositions 60, 90 and 110 which provide for transfers of base year values for senior citizens and disabled property owners within a given county or between counties.

While the Order of December 27, 2001, did not impact the provisions of Proposition 13 that keep a limit and cap on real property valuation and taxation, the Order ruled that the "recapture" method (used by all the California assessors) to restore property value that was previously reduced as allowed by Proposition 8 violated the Constitution. The new Order does not address other related provisions of the Constitution and state property tax laws and rules that the Assessors are also required to follow. The new Order sets up many conflicts of law.

The Assessor is charged with the responsibility to administer the laws governing the appraisal of property value for taxation purposes. The disbursement of tax dollars is the responsibility of various other county and state agencies. This structure is designed to ensure Assessors' independence and objectivity in valuing property.

The Orange County Assessor Department's policy is to follow and apply the laws consistently and even-handedly to all the properties in Orange County. We are now analyzing the Order and reviewing how it could be applied. The Assessor may need further definitive directions from the judicial and/or the legislative branches. Some areas of the Constitution may also require actions to clarify the application of this Order.

Some people have not even considered that the application of this Order can increase their tax bills for past and future real property purchases. So imagine making these changes and then having to undo those actions at a later date. We should be prudent and avoid taking actions that may be reversed later by the courts or legislature, because those actions could cause significant unnecessary impact and disruption to the taxpayers.

So, accuracy and uniformity are necessary parts of this discussion. We will continue to keep you informed of the development of this important event.

January 14, 2002

Source: The Orange County Assessor Department