Opinion
Rehearing Denied June 6, 1967.
For Opinion on Hearing, see 63 Cal.Rptr. 5, 432 P.2d 700. Wallace K. Downey, Los Angeles, for appellants.
Thomas C. Lynch, Atty. Gen., Mario A. Roberti and Neal J. Gobar, Deputy Attys. Gen., for respondent.
LILLIE, Associate Justice.
The within petition was filed to quash a subpoena duces tecum served by the State Board of Equalization on the vice president of California Portland Cement Company pursuant to its statutory duty to equalize the valuation of taxable property in the several counties. (Art. XIII, § 9, Cal. Const.) In performance of this duty the Board is directed to appraise property subject to local assessment, and is required to consider data compiled by its appraisers to ascertain accurately the market value of various properties selected at random. (§ 1815, Rev. & Tax.Code.) Among the properties selected for test purposes was certain desert land consisting of a quarry and cement plant in Kern County belonging to California Portland Cement Company, a California corporation, engaged in the manufacture and sale of portland cement and limestone products in Southern California, Nevada and Arizona. The corporation owns and operates a cement plant adjacent to a limestone quarry in Kern County near Mojave (the subject of this proceeding and hereinafter referred to as the Mojave Plant), in San Bernardino County near Colton, and in Pima County, Arizona, near Tucson. Limestone and other materials are mined and crushed at each quarry, and in a plant adjacent thereto the crushed rock, mixed with other raw materials, is manufactured into cement by calcining and grinding processes. For valuation purposes the appraiser obtained from California Portland certain data and information from its records, but the corporation was unwilling to make available certain other information requested by him, whereupon the within subpoena was served requiring the production of all business records with respect to the Mojave Plant. California Portland produced some but refused to furnish all of the items; threatened with contempt proceedings, petition for alternative writ Inasmuch as the real question here is one of law and both parties requested of the trial judge a ruling "on the adequacy of the subpoena," we pass over the challenge to Finding of Fact III relative to the usefulness of certain information to the appraiser in the capitalized earning ability approach to an appraisal of appellants' property. The main issue is whether the State Board of Equalization can require the production of information pertaining to the profits of the business conducted at the Mojave Plant--the profitability of such business to the present owner. (California Portland)--as relevant to a determination of the "full cash value" of the real property in part used by the owner in the conduct of that business.
"All ledgers, journals, financial statements (including profit and loss statements, balance sheets and operating statements) and all other records of said California Portland Cement Company pertaining to its limestone mine and quarry known as the Mojave Plant and Quarry, located approximately nine miles west of Mojave, Kern County, California, including the property described as Kern County Assessor's Parcel No. 237-090-06-00, showing and supporting the following:
"Full cash value" to be determined in equalization proceedings (§ 401, Rev. & Tax.Code), as used in section 110, Revenue and Taxation Code, is defined in the leading case of De Luz Homes, Inc. v. County of San Diego, 45 Cal.2d 546, 290 P.2d 544, as "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." (P. 562, 290 P.2d p. 554). In its intercounty equalization survey, the Board has the right to subpoena the information from California Portland (Redding Pine Mills, Inc. v. State Bd. of Equal., 157 Cal.App.2d 40, 47, 320 P.2d 25) if it is "reasonably relevant" to a sound and fair appraisal of the real property for tax purposes. (Brovelli v. Superior Court, 56 Cal.2d 524, 529, 15 Cal.Rptr. 630, 364 P.2d 462.) Thus, are production volume, costs of operation and income of, and profits from the sales of limestone products and cement manufactured by, the Mojave Plant for the years 1962, 1963 and 1964 "reasonably relevant" to a determination of the "full cash value" of the real property?
Under the authority of De Luz Homes, Inc. v. County of San Diego, 45 Cal.2d 546, 561-566, 290 P.2d 544; El Tejon Cattle Co. v. County of San Diego, 64 Cal.2d 428, 430, 50 Cal.Rptr. 546, 413 P.2d 146; County of Riverside v. Palm-Ramon Development Co., 63 Cal.2d 534, 537-538, 47 Cal.Rptr. 377, 407 P.2d 289; and Apple Valley Ranchos Water Co. v. County of San Bernardino, 63 Cal.2d 870, 872, 48 Cal.Rptr. 627, 409 P.2d 707, the Board seeks to value the real property herein by the capitalization of income method, a generally accepted standard approach to valuation of property from which income may be or is derived; it claims that income to the present owner derived from the property In the case before us the income sought to be capitalized does not consist of rent from the land being appraised. The property under valuation, the Mojave Plant, comprises a limestone rock quarry and mining equipment from and by which raw materials are mined, and a cement plant adjacent thereto containing the machinery by which the raw materials are manufactured into portland cement and limestone products. The net earnings the Board seeks to capitalize, seemingly lumped together in the general category of profits to the present owner of business conducted from the land, actually consist of profits of the mining operations in the limestone rock quarry and of the manufacture, sale and distribution of limestone products and portland cement.
Considering first the mining operations, it is readily apparent that the land is hardly being used "incidentally" as claimed by appellants. There is a real and substantial relationship between the profit derived from the operation of the quarry and the land itself which yields up the raw material thereafter converted into the marketable product. The income from the mining operations is as much derived from the land being appraised as the rentals in De Luz and other cases wherein the prospective income of the real estate itself was capitalized to arrive at the value of the land. While in Apple Valley Ranchos Water Co. v. County of San Bernardino, 63 Cal.2d 870, 48 Cal.Rptr. 627, 409 P.2d 707, the anticipated income capitalized in the valuation of a water system (which included pipe lines extending through the land) consisted of rates which were fixed by the Public Utilities Commission at a reasonable return on the rate base (value of the water system), the Board took into account the earning power of the water distribution system, present and anticipated, and in determining present earning power considered, among other things, the relevant evidence concerning actual past earnings (p. 872, 48 Cal.Rptr. 627, 409 P.2d 707).
The capitalized earning ability approach reflects the price which a purchaser of the property under valuation could pay on the open market and recover a reasonable return on his investment. Earning data for the past several years is useful to assist an appraiser in projecting and determining future income and earning ability; anticipated income is the basis for an estimate of property value under the capitalized earning ability approach to valuation. As to the quarry, it would be entirely unrealistic for one interested in purchasing it to ignore its production volume, costs and income to the present owner for the past several years as significant and persuasive factors in the determination of a fair price for the quarry. Surely the amount of raw material California Portland has taken from the quarry for a reasonable time in the past, the cost of mining it and the amount for which it is sold is indicative of what the quarry could produce by way of profit in the future. As in the leasehold cases, the income derived from the very land itself is reasonably relevant to a fair appraisal of that property. However, does the same relevancy exist between the "full cash value" of the land and the profit of the manufacture, sale and distribution of cement? Briefly stated, the subpoena calls for California Portland's records pertaining to its sales of products manufactured by it in the plant for 1962, 1963 and 1964, costs of operation of said plant and its profits from the products manufactured therein for said years. All parties concede that there are no cases directly in point. The Board relies on De Luz and other cases hereinabove cited which recognize the capitalization of income method as giving a fair standard for the assessment of the real property from which the income arises, and which cases support our holding relative to the appraisal of appellants' quarry. But the abuses inherent in the use of the method of capitalization of profits to the present owner of his business conducted on the real property being appraised in determining the full cash value of the land are fairly obvious. Assume, for example, there are adjoining three identical stores--the first occupied by a prosperous insurance agency, the next by a dress shop operating at a deficit and the third by a profitable restaurant. Each store front has the same "full cash value" and should be assessed at the same figure, yet the operating results of the businesses conducted therefrom vary considerably. Thus, if the earnings of the restaurant and insurance agency were capitalized they would produce great value for the premises from which they are conducted, while the dress shop would produce no value at all. The well-run and efficiently managed and operated business will be severely penalized by the use of such a method--the value of the land from which it is conducted will be high because the profits of the business will be great, while the land immediately adjacent on which an inefficient organization conducts a not too successful enterprise from which there is little or no profit, perhaps a loss, will be greatly undervalued.
These businesses depend for their profits, not on the land upon or from which they are conducted, but upon various other unrelated factors. While each business is conducted from the building in which it is housed, this is the sole connection between the land and the business operating results; the "fair cash value" of the land has little or no relevancy to the profit of the enterprise. The insurance agency is profitable because its owner is energetic, ambitious and capable, has social and business contacts and is qualified in the insurance field. So, too, profits of the restaurant are primarily the result of good food and service, clean and attractive surroundings and capable management. Factors other than the land itself are the contributors to the profitability of the enterprises. The same is true of California Portland's business of manufacturing, selling and distributing cement and limestone products; its operating results are attributed primarily to factors having no relation to the use of the land. Thus the profit is remote from the "full cash value" of the land upon and from which the business is conducted. While they are not specifically pleaded or established by the evidence herein, no one can doubt that the profitability to California Portland of such business is due to factors for the most part exclusive to the operating organization of California Portland, long experienced in the cement business. Its skill as a manufacturer of portland cement and limestone products, use of secret and patented processes and special machinery, general management, enterprise, efficient manufacturing operation and ability to produce a marketable product; and its merchandising, sales and distributing organization, customer relationships and loyalty, advertising and public relations program are but some of the factors having direct relation to the profits. The use of that part of the land upon which the plant is physically located is only incidental to the operating results of the business conducted thereon; and in the light of California Portland's extensive activities, it is probable that the merchandising, sales and distribution of the finished products are in no way physically connected with the Mojave Plant. Inasmuch as the capitalized earning ability approach reflects the price which a buyer could pay and recover a reasonable return on his investment, assume then that he purchased only the property on which the cement plant is located without the going manufacturing business conducted thereon; clearly he would not be paying a fair price for the plant if it had been determined by the capitalized earnings of the efficient successful and well-established manufacturing business operated by California Portland. The sales volume, costs and income to California Portland of the products manufactured by it in its plant for several years past are hardly relevant to the present market value of the land. Respondent argues that if income has any relevance at all in valuing business property it should be made available for "it does not matter here how important a factor is in determining valuation" as long as it is useful to the appraiser; and to the extent that California Portland's manufacturing and sales profits are attributable to business know-how and intangible factors not available to the willing buyer, the appraiser "can take these factors into account." This immediately poses the query--how much "into account" will a given appraiser take such factors, and how can the owner of business property protect himself against arbitrary action by the assessor.
While our conclusion that the income derived from the limestone rock quarry is relevant to a fair appraisal of the land upon which it is located requires the present owner thereof to furnish the items related thereto requested in the subpoena, and under our holding that the manufacture and sales profits to California Portland are not reasonably relevant to a determination of the "full cash value" of the land, the corporation is exempt from any compulsion to produce this information, we are unable to determine from either the face of the subpoena duces tecum or the record herein which documents relate to that which we have found relevant to a valuation of the property. Thus, the issue appears to be a factual one which can be determined only after a hearing. The judgment is reversed with directions to the superior court to hear specific objections to the documents requested in the subpoena duces tecum and consider the same in accordance with the views expressed herein.
WOOD, P.J., and FOURT, J., concur.
"1. Sales volumes and income of said Mojave plant and quarry for the years 1962, 1963 and 1964.
"2. Costs at said Mojave plant and quarry for the years 1962, 1963 and 1964, broken down as follows:
"a. Quarrying costs, excluding depreciation, depletion and taxes.
"b. Crushing, milling, and burning costs, excluding depreciation, depletion and taxes.
"c. Quarry overhead.
"d. Plant overhead
"e. [This item has been produced.]
"f. General administrative expenses.
"g. Sales expenses.
"h. Federal and State income taxes.
"3. Production volume for said Mojave plant and quarry for the years 1962, 1963 and 1964."