Court Properly Applied Substantial Evidence Standard of Review Where Taxpayer Failed to Produce Evidence that External Market Factors Caused Overcapacity Requiring Reduction in Valuation for Assessment of Product Manufacturing Equipment and Personalty

August 27, 2013 | Bulletin No. 1035621.1

An ice cream manufacturer applied to the county in which it operated for a changed property tax assessment on its plant.  The manufacturer and the county agreed on all issues of the reassessment except for the valuation of certain product production lines.  The manufacturer appealed to the county assessment appeals board, which denied a changed assessment on the disputed lines.  The manufacturer sued in state trial court, arguing it proved that excess capacity in the disputed lines justified a reduction in valuation.  The trial court disagreed, finding that substantial evidence supported the board’s finding that the manufacturer failed to bring evidence that external market forces caused the overcapacity.  On appeal, the board and trial court decisions were upheld.  (Dreyer’s Grand Ice Cream, Inc. v. County of Kern (--- Cal.Rptr.3d ----,  Cal.App. 5 Dist., July 22, 2013).


Dreyer’s Grand Ice Cream (“Dreyer’s”) manufactures ice cream, including half-gallon cartons, ice cream bars, sandwiches, and push-ups in a facility in Kern County (“County”).   The plant runs 27 independently operated production lines, and most lines are dedicated to producing a single type of product.  In 2005, Dreyer’s expanded the plant to add new production lines.  The following year, Dreyer’s applied for a changed property tax assessment.  In a hearing before the Kern County Assessment Appeals Board (“Board”), Dreyer’s and the County agreed on the valuation of the plant’s real property, buildings, fixtures and new production lines.  However, they disagreed on the value of personal property and equipment in its preexisting production lines, called the “novelty lines.”  Dreyer’s asserted that the valuation of the novelty lines should be lowered because their excess capacity resulted in external obsolescence.  Dreyer’s brought evidence including data on annual production and capacity utilization of the novelty lines, as well as testimony by the plant controller and an appraisal expert.  Dreyer’s estimated its utilization of capacity of the novelty lines ranged from 53% to 63.5% from 2003 to 2005. Dreyer’s appraisal expert claimed that ongoing overcapacity in the novelty lines was due to lack of market demand and justified a 27% reduction in valuation. 

The County presented evidence including testimony by a supervising auditor/appraiser who testified that he considered performing an underutilization adjustment to the valuation of the novelty lines.  However, he decided against it because no external factors accounted for the underutilization.  An expert economist testified for the County and also stated that there was no evidence of external industry forces causing the underutilization of the novelty lines.  Moreover, excess capacity of at least 25% was necessary to accommodate seasonal variations in ice cream production, and maintaining excess capacity could have business advantages such as allowing potential for growth, particularly given Dreyer’s interest in preserving its market dominance. 

The Board found in the County’s favor, denying Dreyer’s application for a changed property tax assessment.  The Board concluded that Dreyer’s failed to meet its burden to show that external factors caused its novelty lines to lose value, and that the decrease in utilization of capacity occurred mainly because of the 2005 plant expansion, not due to external market factors.

Dreyer’s appealed the Board decision to state superior court.  The trial court found in favor of the County and concluded that substantial evidence supported the Board’s findings that Dreyer’s did not meet its burden of proof.  Dreyer’s appealed the trial court decision.


The Fifth District Court of Appeal affirmed the trial court decision.  The appellate court rejected Dreyer’s argument that the trial court erred in applying the substantial evidence standard to the case.  The appellate court observed that the substantial evidence standard of review applies when a taxpayer contends that a valid method of valuation was improperly applied, which is a question of fact.  A stricter level of review only applies when the taxpayer challenges the valuation method itself, which is a question of law.  The appellate court noted that at the trial court, Dreyer’s agreed with the county about the method of calculating the property value of the novelty lines and did not dispute the assessor’s ordinary depreciation adjustment.  Accordingly, the court held that the substantial evidence test was the appropriate standard of review.

The appellate court noted that its own standard of review of the case on appeal differed from that of the trial court.  On appeal the question became whether Dreyer’s evidence was “uncontradicted and unimpeached” and left “no room for a judicial determination that it was insufficient.”  The appellate court explained that this type of review required it to view all facts in favor of supporting the trial court judgment.

Looking at the evidence, the appellate court dismissed Dreyer’s contention that an adjustment for economic or external obsolescence was mandatory under state regulations because the plant was not running at full capacity.  The court stated that an underutilization adjustment should only be made when an applicant proves that excess capacity exists, that is “beyond the control of a prudent operator,” and “recognized in the market.”

The court found that Dreyer’s evidence failed to address whether the excess capacity and lack of demand that it claimed was recognized in the market.  Although Dreyer’s controller testified that it was producing as much product as it could sell, Dreyer’s did not explain how it determined market demand or how it formulated its sales forecasts and annual plans, or what information it used in making those determinations.  The court also stated that Dreyer’s did not address the significance of other relevant evidence, such as testimony by Dreyer’s own appraisal expert stating that plants generally are not built to run at 100% capacity but instead allow for increases in production.  Additionally, the County’s auditor/appraiser testified that he did not find external market factors contributing to excess capacity, and did not feel “comfortable” with Dreyer’s production capacity calculations.  Moreover, the County’s expert economist testified that Dreyer’s excess capacity was likely attributable to seasonal fluctuation in ice cream sales and served a strategic business purpose by allowing for demand increases and maintaining a competitive advantage over other producers.  The expert also stated that if Dreyer’s extra capacity was held because it was in the company’s or shareholders’ best interests, that was a business choice and did not constitute overvaluation for property tax assessment purposes.

Based on its review of the evidence, the appellate court held that the evidence “was conflicting, not undisputed” and that it supported the Board’s conclusion that Dreyer’s failed to shoulder its burden of proof, as well as the trial court’s decision that substantial evidence justified the Board’s conclusion.

The appellate court rejected Dreyer’s other arguments, including that it was only required to show that market demand was less than production capacity.  The court pointed out that reduced demand was only one of several factors Dreyer’s had to prove to obtain a valuation adjustment; it also was required, and failed, to show that external conditions caused the equipment underutilization.

Similarly, the court rebuffed Dreyer’s assertion that the Board erroneously attributed the underutilization to Dreyer’s plant expansion.  The court found that evidence supported this finding, and also noted that the Board’s decision was not based solely on this determination, but that it also reviewed all other conflicting evidence brought in the case.


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