Articles Posted in Tax Law

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DFS is in the business of duty-free sales at airports and holds an exclusive lease and concession to sell merchandise duty-free in the San Francisco International Airport (SFO) international terminal. AN extension of DFS’s lease agreement triggered a reassessment; the Assessor valued DFS’s possessory interest in the leased properties using the income approach. The parties disputed the income stream used by the Assessor in applying that methodology, which was the full amount of the Minimum Annual Guaranteed rent (MAG). For 2011 this was $26.4 million. Capitalizing that entire amount, and after deducting certain expenses and applying a discount factor, the Assessor arrived at a present value for the possessory interest of $59 million. DFS challenged the assessment under Revenue and Taxation Code provisions that bar the taxation of intangible rights. Section 110(d)(3) expressly exempts from taxation the exclusive right to operate a concession. DFS argued that the MAG was consideration not only for its taxable use and occupancy of space but also for the valuable but non-taxable exclusive concession rights it obtained under the agreement to sell merchandise on a duty-free basis. The court of appeal agreed and reversed. Exclusivity is essential to the business and DFS was willing to pay extra money for it and would have no interest in being at SFO without it. View "DFS Group, L.P. v. County of San Mateo" on Justia Law

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The Court of Appeal affirmed the trial court's grant of the District's motion for judgment on the pleadings in an action seeking to invalidate a voter-approved special property tax imposed by the District. Public Resources Code section 5566 requires that collected tax money be spent on parks and recreation land and facilities. The court held that section 5566 was not ambiguous and did not read the statute to require a uniform effect or outcome, but rather uniform application. The court held that the District's Measure A special tax satisfied section 5566's uniformity requirement. Finally, the district court did not abuse its discretion by denying leave to amend the complaint. View "Dondlinger v. L.A. County Regional Park and Open Space District" on Justia Law

Posted in: Tax Law

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After the County refunded taxes Harmony overpaid beginning in the year Harmony first challenged the erroneous base value, Harmony sought to recover tax overpayments for those prior years. The Court of Appeal affirmed the trial court's decision to sustain a demurrer without leave to amend and to dismiss the complaint. The court held that Taxation Code section 80 barred Harmony's tax refund claim, and section 80's prospective assessment limit barred refund of the pre-2011 taxes Harmony's complaint sought to recover. The court also held that the prospective assessment limit in section 80, subdivision (a)(5) is constitutional and bars the tax refund claim alleged in Harmony's complaint. Furthermore, the trial court did not abuse its discretion by denying Harmony's request for leave to amend, and the court rejected Harmony's declaratory relief and writ requests. View "Harmony Gold U.S.A., Inc. v. County of Los Angeles" on Justia Law

Posted in: Tax Law

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In 2012, the Campbell Union School District (CUSD) Governing Board enacted a fee on new residential development under Education Code section 17620. The fee, $2.24 per square foot on new residential construction, was based on a study that projected that “it will cost the District an average of $22,039 to house each additional student in new facilities.” This figure was based on a projected $12.8 million cost to build a new 600-student elementary school and a projected $24.4 million cost to build a new 1,000-student middle school. SummerHill owns a 110-unit residential development project in Santa Clara, within CUSD’s boundaries. In 2012 and 2013, SummerHill tendered to CUSD under protest development fees of $499,976.96. The trial court invalidated the fee and ordered a refund of SummerHill’s fees. The court of appeal affirmed, holding that the fee study did not contain the data required to properly calculate a development fee; it failed to quantify the expected amount of new development or the number of new students it would generate, did not identify the type of facilities that would be necessary to accommodate those new students, and failed to assess the costs associated with those facilities. View "SummerHill Winchester LLC v. Campbell Union School District" on Justia Law

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Next Century purchased the Century Plaza Hotel in mid-2008, for $366.5 million. As of January 1, 2009, the property’s enrolled assessed value was $367,612,305. Next Century sought a reduction in the assessed value because the “global economic meltdown” had caused the property’s market value to drop significantly. The Los Angeles Assessment Appeals Board considered discounted cash flow (DCF) analyses that reflected a decline in value below the enrolled value. The Assessor did not attempt to defend the enrolled value. The Board rejected the Assessor’s DCF analysis as overstating the hotel’s 2006 net operating income. Next Century asserts that if the Assessor’s analysis were corrected, it would generally support Next Century’s proposed value. The Board also rejected Next Century’s proposed valuation and upheld the enrolled value, although no party thought it correctly reflected the property’s lien date value. Next Century sued for a tax refund. The court of appeal reversed a judgment in favor of the County. The Board’s rejection of Next Century’s valuation, without sufficient explanation, and with knowledge that the Assessor’s valuation analysis—if corrected— would result in a valuation significantly lower than the enrolled value, was arbitrary, as was its decision to leave in place an enrolled value that had been repudiated by the Assessor and was unsupported by any evidence. The Board’s cryptic findings are insufficient to bridge the analytic gap between the evidence and its conclusions. View "Next Century Associates v. County of Los Angeles" on Justia Law

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Plaintiff and her sister inherited a San Jose house when their mother died in 2003. They took title as tenants-in-common. A recorded deed reflected that each owned an undivided 50 percent interest. Plaintiff lived in the home; her sister did not. In 2009, plaintiff’s sister granted her a life estate in the 50 percent interest that plaintiff did not already own. The deed reflecting that transfer was recorded. The 2009 transfer resulted in plaintiff having sole ownership rights for the rest of her life, with her sister regaining a 50 percent interest in the property on plaintiff’s death. Based on the 2009 transfer, the County reassessed the property’s value under a statute allowing for recalculation of a property’s tax basis upon a change in ownership. The new valuation resulted in a higher property tax bill. Plaintiff unsuccessfully requested a revised assessment on the ground that the creation of a life estate did not constitute a change in ownership. Plaintiff then sued, seeking a property tax refund. The court appeal affirmed a holding that the 2009 deed granting plaintiff a life estate constituted a change in ownership and the reassessment was in conformity with the law. View "Durante v. County of Santa Clara" on Justia Law

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Plaintiff MCI Communications Services, Inc. (MCI) appealed the dismissal of its action for a state tax refund after the trial court sustained California Department of Tax and Fee Administration's (CDTFA) demurrer to MCI's first amended complaint without leave to amend. Certain categories of property are excluded from the definition of tangible personal property and therefore are not subject to sales and use taxation. This appeal required the Court of Appeal to decide whether the tax exclusion in Rev. & Tax. Code section 6016.5 extended to the pre-installation component parts that may one day be incorporated into completed telephone and telegraph systems. The Court held that section 6016.5 excluded only fully installed and completed telephone and telegraph lines from sales and use taxation, not the pre-installation component parts of such lines. Accordingly, the Court affirmed the judgment. View "MCI Communications etc. v. Cal. Dept. of Tax and Fee Admin." on Justia Law

Posted in: Business Law, Tax Law

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When a lease of federal lands includes an option to extend its term and the tax assessor reasonably concludes that the option will likely be exercised, the value of the leasehold interest is properly based on the extended term. The Court of Appeal affirmed the judgment of dismissal entered after the trial court sustained without leave to amend the County's demurrer to Glovis's complaint for refund of property taxes. The court held that the terms of the lease evidenced the parties' mutual intent to grant Glovis the option to extend its possession of the Navy's property past the initial five-year term; the lease clearly and explicitly gave Glovis the exclusive right to lease the Navy's property under 2028; and there was no language permitting the Navy to withdraw or revoke its offer. The court independently reviewed whether to use extrinsic evidence to interpret the lease and held that there was no need to do so in this case. Finally, the court rejected Glovis's contention that the assessor erred when he determined it was reasonable to assume the option will be exercised. View "Glovis America, Inc. v. County of Ventura" on Justia Law

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The U.S. Constitution prohibits states from taxing income earned outside their borders but permits taxation of an apportionable share of the multistate business carried on in the taxing state and grants states some leeway in separating out their respective shares of this multistate income, not mandating they use any particular formula. California adopted the Uniform Division of Income for Tax Purposes Act (UDITPA) (Rev. & Tax. Code 25120), which sets forth an apportionment formula for "unitary businesses." UDITPA does not define the term “unitary business.” In California, a unitary business is generally defined as two or more business entities that are commonly owned and integrated in a way that transfers value among the affiliated entities. Bunzl, a multinational entity comprised of numerous subsidiary corporations and limited liability companies, appealed the trial court’s judgment upholding the Franchise Tax Board’s determination that Bunzl owed $1,403,595 in taxes to California for 2005. Bunzl claimed the Board should have excluded income from Bunzl’s LLCs in calculating its California tax liability. The court of appeal rejected Bunzl’s contention and affirmed. The taxpayer has the burden of showing that the state tax results in extraterritorial values being taxed. That burden is increased because one of UDITPA’s purposes is to avoid double taxation. Bunzl, an acknowledged unitary business, made no showing that what it does inside California is unrelated to its operations outside California. View "Bunzl Distribution USA, Inc. v. Franchise Tax Board" on Justia Law

Posted in: Tax Law

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Plaintiff Harley-Davidson, Inc. and its subsidiaries (Harley-Davidson) formed a multistate enterprise with numerous functionally integrated subsidiary corporations. It contended that defendant California Franchise Tax Board's (Board) tax scheme violated the commerce clause of the federal Constitution, arguing it burdened interstate enterprises by providing a benefit to intrastate enterprises not available to interstate enterprises. The trial court granted summary judgment for the Board, finding that whether or not the state's tax law unduly burdened interstate commerce, the state had a legitimate reason for treating in-state and out-of-state unitary businesses differently that could not be served by reasonable nondiscriminatory alternatives - to accurately measure, apportion and tax all revenue acquired in California by an interstate unitary business. After independent review, the Court of Appeal also found there was a legitimate state interest to require combined reporting of taxable income of interstate unitary businesses, to accurately measure and tax all income attributable to California, that outweighed any possible discriminatory effect. Accordingly, the Court affirmed the trial court. View "Harley-Davidson, Inc. v. Franchise Tax Bd." on Justia Law