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Court of Appeal, First District, Division 5, California.

UNION PACIFIC RAILROAD COMPANY, Plaintiff and Respondent, v. STATE BOARD OF EQUALIZATION, Defendant and Appellant.

A030006, A031647, A032316.

Decided: May 24, 1988

John K. Van de Kamp, Atty. Gen., Timothy G. Laddish, Calvin J. Abe, Deputy Attys. Gen., San Francisco, for defendant and appellant. Peter W. Davis, Jay R. Martin, John E. Carne, James C. Martin, Crosby, Heafey, Roach & May, Oakland, for plaintiff and respondent.

 We hold that the superior court cannot enjoin the production of a taxpayer's specific business records unless the taxpayer proves the information in the records is not reasonably relevant to a legitimate inquiry or has no conceivable basis for assessing a tax.1

This consolidated appeal involves three related appeals:  (1) A030006 is an appeal from the grant of a peremptory writ of prohibition preventing the Board of Equalization (the Board) from subpoenaing confidential portions of Union Pacific Railroad Company's (Union Pacific) 1983 “Strategic Plan”;  (2) A031647 is an appeal from an order preventing the Board from imposing or collecting any penalty from Union Pacific for its refusal to produce portions of its Strategic Plan;  and (3) A032316 is an appeal from an award of attorney fees to Union Pacific in bringing action number A031647.


As part of its duty to value the state-assessed property of Union Pacific for the 1984 tax year, the Board requested the company to produce its 1983 Strategic Plan (the Plan).   Among other things, the Plan contains:  (1) an assessment of major market and commercial opportunities and outlines the corporate strategy for the company's future, (2) a forecast of the future capital needed to meet potential acquisitions, (3) estimates of future asset requirements, and (4) evaluations of the strengths and weaknesses of the corporation and its competitors.   Union Pacific produced all parts of the Plan dealing with currently held property, including future use of that property, but the company declined to produce sections which discussed possible future acquisitions and the projected income from those potential acquisitions.   The company maintained that this information was irrelevant to the Board's function in valuing the railroad's property as of the March 1st lien date;  that this information was highly sensitive and its disclosure would cause irreparable harm.

The Board rejected this explanation and imposed a $5 million penalty, pursuant to Revenue and Taxation Code section 830, which resulted in an additional tax liability of $57,000.   Union Pacific petitioned the Board for abatement of the penalty (Rev. & Tax. Code, § 830, subd. (d)) while the Board issued a subpoena duces tecum for the undisclosed portion of the Plan.   Union Pacific then petitioned the superior court for a writ of prohibition to prevent enforcement of the subpoena.   The Board agreed to postpone its decision on the request for an abatement of the penalty until the superior court ruled on Union Pacific's writ petition to quash the subpoena.   On November 30, 1984, the superior court issued a peremptory writ of prohibition finding the Board was acting in excess of its powers.   The Board was served with a copy of the order.   Nevertheless, on December 11, the Board denied Union Pacific's request for an abatement of the penalty.

On January 28, 1985, Union Pacific applied for a contempt order on the ground that the enforcement of the penalty by the Board, in the face of the successful writ petition, was in violation of the court's order.   After a hearing, the trial court refused to find the Board in contempt, but did find that the Board violated the spirit of the writ of prohibition and entered a second order prohibiting the Board from imposing or enforcing any penalty against Union Pacific.   The Board appeals from this order in case number A031647.

The court also indicated that it believed the Board's refusal to abate the penalty was in bad faith and indicated its determination to impose attorney fees as sanctions pursuant to Code of Civil Procedure section 128.5.   A noticed hearing was held on May 30, 1985, and the trial court awarded Union Pacific attorney fees and costs in the amount of $9,950.50.   The Board appeals from this order in case number A032316.


The central issue before us is whether the superior court has jurisdiction to issue a writ in this proceeding.   The Board argues, for the first time on appeal, that article XIII, section 32 of the California Constitution 2 prevents the trial court from enjoining it from collecting the penalty.   Union Pacific argues that the Board waived its right to raise this issue by not urging it below.


As a threshold matter, we must decide if the Board is barred from urging this issue for the first time on appeal.   Preliminarily, we note that the Board raised the bar of the anti-injunction provision of section 32 only in connection with the application of the penalty in case number A031647.   Because our decision on this issue will affect not only the propriety of imposition of the penalty but also the more fundamental issue of the right to subpoena the documents in the first instance, we will treat this issue as applying to this appeal generally.

Union Pacific contends that the Board's failure to urge this issue in the trial court constitutes a waiver of the jurisdictional issue and it is now estopped from urging lack of jurisdiction for the first time on appeal.   It is a fundamental principle that subject matter jurisdiction cannot be established by consent of the parties or by estoppel and it is always a proper subject of inquiry by a reviewing court.  (See Abelleira v. District Court of Appeal (1941) 17 Cal.2d 280, 303, 109 P.2d 942;  Consolidated Theatres, Inc. v. Theatrical Stage Employees Union (1968) 69 Cal.2d 713, 721, 73 Cal.Rptr. 213, 447 P.2d 325;  2 Witkin, Cal.Procedure (3d ed. 1985) Jurisdiction, § 10, pp. 374–376.)   The difficulty lies in defining what constitutes subject matter jurisdiction in this context.

Union Pacific asserts that in issuing its order quashing the subpoena, the trial court is alleged to have acted in “excess of jurisdiction,” and that this aspect of jurisdiction can be waived by failure to object in the court below.   In some instances, where a court has subject matter jurisdiction over a controversy, a party can consent to an act by the court which otherwise exceeds its jurisdiction.  (See Campbell v. Cory (1983) 142 Cal.App.3d 992, 995–996, 191 Cal.Rptr. 430 [probate court incorrectly imposed inheritance tax on property transferred outside the estate;  the beneficiary abandoned the appeal from that ruling, which was deemed a waiver];  Camp v. Board of Supervisors (1981) 123 Cal.App.3d 334, 357–358, 176 Cal.Rptr. 620 [the court had subject matter jurisdiction to determine the validity of the county's “General Plan”;  the county was estopped from arguing, for the first time on appeal, that the court exceeded its jurisdiction];  West Coast Constr. Co. v. Oceano Sanitary Dist. (1971) 17 Cal.App.3d 693, 698–699, 95 Cal.Rptr. 169 [the district was estopped from arguing that time ran for issuing an injunction because it failed to object to a series of continuances];  see 2 Witkin, Cal.Procedure, supra, Jurisdiction, § 267, at pp. 665–667.)

 Whether a party should be estopped from challenging jurisdiction depends on the importance of the irregularity, the impact on the functioning of the courts and the public policy considerations.  (In re Griffin (1967) 67 Cal.2d 343, 348, 62 Cal.Rptr. 1, 431 P.2d 625.)   Often, the court's subject matter jurisdiction to act and an act in excess of that jurisdiction are so interrelated as to make any distinction unworkable and unwise.   In the cases cited by Union Pacific, it was determined that the courts had subject matter jurisdiction, but the relief granted was alleged to be in excess of that jurisdiction.   To the contrary, here the central question is whether, in light of the constitutional provision, the court had subject matter jurisdiction over the controversy at all.

 The constitutional provision, section 32, is more than a declaration of rules applicable for injunction, mandamus or other equitable relief;  it is part of this state's organic law, subordinate only to the United States Constitution.  (People ex rel. Franchise Tax Bd. v. Superior Court (1985) 164 Cal.App.3d 526, 550, 210 Cal.Rptr. 695;  Pacific Gas & Electric Co. v. State Bd. of Equalization (1980) 27 Cal.3d 277, 282, 165 Cal.Rptr. 122, 611 P.2d 463;  Modern Barber Col. v. Cal. Emp. Stab. Com. (1948) 31 Cal.2d 720, 725, 192 P.2d 916.)   That provision goes further than merely proscribing the availability of a particular remedy;  it reflects a fundamental limitation on the jurisdiction to intervene, in the first instance, in the collection of taxes.  (See generally, Pacific Gas & Electric Co. v. State Bd. of Equalization, supra, 27 Cal.3d at pp. 282–283, 165 Cal.Rptr. 122, 611 P.2d 463.)   Under these circumstances, we conclude that the Board's reliance on the anti-injunction provision of section 32 is a challenge to the subject matter jurisdiction of the trial court and it may be argued for the first time on appeal.


 We must determine if section 32 provides an absolute prohibition to judicial interference in the assessment and collection of the tax or if there exists circumstances which permit limited judicial intervention.   This question was answered in the recent case of Western Oil & Gas Assn. v. State Board of Equalization, supra, 44 Cal.3d 208, 242 Cal.Rptr. 334, 745 P.2d 1360.   The court indicated that because the Board's demands for information are the first step in the assessment and collection of taxes, section 32 applies.   Nonetheless, limited judicial intervention is permitted when the request for information violates provisions of the federal Constitution prohibiting unreasonable searches and seizures, violations of the right to privacy or the privilege against self-incrimination.  (See id., at pp. 213–214, 242 Cal.Rptr. 334, 745 P.2d 1360.)  “The court's inquiry must necessarily be limited, however, to avoid undue interference with the collection of taxes.   The Board may compel the disclosure of information if:  (1) its inquiry is authorized;  (2) the requests are specific;  and (3) the information sought is reasonably relevant to the inquiry.  [Citations.]”  (Id., at p. 214, 242 Cal.Rptr. 334, 745 P.2d 1360.)   After reviewing the similar anti-injunction statute for federal tax matters, the court concluded that “prepayment relief must be limited to those situations in which it is clear that ‘ “under no circumstances” can the government prevail.’  [Citations.]”  (Ibid.)


At the hearing to quash the subpoena, Union Pacific argued that the information sought is irrelevant to the assessment of currently held property.   The portion of the Plan withheld contains estimates of future income stream predicated upon anticipated acquisitions of significant amounts of new assets.   Union Pacific contended the Board should be concerned only with the anticipated income from property existing on the March 1st lien date, not on the anticipated income stream from property the railroad planned to acquire sometime in the future.

In opposition, the Board argued that future acquisitions significantly impact on the value of current assets.   The Board asserted that the Plan contained income projections and anticipated investments which are relevant to the Board's valuation of the railroad's property in light of the recent merger, and for which historical data is inadequate.   Also, the Board asserted this information was necessary to confirm the formula used by the Board for projecting future earnings.

 Under the capitalized earnings approach used by the Board, the appraiser values an income property by computing the present worth of a future income stream.  (Cal.Admin.Code, tit. 18, § 8;  see also ITT World Communications, Inc. v. City and County of San Francisco (1985) 37 Cal.3d 859, 863–864, 210 Cal.Rptr. 226, 693 P.2d 811.)   It is the preferred approach for assessment of public utilities for which market data is usually unavailable.   It is used to estimate the income a purchaser of the property could reasonably expect to earn from future operations.  (See generally, California Portland Cement Co. v. State Bd. of Equalization (1967) 67 Cal.2d 578, 582–583, 63 Cal.Rptr. 5, 432 P.2d 700.)

California Administrative Code, title 18, section 8 provides in part:  “(a) The income approach to value is used in conjunction with other approaches when the property under appraisal is typically purchased in anticipation of a money income and either has an established income stream or can be attributed a real or hypothetical income stream by comparison with other properties.․  [¶] (c) The amount to be capitalized is the net return which a reasonably well informed owner and reasonably well informed buyers may anticipate on the valuation date that the taxable property existing on that date will yield under prudent management and subject to such legally enforceable restrictions as such persons may foresee as of that date.”  (Emphasis added.)   However, nothing in this section indicates, one way or the other, whether the Board may consider the economic impact of future acquisitions on the income stream of currently held property.

 In applying the standard announced above, we are directed to consider the decision in Union Pacific R. Co. v. Looney, supra, 111 Idaho 1000, 729 P.2d 1063, which concerned the Idaho taxing authority's right to review Union Pacific's 1983 Strategic Plan.   The Looney court upheld the taxing authority's right to review the Plan, reasoning that (1) it contained information that would affect the market value of the railroad and (2) the Plan would be relevant to contradict or impeach other evidence of valuation.   (Id., 729 P.2d at p. 1066.)   As in Looney, the Board's experts in this case declared that the Plan would assist it in arriving at a more accurate appraisal figure, that the best source of revenue, income and expense estimates is the company's own projections, and that this information would help the Board to confirm its method of valuation.   In light of this testimony, we cannot state that this information is not reasonably relevant to the Board's duty to appraise the property.   Nor can we state that the Board would have no conceivable basis to impose a tax based on the information obtained.  (See Western Oil & Gas Assn. v. State Board of Equalization, supra, 44 Cal.3d at p. 214, 242 Cal.Rptr. 334, 745 P.2d 1360.)   The trial court erred in preventing the Board from discovering the Plan.   Prepayment judicial intervention is an exception to the rule, and, as such, every reasonable inference must be made in favor of discovery “so that essential public services dependent on the funds are not unnecessarily interrupted.  [Citation.]”  (Pacific Gas & Electric Co. v. State Bd. of Equalization, supra, 27 Cal.3d at p. 283, 165 Cal.Rptr. 122, 611 P.2d 463.)

We do not hold that the Board is required to use all or any of this information to appraise the property or that the ultimate validity of the assessment is immune from attack.   That question can only be answered in an appropriate action for refund after payment.  (State Bd. of Equalization v. Superior Court (1985) 39 Cal.3d 633, 638, 217 Cal.Rptr. 238, 703 P.2d 1131.)   We decide today only that the Board is not barred from undertaking this inquiry.


Union Pacific also argues that the disputed portions of the Plan are extremely sensitive and confidential and that the release to the Board will cause irreparable harm.   We do not deny the importance of the corporate strategy detailed in the Plan and the damage that would likely result should this information be disclosed to Union Pacific's competitors.   Nevertheless, the Board is compelled by statute to keep this information secret.  (Rev. & Tax.Code, § 833, subd. (a).)  If this information is supplied to sister-state taxing agencies, the state requesting this information must agree to maintain its confidentiality.  (Rev. & Tax. Code, § 833, subd. (e).)

 While we do not minimize the need to maintain confidentiality, we conclude that the mere potential for harm which might result from disclosure is insufficient reason to justify an exception to the clear language of section 32.   Union Pacific has not presented us with any case to the contrary.


The Board also appeals from the order prohibiting it from imposing or collecting a penalty fee against Union Pacific and from the order awarding Union Pacific attorney fees.

The trial court issued the first order mentioned above after the Board failed to grant Union Pacific's application for abatement of the penalty imposed by the Board for refusing to reveal portions of the Plan.  (Rev. & Tax. Code, § 830, subd. (a)(1).)   The application for abatement was heard by the Board after the trial court issued the writ of prohibition preventing discovery of the Plan.   The Board denied the request for abatement and Union Pacific filed an application for contempt with the trial court to force the Board to abate the penalty.   Meanwhile, Union Pacific paid the penalty.   The trial court refused to hold the Board in contempt, but instead issued an order prohibiting the Board from imposing or enforcing any penalty on Union Pacific.   Apparently, the trial court reasoned that its order granting the writ, while not explicit, was a sufficiently clear direction to the Board to abate the penalty—that Union Pacific acted reasonably and in good faith when it refused to disclose the challenged portions of the Plan.  (Rev. & Tax. Code, § 830, subd. (d).)

Revenue and Taxation Code section 830, subdivision (d) provides:  “If the assessee establishes to the satisfaction of the board that the failure to file the property statement or any of its parts within the time required by this section was due to reasonable cause and occurred notwithstanding the exercise of ordinary care and the absence of willful neglect, the board shall order the penalty abated, provided the assessee has filed with the board written applications for abatement of the penalty within the time prescribed by law for the filing of applications for assessment reductions.”

 Before we address the merits of the Board's contention, it is necessary to discuss the manner in which this issue came before the trial court.   In a proceeding initiated as an application for contempt, Union Pacific requested the trial court to order the Board to abate or refund the penalty.   This is improper for several reasons.

First, the Revenue and Taxation Code requires the assessee to file a written application with the Board for an abatement.  (Rev. & Tax. Code, § 830, subd. (d).)  If the application is denied, then the assessee should be required, like other taxpayers, to pay the penalty and sue for a refund.  (See Rev. & Tax. Code, § 5148.)   But here, Union Pacific's action for contempt was designed to preempt the abatement procedure and to bar the Board from exercising its statutory mandate.   That this was the goal is readily apparent when one considers that Union Pacific viewed the writ of prohibition as barring the Board from imposing or enforcing the penalty.   In fact, this is precisely the basis relied upon by the trial court when it issued its order.

If we were to condone this procedure, any taxpayer could seek abatement of a penalty through a writ of prohibition, thus sidestepping the administrative remedy.   This would effectively deprive the Board of its own discretion in ruling on the abatement request.   Such a result would run contrary to the statutory scheme which is designed to require the assessee to pay all amounts imposed by the Board and to exhaust its administrative remedies before seeking judicial relief.   More importantly, this result also would violate the intent behind section 32, ante, which prohibits prepayment judicial intervention except in a very limited circumstance.   A petition to order the Board to abate the penalty does not come within any of the exceptional circumstances justifying prepayment judicial intervention.

 Further, the procedure used here changes the entire scope of judicial review.   Instead of reviewing the decision of the Board in rejecting the abatement application, we are called upon to review the court's decision to issue the enforcement order.   We hold that judicial review of the Board's determination should be governed by the substantial evidence test.   It logically follows the decision not to abate the penalty should adopt the same scope of review of property tax appeals in general;  “the court's task is to review ‘the entire record to determine if the findings are supported by substantial evidence’․ according deference to the factual findings made by the [Board].  [Citations.]”  (Prudential Ins. Co. v. City and County of San Francisco (1987) 191 Cal.App.3d 1142, 1148, 236 Cal.Rptr. 869, fn. omitted, opn. mod. 192 Cal.App.3d 1647a [review of decision of local assessment appeals board];  Kaiser Center, Inc. v. County of Alameda (1987) 189 Cal.App.3d 978, 983, 234 Cal.Rptr. 603 [same];  Hunt–Wesson Foods, Inc. (1974) 41 Cal.App.3d 163, 176, 116 Cal.Rptr. 160 [same].)

In such cases, we must determine whether the record as a whole contains substantial evidence, making all reasonable inferences and resolving all factual conflicts in favor of the administrative agency's ruling.   In this regard, the trial court and appellate court occupy identical positions vis-a-vis the administrative record and the determination of whether the agency's decision is supported by substantial evidence;  as such, the trial court's decision is not binding on appeal.  (See Sonoma Subaru, Inc. v. New Motor Vehicle Bd. (1987) 189 Cal.App.3d 13, 22, 234 Cal.Rptr. 226, fn. 2;  also Bowman v. City of Petaluma (1986) 185 Cal.App.3d 1065, 1076, 230 Cal.Rptr. 413.)   Given the procedural posture of this appeal, Union Pacific would turn the scope of judicial review on its head and have us determine if the trial court's decision is supported by substantial evidence.   For the reasons discussed above this would be improper.

 Contrary to the usual procedure of allowing the trial court to review the Board's determination, we decide the issue since it would serve no useful purpose to send this matter back to be reheard.   Here, Union Pacific had already paid the penalty prior to the abatement proceeding.   This court sits in the same position as the trial court in reviewing the Board's ruling.   The record before us is the identical record which was before the trial court, and no new evidence was admitted in the trial court.   Applying the substantial evidence test, we conclude that the record does not contain sufficient evidence to support the Board's decision to deny the abatement.  Revenue and Taxation Code section 830 provides in part:  “(d) If the assessee establishes to the satisfaction of the board that the failure to file the property statement or any of its parts within the time required by this section was due to reasonable cause and occurred notwithstanding the exercise of ordinary care and the absence of willful neglect, the board shall order the penalty abated․”  (Emphasis added.)   The undisputed evidence establishes that Union Pacific withheld portions of its Plan in the good faith belief that the proposed acquisitions have no relevance to the assessment value of the currently owned property.   Reasonable minds could differ on that issue as reflected in the hotly contested writ proceeding.   Moreover, the discoverability of this evidence was far from clear as indicated by the trial court's issuance of the writ.

Giving the deference to the Board's decision to which it is entitled, we find that the decision not to grant Union Pacific's application for abatement was error and was not supported by the evidence.

 Finally, we address the appeal from the imposition of $9,950.50 in attorney fees and costs pursuant to Code of Civil Procedure section 128.5.   In imposing this sanction, the court found that “[t]he Board's actions giving rise to the issuance of the Order To Show Cause re Contempt were not based on good faith, were frivolous and caused unnecessary delay within the meaning of Code of Civil Procedure section 128.5.”   In light of our conclusion that the application for a contempt order was improperly brought, it would be manifestly unjust to uphold the award of attorney fees and costs for bringing that motion.   We reverse.

The orders granting the writ of prohibition and the award of sanctions are reversed.   The order prohibiting the imposition of the penalty is affirmed and the superior court is directed to order the Board to refund all amounts collected pursuant to the penalty, including taxes and interest paid thereupon, if any.   Each party to bear its own costs on appeal.


1.   Our Supreme Court, 239 Cal.Rptr. 292, 740 P.2d 404 previously granted review of this case on August 26, 1987 (S001602).   By order filed on March 31, 1988, the Supreme Court transferred this cause to the Court of Appeal with directions to reconsider the matter in light of Western Oil & Gas Assn. v. State Board of Equalization (1987) 44 Cal.3d 208, 242 Cal.Rptr. 334, 745 P.2d 1360 and Union Pacific R. Co. v. Looney (1986) 111 Idaho 1000, 729 P.2d 1063.

2.   All section references are to the California Constitution, article XIII, unless otherwise indicated.

LOW, Presiding Justice.

KING and HANING, JJ., concur.