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California Court of Appeal Broadens Exemption for Intangible Assets

Zachary T. Atkins
Sutherland Asbill & Brennan LLP - Atlanta Office

Douglas Mo
Sutherland Asbill & Brennan LLP - Sacramento Office

June 17, 2014

Previously published on June 15, 2014

The California Court of Appeal held that the San Mateo County Assessor illegally assessed the intangible assets of the Ritz-Carlton Half Moon Bay Hotel. This is the first appellate decision to follow Elk Hills Power, LLC v. Board of Equalization, 57 Cal.4th 593, 304 P.3d 1052 (2013) (reported by Sutherland this legal alert). The court reaffirmed the exempt nature of intangibles and ruled that the assessor’s use of the “Rushmore Approach,” which simply calls for the deduction of the expenses associated with intangibles, failed to remove the value of the taxpayer’s intangibles when performing an income approach to value. In rejecting the assessor’s use of the Rushmore Approach, the court quoted with approval the California State Board of Equalization’s Assessors’ Handbook. The Assessors’ Handbook, the court noted, rejects the “Rushmore Approach” because it allows only a return of the investment in the intangibles and not a return on the intangibles. The court singled out intangibles such as work force, a leasehold interest and an operating agreement as assets that were not removed from the assessment of the taxable real property. Of note, the court rejected the taxpayer’s claim that the assessor illegally taxed goodwill, as the taxpayer employed a residual method to value goodwill. The court stated that the taxpayer did not refute the assessor’s evidence that the deduction of the management and franchise fee from the income stream fully accounted for the value of the taxpayer’s goodwill. SHC Half Moon Bay v. Cnty. of San Mateo, No. A137218, 2014 WL 2126637 (Cal. Ct. App. May 22, 2014).

The Court of Appeal’s decision is helpful for all California businesses that possess significant intangible assets, and it is a landmark decision for the hospitality industry in rejecting the use of the “Rushmore Approach”—an approach that has gained widespread acceptance in the assessment community. That said, the decision is a cautionary tale for the exclusion of value for goodwill. Taxpayers would be best served to rely on more than a residual approach to support their claim to a goodwill value.


The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.

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Zachary T. Atkins
Douglas Mo
Sutherland Asbill & Brennan LLP
Atlanta Office
Sacramento Office
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