BRET HARTE INN INC v. CITY AND COUNTY OF SAN FRANCISCO

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Court of Appeal, First District, Division 2, California.

BRET HARTE INN, INC. (d/b/a Hotel Stewart), Plaintiff and Respondent, v. CITY AND COUNTY OF SAN FRANCISCO, Defendant and Appellant.

Civ. 33594.

Decided: January 22, 1975

Thomas M. O'Connor, City Atty. of City and County of San Francisco, George E. Baglin, Deputy City Atty. of City and County of San Francisco, San Francisco, for defendant and appellant. Athearn, Chandler & Hoffman, Theodore P. Lambros, Richard Harrington, San Francisco, for plaintiff and respondent.

Defendant, City and County of San Francisco, appeals from a judgment determining that plaintiff, Bret Harte Inn, Inc., was entitled to recover certain personal property taxes collected by the City and County.

The relevant facts, as set forth in the trial court's findings, may be summarized as follows: In the years 1964 through 1966, plaintiff owned merchandise, equipment and cash located at the Hotel Stewart in San Francisco, California. Plaintiff filed personal property tax returns in 1964 and 1965, but the returns were filled out in blank and did not state the costs of its merchandise and equipment. Defendant ascertained such costs by audits conducted in 1964 and 1965. In 1966, plaintiff filed a tax return which did disclose the costs of its merchandise and equipment according to plaintiff's books. The assessor made his assessments for the years 1964, 1965 and 1966, and the San Francisco Board of Supervisors equalized the assessment rolls without changing any of the assessments on plaintiff's personal property. Plaintiff paid the assessments in a timely manner.

Subsequently, pursuant to the writ of mandate issued in Knoff v. City, etc., of San Francisco (Superior Court No. 564237),1 the assessments of plaintiff's personal property for 1964, 1965 and 1966 were audited by certified public accountants who determined the costs of plaintiff's merchandise and equipment and the amount of cash on hand on the first Monday in March in 1964, 1965 and 1966. On March 7, 1967, based upon such determination of cost, defendant levied escape assessments upon plaintiff in the amount of $1,975.03 for 1964 personal property taxes, $2,569.45 for 1965 personal property taxes, and $931.49 for 1966 personal property taxes. After exhausting its administrative remedies, plaintiff paid the escaped assessments, under protest, in the total amount of $5,465.97, and then commenced the instant action for refund.

The evidence produced at the trial established that, in conducting the reappraisals of plaintiff's personal property, defendant had arrived at assessed value by taking the original acquisition costs of plaintiff's personal property (as stated in plaintiff's records), deducting 50 percent for depreciation and assessing the remaining 50 percent at a 50 percent ratio. Defendant did not take into consideration the age of the property in question but, instead, deducted a flat 50 percent for depreciation form the original acquisition costs regardless of whether the property was new or used. Mr. Paizis of the city assessor's office admitted that it would be possible to more accurately determine the value of the property by conducting a physical inventory; however, he explained that defendant lacked the financial resources and time to utilize this method.

Plaintiff produced uncontradicted testimony by two witnesses to the effect that the fair market value of plaintiff's personal property on the first Monday in March in 1964, 1965 and 1966 was less than the assessed value of such property as determined by defendant.

The trial court held that defendant was legally required to assess property at its full cash value and that full cash value meant fair market value or the price that property would bring to its owner if it were offered for sale on an open market under conditions in which neither buyer nor seller could take advantage of the exigencies of the other. The court further held that full cash value or fair market value could not be equated legally with the original acquisition cost of the property and that since defendant had calculated the escaped assessments on plaintiff's personal property in this manner, such assessments were invalid and plaintiff was entitled to a refund.

Defendant's first contention on appeal is that plaintiff made no showing in the trial court that it received discriminatory tax treatment from defendant in the sense that its personal property was not assessed on the same basis as other property of like character and similarly situated. Defendant asserts that, to the contrary, the evidence established that the same assessment formula was uniformly applied to the personal property of all persons doing business in San Francisco. Defendant takes the position that the judgment must be reversed on this ground alone since a taxpayer's only basis for invalidating an assessment is to demonstrate that the method of assessment varied from that employed ‘in assessing other property of like character and situation.’ Defendant denies that any such situation existed in the instant case, and asserts that it was entirely reasonable and proper for it to arrive at the assessed value of plaintiff's personal property by deducting 50 percent from the original acquisition cost of such property and applying a 50 percent ratio to the remaining 50 percent.

We conclude that defendant's position cannot be sustained. Article XIII, section 37 (formerly art. XI, § 12) of the California Constitution provides that ‘All property subject to taxation shall be assessed . . . at its full cash value.’

Section 110 of the Revenue and Taxation Code, as it read prior to repeal and reenactment in 1971, defined ‘full cash value’ as ‘the amount at which property would be taken in payment of a just debt from a solvent debtor.’ This language was interpreted in De Luz Homes, Inc. v. County of San Diego (1955) 45 Cal.2d 546, 561–562, 290 P.2d 544, 554, to provide for ‘an assessment at the price that property would bring to its owner if it were offered for sale on an open market under conditions in which neither buyer nor seller could take advantage of the exigencies of the other.’

Section 110 of the Revenue and Taxation Code, as clarified by the Legislature in 1971, now defines ‘full cash value’ or ‘market value’ as ‘the amount of cash or its equivalent which 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 with 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.’

It is settled that an assessor must perform his duty in compliance with the constitutional and legislative provisions prescribing the method by which property is to be assessed and that full cash value is the standard of value which must be used in the assessment of all taxable property. (De Luz Homes, Inc. v. County of San Diego, supra, at pp. 561–562, 290 P.2d 544; County of Sacramento v. Hickman (1967) 66 Cal.2d 841, 845–846, 854, 59 Cal.Rptr. 609, 428 P.2d 593.)

Defendant relies upon language from a number of cases as authority for its contention that it was entirely proper for it to base its assessment of plaintiff's personal property solely upon the original acquisition cost of such property, less certain flat percentages.2 However, it is apparent that those authorities stand for the proposition that original cost is but one factor which may be taken into consideration in determining the full cash value or market value of property. Far from supporting defendant's contention that it was entitled to base its assessment solely upon the original acquisition cost, the cases cited make it clear that it would be improper to do so since the required standard of valuation is ‘full cash value’ and not ‘cost per se.’

In the instant case, the evidence established that defendant based its assessments of personal property solely upon original acquisition cost without taking any other factor into consideration. Thus, defendant's uniform practice was to deduct 50 percent for depreciation from the original acquisition cost and then assess the remaining 50 percent at a 50 percent ratio. According to Mr. Paizis of the city assessor's office, the 50 percent depreciation figure was an ‘arbitrary’ one based upon the assumption that, on the average, all personal property was ‘half-used.’ The age, condition or fair market value of the property in question was not taken into consideration; thus a taxpayer whose property was 15 years old would pay the same tax as a taxpayer whose property was one day old, provided that there was no difference in the original acquisition costs of the two taxpayers. Such a method of assessment cannot be deemed a reasonable attempt to estimate the full cash value of personal property since it could, and inevitably would, result in discrimination and inequitable results. In the instant case, the uncontradicted testimony produced by plaintiff established that the full cash value of its personal property (in terms of what the property would bring on the open market) was substantially less than the assessed value of said property as determined by defendant.

In Ex-Cell-O Corp. v. County of Alameda (1973) 32 Cal.App.3d 135, 139, 107 Cal.Rptr. 839, 842, the court stated, ‘We discern no meaningful distinction between the lack of uniformity which is caused by application by the assessor of different ratios against different properties than that which is caused by faulty or incomplete reporting by the assessee which has effected a lower valuation of the property. In the first case, the multiplier is false; in the second, the multiplicand is defective.’

Here, the multiplicand used by defendant, consisting of the original acquisition cost of personal property, is defective, since it does not reasonably equate to the full cash value or market value of the property being assessed. Hence, the trial court was correct in invalidating the assessment of plaintiff's personal property.

Defendant's next contention on appeal is that plaintiff was not entitled to a tax refund because it came into court with unclean hands. Defendant bases this argument upon the fact that plaintiff filed blank personal property tax returns for the years 1964 and 1965 and in the year 1966 misstated the amount of cash which it had on hand.

This argument must fail for two reasons. First, although defendant did raise the defense of unclean hands in its answer, defendant did not pursue this defense at the trial and would appear to have abandoned it altogether. A reading of the reporter's transcript shows that toward the end of the trial, when defendant's counsel was questioning Mr. Mette, the individual who had prepared plaintiff's personal property tax returns for the years 1964 through 1966, defendant's counsel made reference to the blank personal property tax return filed in 1965 and asked Mr. Mette whether he would ever file such a blank return with the Internal Revenue Service. Plaintiff's counsel objected to the question as irrelevant, and the trial court sustained the objection and expressed the view that the filing of a blank return had nothing to do with the case unless defendant was accusing plaintiff of some criminal matter. Plaintiff's counsel then made the statement that defendant had made no such allegation in its answer. Defendant's counsel made no attempt to refute this statement, and the trial court then expressed the view that the sole issue before it was whether the assessments of plaintiff's personal property were proper. Defendant's counsel again remained silent and made no attempt to argue that the filing of a blank return was relevant to the defense of unclean hands. Instead, he merely abandoned this line of questioning and pursued the matter no further. By such conduct, he allowed the trial court to believe that it had correctly stated the issue before it and that defendant was no longer relying upon the defense of unclean hands. It is the rule that where a party misleads the trial court by conduct of this nature, he waives his right to urge the point on appeal. (Cummings v. Cummings (1929) 97 Cal.App. 144, 149, 275 P. 245.)

Assuming, arguendo, that defendant did not waive the defense of unclean hands by such conduct, its argument still fails since defendant offered insufficient proof in support of such a defense. Defendant has made no attempt in its brief to explain why the filing of a blank tax return gives rise to the defense of unclean hands and asserts only that plaintiff was a ‘corner-cutter.’ We do not agree. When plaintiff filed blank personal property tax returns in 1964 and 1965, plaintiff was obviously acknowledging that it was liable for such taxes, but it was leaving it up to defendant to make its own determination of the amount due. Defendant did in fact make such a determination by conducting its own audits of plaintiff's books. Thus, defendant itself did not treat the filing of the blank returns as reprehensible conduct at the time. At the trial, defendant chose not to pursue the matter or to offer any evidence that plaintiff had acted from improper motives or the hope of wrongful gain when it filed the blank returns.

Regarding the alleged misstatement in the 1966 personal property tax return, the record shows that plaintiff's return listed its cash on hand as $200, whereas defendant's auditor subsequently found that ‘Before 12 noon of first Monday of March the taxpayer deposited 8800 into bank.’ A reading of the defendant's printed personal property tax return shows that it instructs the taxpayer, when reporting cash on hand, to ‘Include petty cash, change funds, etc. Do not include bank balance.’ From all that can be determined from the record, plaintiff complied with these instructions. The source of the funds placed in plaintiff's bank account is unknown, since defendant offered no evidence on this point, and there is again no showing of improper motive or wrongful conduct on plaintiff's part. Further, as plaintiff correctly points out, it is not every wrongful act, nor even every fraud, which establishes the defense of unclean hands. It must be shown that the misconduct was intimately acquainted with the injury of another and that it would therefore be inequitable to accord the wrongdoer relief. (Bradley Co. v. Bradley (1913) 165 Cal. 237, 242, 131 P. 750.) In the instant case, defendant was in no way injured by the statement in plaintiff's tax return. In fact, it conducted its own investigation and included the $8,800 in its assessment.

Defendant's final contention is that the trial court should have ordered the case reassigned to the Department Extra Sessions No. 5 because that department had reserved jurisdiction over the collection of taxes undertaken pursuant to the writ of mandate issued in Knoff v. City etc. of San Francisco (Superior Court No. 564237).

Plaintiff, in reply to this argument, asserts that defendant waived its right to have the case tried in another department by its conduct in proceeding to trial in the department to which this case was assigned without making any objection until after the court had decided the case in a manner adverse to defendant's position. Plaintiff's position is sound.

In Williams v. Superior Court (1939) 14 Cal.2d 656, 96 P.2d 334, which case is cited by defendant in its opening brief, our Supreme Court pointed out that it is well settled that if one department of a court exercises authority in a matter which might properly be heard in another, the action constitutes at most an irregularity and does not affect jurisdiction. (P. 663, 96 P.2d 334.)

In the instant case, defendant, by its failure to deny in its closing brief, concedes that it made no objection to the assignment of this case to the department in which it was heard and that, in fact, it remained silent until after it had lost the case. Under such circumstances, defendant is precluded from contending on appeal that the case should have been assigned to another department.

The judgment is affirmed.

FOOTNOTES

1.  In the Knoff case, the trial court issued a writ of mandate compelling the City and County of San Francisco to conduct a full investigation into the matter of loss by the City and County of San Francisco of property tax revenues and to employ independent experts to identify taxable properties which had not been assessed, had been underassessed or had otherwise escaped taxation for any reason and to make a full audit or reaudit and appraisal or reappraisal of such properties. The judgment issuing the peremptory writ of mandate was affirmed on appeal. (Knoff v. City, etc., of San Francisco (1969) 1 Cal.App.3d 184, 81 Cal.Rptr. 683.)

2.  For example, defendant points out that in Union Hollywood W. Co. v. Los Angeles (1920) 184 Cal. 535, 538, 195 P. 55, 56, the court stated that ‘The cost of a thing is evidence of its value, especially where it appears that it is comparatively new and where it has no established market value . . ..’ Defendant also relies upon the statement in Lockheed Aircraft Corp. v. County of L. A. (1962) 207 Cal.App.2d 119, 128, 24 Cal.Rptr. 316, 322, that ‘It is a truism that cost is not necessarily value, even though it is sometimes a useful indicator of value.’ Likewise, defendant notes that in Michael Todd Co. v. County of Los Angeles (1962) 57 Cal.2d 684, 697, 21 Cal.Rptr. 604, 612, 371 P.2d 340, 348, the court stated, ‘It is true, as plaintiff emphasizes, that the standard of valuation prescribed by statute is ‘full cash value’ rather than cost per se. But in proper circumstances cost may serve as a point of departure from which the assessor may proceed to determine ‘full cash value.’ While the use of production cost for this purpose (rather than ‘replacement cost’) has been criticized (see 1 Bonbright, The Valuation of Property, pp. 140–149), we are not committed to the view that the former figure must automatically be excluded from consideration.'

ROUSE, Associate Justice.

TAYLOR, P. J., and KANE, J., concur.

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