Deluxe RentAcar's Fraud King and Special Interest's Poster Child For Abuse

Special Interest at Work - $21 Billion Debt
but ...
THE PEOPLE OF
THE STATE OF CALIFORNIA
We want our money to run a 9.865 E/T …?
$2-8,000,000 taxpayer’s money in John Hennessay’s pocket

Teacher, police, firemen laid off/cutbacks… 19% unemployment
Government agencies are aware but do nothing, and have their hands tied....
Here where your school teacher’s money is going to undereducated your kid…..
http://www.youtube.com/watch?v=Foz2ZGGpz3s
California Economic Terrorist
Teachers, Firemen and Police will be laid off and take pay cuts
Officials won’t stop it…. You will pay the $21 Billion in debt
He will buy new race cars and going on vacations
400+ victims every day… $2-4 million in fraud annually and no charges
John Hennessey, Rental Car Bandit & Poster Child of Special Interest Abuse
The continuing raping of the American economy has help empower the wealthy pirates to a point of
arrogance upon where the feel untouchable. This sector of “The Wealthy” work to become even
further distanced from the working class from theft and fraud rather than invention and innovation.
Much like parents tell their children about “Santa Clause” so children behave appropriately and have
something to look forward to, the “Wealthy” use “The Trickle-Down Effect - Fairy Tale” for the
working class. This is cloaked in deceptive legislation and adaptation and interpretation of laws to
bypass the wisdom of the founders of the US. These same founders that escaped the very privileged
class oriented structure to come and start this country free of such abuse would turn in their graves to
see how the “Privileged” have abused the system to create the enormous debt of the nation and
enriched themselves to well beyond conspicuous consumption. While I am definitely not referring to
all of this class, there is surprisingly large number of them. John is a real person but is only
representative of the abuse that happens across the nation when political agenda dwarf personal
constitutional protection guaranteed by the government.
The U.S. economy has been attacked and damaged far worse than the terrorist of 911. This has
started the domino effect that has reached the far corners of the world and made the most powerful
country in the world look like low FICO paupers with bad debt to the rest of the world. The real
terrorists are the leaches that suckle the financial resources of the people through fraud. These are
“Domestic Terrorist” and not the mentally disturbed ones like Timothy McVeigh, these are the bright,
educated, well spoken, politically connected, lawyer protected ones that everyone knows runs a
successful business and are looked up to as a success story to tell your kids about the American
dream and rewards of working hard.
This story is a lie as the truth is they are common gypsies, and con artist and they are worse than the
crack-head in the projects. You see able to see the crack-head is a dirty addict that will rob and steal
whatever he can to get high to escape the pain he feels in his life. The economic terrorist is
“Timmy’s” dad in Beverly Hills that owns multiple businesses and exacts his “terror” on the pockets
of consumers, and conspires to defrauds the state of tax revenue to buy second and third homes, go on
vacations and build race cars
The crack-head can’t steal from 400-1000 people per day… The owner of a Rental Car Agency
can… and John Hennessy thru Deluxe Rent A Car did…for nearly two years, and even continued to
do so for 3mo. after his Beverly Hills attorney’s were notified about the fraud. In fact during this
fraud he was so blatantly, arrogantly, unconcerned he just changed the name of and continued the
fraud. Being part of the “Rental Car Cartel” provides some protection because their records are
protected by the Board that governs them…and run by them!
For example, this particular terrorist is part of a protected special interest group created and
controlled by members of the car rental industry. They even initiated adding them as a new segment
to the travel industry and also given a certain level of immunity and impunity providing they deliver
the “voluntary contribution” needed pay the interest as a minimum return on the bond to fund the
Rental Car Facility. This is a politically created cartel specifically created to bypass the need to have
the people actually vote to fund the project. This is done for the perceived economic good of the
population. The problem is in order to do this there are sweetheart deals with arrangements creating
both insinuated and actual legal protections.
Imagine the farmer allowing the “Foxes” to create a commission to see over “the Henhouse” with
the promise to give them some eggs every month under the condition that they won’t abuse the
chickens. You tell us how many eggs you collect and give us 10% and as long as we get enough to
cover the interest you can cover the henhouse and we won’t ask you how many chickens there are
Well the farmer will likely never know nor do much when hearing the screams of the chickens as
long as the “Foxes” continue to deliver the eggs. Overtime they will make alliances with other
“Foxes” all around the US and teach them to make the same arrangement and eventually those that
play the game and keep it low-key will be part of the Fox-n-Egg Industry segment and have enough
power to not worry anymore about the farmer and monopolize a whole industry. Now I’m not saying
that all the “Foxes” are bad but that’s a lot of power to put in the hands of those that love to eat
chicken. Now what if one “Fox” really liked screwing the unlucky birds that came his way… and
would screw 400 a day and told the chickens that complained “F-you, sue me then… that’s what I
pay my lawyers for”. Eventually one of the chickens who really hated being screwed might get loose
and go screaming to let the whole world know about the “Chicken F-er” until the farmer or someone
else took action to remedy the situation.
This is the Rental Car Industry created just so the LAWA could fund the RAC facility. The problem
is these officials created the possibility of these monsters to exist and empowered them through the
use of sovern powers, property rights and lease assignments and an unsupervised deregulated
industry. John Hennessey… he’s just like the “Chicken F-er” and somebody from some agency needs
to properly deal with this abuse before more people get “F-ed”.
Meanwhile in States without $21 Billion in debt……
Brevard County Sues Web Sites and Online Merchants over Tax Money
11/3/2009
Brevard County has sued online travel sites Priceline.com Inc., Orbitz, Inc. and Expedia Inc. for what
it claims are millions of dollars in unpaid tourist taxes. The web sites buy rooms at discounted
wholesale rates from Space Coast hotels and motels, then sell them to customers at higher retail
prices, keeping the difference as profit. Local hotel and motel owners pay Tourist Development Tax
on their wholesale transactions. But the Web sites have not paid taxes on the difference charged to
customers -- although they do factor the value of the tax into their prices. Brevard's lawsuit also
names several other online merchants including Travelocity.com LP, Hotwire, Inc., Hotels.com and
Travelweb Ltda. as 'unjustly enriching' themselves by not paying the 5% tourist development tax
from their sales. Online companies have said they shouldn't have to pay hotel-room taxes, because
they don't own any hotels. The county also seeks penalties and attorneys fees.
Jury Awards $20 Million in Texas Hotel Tax Dispute Against Orbitz Inc., Priceline.com Inc.,
Hotels.com LP, Hotwire Inc., Travelocity and Expedia Inc
11/3/2009
A group of online travel services companies plans to appeal a $20 million verdict awarded to more
than 170 Texas cities in a dispute over hotel occupancy taxes. The 2006 class-action lawsuit was
brought by cities wanting to collect tourism tax revenue they alleged was underpaid by Internet hotel
room wholesalers. San Antonio and other Texas cities alleged the online companies booked blocks of
rooms at, for example, $75 a night, resold them for $100, then paid taxes on the lower rate. Jurors
found the companies controlled hotels under the cities' ordinances and should have paid hotel
occupancy taxes on the amounts they charged. The verdict was returned Friday in San Antonio,
where the suit was originally filed. The 11 companies sued included Expedia Inc., Travelocity,
Hotwire Inc., Hotels.com LP, Priceline.com Inc. and Orbitz Inc.. They contended they do not control
the hotels because they don't control the actual building and that they paid all the taxes due to the
cities.
The Pine Bluff Advertising and Promotion Commission Files Lawsuit Against a Dozen Online
Travel Companies Claiming Not Paying All of the Hotel Taxes
09/26/2009
The Pine Bluff Advertising and Promotion Commission filed a lawsuit against a dozen online travel
companies, claiming they are not paying all of the hotel taxes they collect from their online
customers. The lawsuit, filed in Jefferson County Circuit Court, seeks to include other Arkansas
advertising commissions, cities and counties that collect hotel taxes throughout Arkansas. The
complaint alleges the defendants contract with Pine Bluff hotels at discounted rates, then mark the
prices up on their Web sites. The online companies, the lawsuit alleges, then remit taxes on the
discounted rate, not the higher rate paid by the customer. Defendants are Hotels.com LP, Hotwire
Inc., Trip Network Inc., Travelport Limited, Expedia Inc., Internetwork Publishing Corporation,
Maupintour Holding, LLC, Orbitz, LLC, Priceline.com Inc., Travelocity.com LP, Travelweb, LLC
and Site59.com, LLC.
I guess they actually want the tax that was collected in their name …..
National Security, the Financial Crisis and Bernie Madoff
On February 12, 2009, Director of National Security (DNI), Dennis C. Blair, testified before
the Senate Select Committee on Intelligence. DNI Blair provided the Committee with the
Annual Threat Assessment of the Intelligence Community. The first sentence of the
assessment states:
“The primary near-term security concern of the United States (U.S.) is the global economic
crisis and its geopolitical implications.”
This was the first time in six years that terrorism was not listed as the primary threat to the
country. Fraud and other criminal activity resulting in the laundering of illicit funds have
always been considered a threat to our national economy. The current financial crisis was
primarily driven by the frightful combination of fraud, greed and arrogance. The magnitude
of that fraud, greed and arrogance has clearly shaken not only our national economy but the
global economy as well. In so doing, as noted by DNI Blair, the resulting international
instability created by the financial crisis has become the most significant threat to our
national security.
Bernard Madoff appeared in U.S. District Court in the Southern District of New York on
March 12, 2009. He pleaded guilty to 11 felony counts, including securities fraud, mail fraud
and money laundering. The fraud and Ponzi scheme involved a reported $65 billion.
Madoff has clearly become the poster child for the fraud, greed and arrogance that
symbolize the financial crisis.
As a former FBI Agent, with extensive investigative experience in sophisticated fraud and
financial crime schemes, I was intrigued by a statement Madoff made to the court during his
pleading. He said “… and as the years went by, I realized my arrest and this day would
inevitably come.” Someone needs to ask Madoff the question “at what point in time did
you realize that your scheme would be detected?” How many years ago did Madoff reach
his conclusion? In my experience, at that point in time, Madoff began planning his exit
strategy.
Big time fraudsters usually theorize that their schemes have a certain shelf life, and at some
point, their fraud will be detected. Therefore, many of these fraudsters make contingency
plans and devise exit strategies. In many cases, that would mean fleeing the U.S. and
relocating to a safe haven such as Robert Vesco and Marc Rich did. Interestingly, Madoff did
not. So what was his exit strategy? Could he have been laundering funds for an extended
period of time, in an attempt to separate them from his fraud and give such funds an air of
legitimacy for his family or other designees to benefit from at the expense of his victims?
[ 13800 Coppermine Rd, Herndon, VA 20171

Office: 703.234.5425 - Fax: 703.234.5740 - www.ipsaintl.com
Could he have been insulating co-conspirators by focusing guilt solely on himself and
confessing at a preordained time to protect them?
Hopefully, prosecutors, investigators and government appointed Trustee Irving Picard will
ask these questions and assess Madoff’s exit strategy. As a result, they should be able to
recover or account for missing funds and identify other individuals who wittingly
participated in the fraud.
Congress should take into account that the questionable activities of Madoff, and many
other prominent business executives have contributed to our financial meltdown, thereby
undermining the economy and threatening our national security. In this context, Madoff,
and other despicable business executives and fraudsters should be considered economic
terrorists. As such, Congress should strongly consider legislating more stringent criminal
and civil penalties. Current penalties for white collar criminals are not as harsh as they
should be considering the state of our current economy. Madoff, for example, should be
sentenced to life in a maximum security facility and subject to forfeiture of all assets owned
by him and his wife, and perhaps the assets of his immediate family as well. That is unlikely
to occur. He will more likely be sentenced to a minimum security facility and have many
millions of dollars in assets protected and in safe keeping for his wife and others.
It’s bad enough to be consumed by greed and arrogance, but when prominent business
executives cross the line and allow greed and arrogance to result in millions or billions of
dollars in fraud, they should be considered economic terrorists. As economic terrorists,
when they are convicted, they should face the same criminal and civil penalties as other
domestic or international terrorists.
By Dennis M. Lormel 3/13/2009
[ 13800 Coppermine Rd, Herndon, VA 20171

Office: 703.234.5425 - Fax: 703.234.5740 - www.ipsaintl.com
Members of the Board of Airport
Commissioners of the
City of Los Angeles, California
INDEPENDENT AUDITOR’S REPORT ON COMPLIANCE WITH REQUIREMENTS

APPLICABLE TO THE PASSENGER FACILITY CHARGE PROGRAM
AND ON INTERNAL CONTROL OVER COMPLIANCE
Compliance
We have audited the compliance of Los Angeles World Airports (Department of Airports of the City of
Los Angeles, California) (LAWA) with the compliance requirements described in the Passenger Facility
Charge Audit Guide for Public Agencies (the Guide), issued by the Federal Aviation Administration, for
its passenger facility charge program for the year ended June 30, 2007. Compliance with the requirements
of laws and regulations applicable to its passenger facility charge program is the responsibility of
LAWA’s management. Our responsibility is to express an opinion on LAWA’s compliance based on our
audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of
America; the standards applicable to financial audits contained in Government Auditing Standards issued
by the Comptroller General of the United States; and the Guide. Those standards and the Guide require
that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the
compliance requirements referred to above that could have a direct and material effect on the passenger
facility charge program occurred. An audit includes examining, on a test basis, evidence about LAWA’s
compliance with those requirements and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does
not provide a legal determination of LAWA’s compliance with those requirements.
In our opinion, LAWA complied, in all material respects, with the requirements referred to above that are
applicable to its passenger facility charge program for the year ended June 30, 2007.
Internal Control over Financial Reporting
The management of LAWA is responsible for establishing and maintaining effective internal control over
compliance with requirements of laws and regulations applicable to the passenger facility charge
program. In planning and performing our audit, we considered LAWA’s internal control over compliance
with requirements that could have a direct and material effect on the passenger facility charge program in
order to determine our auditing procedures for the purpose of expressing our opinion on compliance, but
not for the purpose of expressing an opinion on the effectiveness of internal control over compliance.
Accordingly, we do not express an opinion on the effectiveness of LAWA’s internal control over
compliance.
A control deficiency in LAWA’s internal control over compliance exists when the design or operation of
a control does not allow management or employees, in the normal course of performing their assigned
functions, to prevent or detect noncompliance with a type of compliance requirement of the passenger
facility charge program on a timely basis. A significant deficiency is a control deficiency, or a
combination of control deficiencies, that adversely affects the LAWA’s ability to administer the
passenger facility charge program such that there is more than a remote likelihood that noncompliance
with a type of compliance requirement of the passenger facility charge program that is more than
inconsequential will not be prevented or detected by LAWA’s internal control.
A material weakness is a significant deficiency, or combination of significant deficiencies, that results in

more than a remote likelihood that material noncompliance with a type of compliance requirement of the
passenger facility charge program will not be prevented or detected by the Authority’s internal control.
Our consideration of the internal control over compliance was for the limited purpose described in the
first paragraph of this section and would not necessarily disclose all matters in the internal control that
might be significant deficiencies or material weaknesses. We did not identify any deficiencies in internal
control over compliance that we consider to be material weaknesses, as defined above.
This report is intended solely for the information and use of the members of the board of commissioners
and management of LAWA, and the Federal Aviation Administration, U.S. Department of
Transportation, and is not intended to be and should not be used by anyone other than these specified
parties.
Certified Public Accountants
Los Angeles, California

January 28, 2008
5
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Approximately 40 rental car companies operate out of LAX, with vehicle rental sites located off the airport.
Many of these rental car companies provide phone links inside or near the baggage claim areas on the
News & Facts Lower/Arrival Level of the terminals so travelers can request a free shuttle pick up to reach the rental car
Maps sites.
FAQs
Ten rental car companies are permitted to pick-up and drop-off their customers directly from the airline
Inside the Airport terminals using courtesy shuttles. These are the following companies:
Quick Links
Advantage www.advantage.com
Projects
Alamo www.alamo.com
RFPs
Avis www.avis.com
Rules & Regs
Budget www.budget.com
Dollar www.dollar.com
Travelers with
Special Needs Enterprise www.enterprise.com
Hertz www.hertz.com
Text Size: [+] [-]
Fox www.foxrentacar.com
Payless www.paylesscarrental.com
National www.nationalcar.com
Thrifty www.thrifty.com
These are allowed to meet arriving customers under the purple sign "Rental Car Shuttles" on the
Lower/Arrival level islands outside baggage claim.
Customers of other rental car should contact their rental car of choice using the Ground Transportation
Telephone Boards in baggage claim areas of each terminal to arrange for pick-up.
These customers will use the free LAX Shuttle Bus to reach the Off-Airport Rental Car Terminal to meet
their rental car courtesy shuttle. Customers should meet the LAX Shuttle Bus "Lot C" on the Lower/Arrivals
level island under the sign for LAX Shuttle to travel to the rental car terminal.
Click on the following for a list of rental car companies serving LAX. [Rental car serving LAX]
Click the image above for Waiting Area Map
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http://www.lawa.org/welcome_lax.aspx?id=1294 6/19/2009
“Legalfigher” is Deluxe Rent A Car – This is his Written Assault on me
RICHELLE L. KEMLER
rkemler@gbsjknv.com
In Reply Refer To: D191-1
August 4,2008
VIA E-MAIL AND U.S. MAIL
Kevin Powell
22320 Harbor Ridge Lane #2
Torrance, CA 90602
Re: Deluxe Rent a Car
Dear Mr. Powell:
This firm represents Deluxe Rent-a-Car and its president, John Hennessay. Mr.
Hennessay learned just last Wednesday, July 30,2008, of your extreme dissatisfaction with the
vehicle you rented from Deluxe on or about June 5,2007 through June 26,2007. On behalf of
Mr. Hennessay, we extend our sincere apologies for your unfortunate experience and wish to try
to make amends for the problems you encountered.
Because the rental took place more than one year ago now, we have no way at this time
to verify your complaints and compensate you for that vehicle rental. We can tell you that the
condition of the car you have described is below Deluxe's accepted standards, it was a mistake to
have issued you a car in that condition, and for that our client extends his sincere apology. On the
other hand, one complaint that we must take issue with is your accusation of fraud. That is a
very serious accusation, and we are confident that none of our employees would have forged
your signature, especially when your signature was not required on the form you allege was
forged.
Nevertheless, we wish to rectify this situation. As such, please let us know what we can
do to settle this unfortunate matter.
Sincerely,
GLASSMAN, BROWNING, SALTSMAN & JACOBS, INC.

>
-
By: &kc~/&
RICHELLE L. KEMLER
w
Deluxe & Carrentals.com Fraud Analysis
Hertz www.hertz.com • Hertz (28.0% market share) Enterprise www.enterprise.com • Enterprise
Avis www.avis.com • Avis (21.4% market share) Thrifty www.thrifty.com • Thrifty (3.7
Budget www.budget.com • Budget (10.5% market share) • Others ‐ (1.6% market share)
Alamo www.alamo.com • Alamo (10.5% market share) Advantage www.advantage.com
National www.nationalcar.com • National (12.1% market share) Fox www.foxrentacar.com
Dollar www.dollar.com • Dollar (8.5% market share) Payless www.paylesscarrental.com
Weekly Analysis /
LAWA
Approv
Carrentals.com ‐ Web Clients Daily Rate 1 Wk Rate W/Taxes Tax & Fee CA Tax Tour Tax
ed
No $190.40 $248.53 $56.13 $21.66 $4.76
Deluxe $362.69 $441.92 $79.23 $38.45 $9.07
Airport Van Rentals N/A Does not rent Automobiles
Economy Yes $243.70 $311.88 $68.18 $22.54 $6.09
Fox Luxury $425.40 $536.98 $111.58 $39.35 $10.64
Economy Yes $248.70 $318.08 $69.38 $23.00 $6.22
Payless Luxury $430.40 $543.17 $132.30 $39.81 $10.76
Economy Yes $427.39 $543.75 $116.36 $39.53 $10.68
Enterprise Luxury $473.78 $601.69 $127.91 $43.82 $11.84
Economy Yes $433.41 $546.94 $113.53 $40.09 $10.84
Dollar Luxury $511.99 $644.29 $132.30 $47.36 $12.80
Economy Yes $433.41 $546.94 $113.53 $40.09 $10.84
Thrifty Luxury $511.99 $644.29 $132.30 $47.36 $12.80
Economy Yes $509.89 $641.67 $121.78 $47.16 $12.75
Alamo Luxury $561.89 $706.09 $144.20 $51.97 $14.05
Economy Yes $72.86 $509.99 $641.82 $131.83 $47.17 $12.75
Budget Luxury $80.28 $561.99 $706.24 $144.25 $51.98 $14.05
Economy Yes $521.89 $656.54 $134.65 $48.27 $13.05

National Luxury $571.50 $718.00 $146.50 $52.86 $14.29
Economy Yes $76.00 $531.99 $669.07 $137.08 $49.21 $13.30
Avis Luxury $581.99 $731.02 $149.03 $53.83 $14.55
Economy Yes $532.49 $669.64 $137.15 $49.26 $13.31
Hertz Luxury $582.49 $731.57 $149.08 $53.88 $14.56
*** All Companies listed on carrentals.com are on the list of LAWA's approved agencies ‐ therefore, we can conclude that all of the business from c
This means a) The "State of California's" direct loss of tax revenue due to this fraud is between $117,573 and $223,964 annualy b
c) The LAWA's direct loss of ACRF funds amounts to between $1,077,000 and $2,051,577 d) Th
*Carrentals.com currently has figures that don’t match invoices … incorrect tax calculation and fees for other co. See O/F
* U/P Tax = Unpaid tax based on corrected rental price adjusted with fraudulent ACRF fee
ACRF FRAUD Assumptions
(3.7% market share) Low High CA Tax 9.25%
% market share) 13.10% 27.00% Tour Tax 2.50%
1‐Time LAWA $10.00 Vehicle Licensing Fee
Fleet ‐Size 1,400 Economy Car Cost
Rental % 70.00% Luxury Car Cost
Active Rentals 980
/ Car Weekly Fraud Results
Low ACRF High ACRF U/P Tax U/P Tax U/P CFC Unpaid
LAWA $10 ACRF‐11.1% O/Fees LOW HIGH FEE ACRF CA. Tax
$0.00 * $21.13 * $0.00 $24.94 $51.41 $2.31 $4.76 $10.00 $24,443.55 $2,261.03
$0.00 * $40.26 * $0.00 $47.51 $97.93 $4.39 $9.06 $10.00 $46,562.14 $4,307.00
LAWA‐ACRF Tax Dif
$10.00 27.05 $2.50 $0.88 $26,509.00 $864.60
$10.00 47.22 $4.38 $0.90 $46,275.60 $881.51
$10.00 27.61 $2.55 $1.34 $27,057.80 $1,317.86
$10.00 47.77 $4.43 $1.36 $46,814.60 $1,334.76
$10.00 47.48 $8.66 $17.87 $46,530.40 $17,516.10
$10.00 52.64 $9.60 $5.37 $51,587.20 $5,267.16
$10.00 48.15 $4.45 $18.43 $47,187.00 $18,061.82
$10.00 56.88 $5.26 $8.91 $55,742.40 $8,730.89
$10.00 48.15 $4.45 $18.43 $47,187.00 $18,061.82
$10.00 56.88 $5.26 $8.91 $55,742.40 $8,730.89
$10.00 54.05 $7.82 $25.50 $52,969.00 $24,994.73
$10.00 56.88 $11.30 $13.52 $55,742.40 $13,254.33
$10.00 56.61 $5.30 $25.51 $55,476.71 $25,003.79
$10.00 62.38 $5.84 $13.53 $61,133.27 $13,263.39
$10.00 55.32 $8.01 $26.61 $54,213.60 $26,082.53

$10.00 60.58 $8.77 $14.41 $59,368.40 $14,125.48
$10.00 48.15 $16.42 $27.55 $47,187.00 $26,998.09
$10.00 56.88 $13.77 $15.38 $55,742.40 $15,076.39
$10.00 59.11 $5.47 $27.60 $57,927.80 $27,043.42
$10.00 64.66 $5.98 $15.43 $63,366.80 $15,121.72
carrentals.com (90%‐95% of Deluxe's business) would have gone to one of those 10 companies
b) The "State of California's" indirect loss could be between $162,533 and $1,523,831
he LAWA's indirect loss is between $1,378,468 and $3,295,074 that would have been paid by "Approved Agencies"
Fees column for discrepancies
$1,378,468 #####
Car Cost LF Total/ VLF U/B / Day

$19,000.00 ##### $0.26
$30,000.00 ##### $0.41
Annual Results ‐Fleet
Unpaid Tax due Direct
California LAWA Loss Total Fraud Loss
$117,573 1,077,009.02 $1,194,582.51 Actual Fraud Committed By Deluxe Rent‐A‐Car
$223,964 2,051,577.75 $2,275,541.65
+ Tax Loss + LAWA Cost ACRF Fraud Cost Net Effect of the Fraud Commmited By Deluxe Rent‐A‐Car
$162,533 1,378,468.00 $1,541,000.95 *** Low End ‐ Estimate ***
$163,412 2,406,331.20 $2,569,743.21
$186,102 1,407,005.60 $1,593,107.55
$186,981 2,434,359.20 $2,621,340.21
$1,028,411 2,419,580.80 $3,447,991.67
$391,466 2,682,534.40 $3,074,000.05
$1,056,788 2,453,724.00 $3,510,511.94
$571,580 2,898,604.80 $3,470,184.75
$1,056,788 2,453,724.00 $3,510,511.94
$571,580 2,898,604.80 $3,470,184.75
$1,417,299 2,754,388.00 $4,171,687.37
$806,799 2,898,604.80 $3,705,403.37
$1,417,771 2,884,789.03 $4,302,559.78
$807,270 3,178,930.15 $3,986,200.10
$1,473,865 2,819,107.20 $4,292,972.17
$852,098 3,087,156.80 $3,939,254.99
$1,521,474 2,453,724.00 $3,975,198.35
$901,546 2,898,604.80 $3,800,150.75
$1,523,831 3,012,245.60 $4,536,076.85 *** High End ‐ Estimate ***
$903,903 3,295,073.60 $4,198,976.45
Re: Deluxe Page 1 of 3
From: TIM GIPSON <22827@lapd.lacity.org>

To: theplatinumlife@aol.com
Subject: Re: Deluxe
Date: Fri, Jun 12, 2009 1:54 pm
Hello Kevin,
Yes, The Judge can call me at anytime (310-444-1574) for facts
regarding Deluxe. The District Attorney's final reveals the follow
"Former employee of Deluxe Rent A Car is being framed by her employer.
No evidence to indicate that defendant forged a customer's signature."
As previously mentioned, this information is available for court but

the actually report / notes can only be presented in court as they have
not yet been charged with a crime! Have a wonderful weekend.
Detective T. Gipson
>>> <theplatinumlife@aol.com> 6/12/2009 11:06 AM >>>

Hi Tim
I talked to Deluxe's attorney and she was supposed to be working on

a continuance in the case and I was expecting Deluxe's attorney to
respond before today, but unfortunately my daughters graduation was
yesterday and my nephew graduates from High School today and Deluxe has
yet to respond. This means I haven't had or have the time to file the
"ex parte" request as planned. I am putting together a request to ask to
have it removed from calender pending retention of council and to allow
for me to finish gathering the info on the "newest" fraud they are
commiting. I haven't been able to catch up with you on the notes or
whatever you can document on the steps they took to avoid producing the
documents they forged and how it mysteriously disappeared. I want to ask
the judge to make an order preventing them from destroying documents and
I believe that your input on this company will be helpful.
I am actively investigating the option of refiling this case under

"California False Claims" statues. The DA won't pursue the fraud on this
case because they destroyed the document they forged but if I can file
under this the Attorney General is mandated to do so within 60 days. I
have given the LAWA this information, the city attorney, written the
Mayor, and even the Governor and nobody wants to do anything about it or
sees in terms of nickles and dimes. These whistle blower statues or the
simular tax ones appear to be viable options but as the
re have been less than ten thousand of the cases filed finding an
attorney has harder than I expected. As this is a specialty the
attorneys so far know less than I do about it and I have to explain to
them why they are wrong and quote the case law, or they are so large
that the $2-4million in fraud isn't worth their time as they go after
the $Billion frauds. Although the law requires that the person who
commits the offence is chaged "treble" the damage and the agency get a
third, the prosecuter gets 1/3, the "original source" gets 1/3. As the
original source of both the ACRF fraud and the new info on their newest
fraud I sent to you the other day, perhaps I may be able to actually
recover something for the 100's of hrs this case has taken from me and
get justice served at the same time. It's been a eye opening experience
to me. I cant believe I can document a fraud, provide proof to multiple
government agencies that the fraud exists and demonstrate using
plausible numbers a fraud that indicate the following ...
“The "rentals" subject to the tax include any payments required by

the lease…. ”
http://webmail.aol.com/43471/aol/en-us/mail/PrintMessage.aspx 6/15/2009
CarRentals.com - Local Policy Information Page 1 of 1
Local Policy Information

Print This Page
z YOU ALWAYS SAVE MORE BECAUSE DELUXE DOES NOT CHARGE ANY
EXTRA AIRPORT FEES LIKE OTHERS........YOU WILL ALWAYS RECIEVE A
TOTAL PRICE WITH NO SUPRISES. AFTER YOU COLLECT YOUR LUGGAGE,
EXIT THE TERMINAL AND GO TO THE OUTSIDE ISLAND UNDER THE RED
SIGN THAT READS HOTELS AND COURTESY SHUTTLES. BOARD THE WHITE
JOHNNYPARK SHUTTLE at C THAT WILL BRING YOU TO OUR FACILITY.....WE
ARE OPEN 24 / 7
z Minimum age for renters and drivers is 21. Renters and drivers under the age of 25
are subject to an underage charge of $20.00 per day.
z .........NO LOCAL RENTERS...........................YOU may be asked to HAVE A
RETURN AIRLINE TICKET TO RENT WITH US............DELUXE IS AN AIRPORT
CAR RENTAL COMPANY. only access is from LAX . No walk ins allowed.
RENTALS........................................................................Renters must have a valid
return Airline ticket in their name departing from LAX.
z Debit cards: Debit card only accepted at time of rental when presented with the
return flight segment of a round trip airline ticket in the renters name. .... Debit card
must have available funds of $400.00 plus total estimated rental charges. Unused
funds will be returned through the credit card processor after vehicle return. Due to
bank processing it can take up to 14 days to appear back on your account when
using this form of payment, additional fees and restrictions may
apply.......................................................................
z State of California requires that all renters have Liability insurance. Deluxe requires
all renters to have insurance to cover damage to our rental car. Residents living in
the U.S.A or Canada please bring with you your insurance card issued by your auto
insurance company. If you did not bring this proof with you, you will be required to fill
out a statement of insurance form that Deluxe will provide.
z .Deluxe Rent A Car is an Airport Only Car Rental Company.. NO LOCAL RENTALS.
Renters must have a valid return Airline ticket in their name departing from LAX. Our
company is not insured or set up to service the local customers..
z Any violations of the rental contract will cause your rate to change. Rate changes will
be determined by the management. MPG information is highway miles from
Manufactures web site. International Drivers, other restrictions or fees may apply.
.......... Additional drivers must have a valid drivers license and the additional proof of
insurance required by renter.
z Major credit cards: Valid drivers license and credit card must be in the same name.
Credit card must have available funds of $300.00 plus estimated amount of rental
charges. Unused funds will be returned through the credit card processor after
vehicle return. Due to bank processing it can take between 2 to 5 days to appear
back on your account when using this form of payment. Cash payments also
accepted at end of rental. ..............................................................................
z Reservations will be honored for a period of four hours after the confirmed pick up
date and time. Vehicles must be returned with the same amount of fuel as at the
start of the rental to avoid refueling charges. All renters must have a return airline
ticket in their name departing out of LAX no latter than 28 days from the rental pick
up date.
z Renters are only allowed to drive in the state of California, Nevada and Arizona.
http://www.carrentals.com/localPolicy.jsp?vendor=21&pickupCode=19737_LAX 8/11/2008
Page 1 of 2
Email not displaying correctly? View it in your browser.
Join the Deluxe Rent A Car Revolution and say NO to additional Airport
taxes and fees.
Through special contracts with the Los Angeles Airport, Deluxe Rent A Car at LAX no
longer needs to charge our valued car rental customers ANY additional Airport fees
or taxes that other car rental companys charge.
You will only pay sales tax and the standard California 2 ½ % Tourism fee, this is a
savings of over 30% off your total rental bill in most cases when compaired to
others.
Shop around and compare our TOTAL COST with other car rental companies at LAX,
then return to our site, pick out one of our 16 discount coupons found on our site under
DEALS and book on line and save.
We are still located at our LAX location and

adding even more of the cars you like to rent,
like the new Hondas and Toyotas.
Our new 2,500 sq ft state of the art customer

service lobby should be ready soon to serve our
ever growing customer base.
NEWS FLASH !!!!

Deluxe Rent A Car voted the Best Deal and Fastest Growing car rental company at
the Los Angeles Airport for 2008.
“Book Now” says Jonathon Drake EVP," I have never seen rate increases like this in my
34 years in the business". Mr. Drake goes on saying, “ in the coming months there will be
a large imbalance of supply vs. demand at most airports world wide. The big 3 car
companies have cut production over 50% and the major car rental companies will have a
very hard time finding cars to replace their older fleet. The major car rental
companies will be running older cars with much higher miles, and with most of the them
not having their own maintenance departments, will find managing their fleets to be a
difficult task.
Deluxe is in a great position to take advantage of this as our fleet needs are not as great as
http://campaign-archive.com/?u=f4c9c2127e84103f76f524f33&id=71a5fb87e6&e=21686... 2/10/2009
Page 2 of 2
the large car rental companies and as we always have done in the past, we go directly to
the retail dealers and buy new cars right off the lots". Also, says Mr. Drake," Deluxe has
its own in-house, full service maintenance facility, staffed with factory trained and
certified technicians.
With the combined synergy from our sister company "johnnypark" (our airport parking
company) and our new lower cost “no airport fees total pricing”, Deluxe Rent A Car is
your ticket to great savings at the Los Angeles Airport".
You are receiving this one time email because you are a customer of Deluxe Rent
a Car at LAX
Unsubscribe BMICHELSON@BORROWERHOTLINE.COM from this list.
Our mailing address is:

Deluxe Rent a Car
11101 hindry ave
los angeles, ca 90045
Our telephone:
310-338-3370
Add us to your address book
Copyright (C) 2009 Deluxe Rent a Car All rights reserved.
Forward this email to a friend

Update your profile
Re: Commission structure Page 1 of 1
From: Kprince310@aol.com
To: ThePlatinumLife@aol.com
Subject: Re: Commission structure
Date: Sat, May 23, 2009 6:44 pm
no buddy the owner is so freakin greedy , he wont give u nothing, he give commission cuz as rental agent we
sell insurances which i doubt he got any , but all the rental company pays commission , anyway lets meet up
somewhere buddy n talk? i can see u in person and from the impression i will get the idea about u, and if u were
honest person as u seem like it then i will stand with the truth. but there is no commission on ACRF , that money
is straight in his pocket , its suppose to be for LAX but Mr. John loves to steal and that's why he has team of
lawyers and that's one of the reason i don't wanna work for him.
later
In a message dated 5/23/2009 1:19:30 P.M. Pacific Daylight Time, ThePlatinumLife writes:
I am very curious as to how did the commission structure worked at Deluxe and if it was tied into the
ACRF fee.
A Good Credit Score is 700 or Above. See yours in just 2 easy steps!
A strong credit score is 700 or above. See Yours in Just 2 Easy Steps!
Subject: Re: Deluxe
Date: Sun, May 31, 2009 9:38 pm
No they have nothing against me, I didn't work with any of their stuff, they know that , and they never made me
sign any paper, i just got my check even after 1 week of termination, legally it should be within 24 hours but I don't
mind those little stuff, Plus I don't wanna fight for myself, i rather fight for other people. In my life i always fight for
others and try to forgive people who did wrong to me. The reason i am with u on deluxe cuz they ripped off 100s
of customer and the greedy owner will never stop, so that's y i wanna stop him to rip off other people in the future.
About that employee froged the paper n lost it is all bollshit, employees has nothing to deal with paper and
contracts. its all there with managers and goes to corporate office.
later
In a message dated 5/31/2009 9:24:05 P.M. Pacific Daylight Time, ThePlatinumLife writes:
Do you have copies of your e-mails ? With this and the termination without cause you have a wrongful
termination case with federal protection... he will be screwed. And better believe they will have a ton of
negative shit to say about you. When the investigating detective demanded they provide the
"disappearing" original document that they "didn't forge" they lost it and blamed it on a employee they
fired at that worked there when it happened. When did you start and When did they fire you ? Did they
make you sign paperwork about your termination ? there are steps that mudt be taken or they have failed
to follow rules and they are exposed to litigation. This could be great !!!
http://www.deluxerentacar.info/index2_frame.htm
This communication and any files or attachments transmitted with it may contain information that is confidential, privileged and exempt from
disclosure under applicable law. This communication is intended solely for the use of the individual or entity to which it is addressed. If you
are the intended recipient of this information, please treat it as confidential information and take all necessary action to keep it secure. If
you are not the intended recipient, you are hereby notified that any use, dissemination, forwarding, or copying of this communication is
strictly prohibited. If you have received this communication in error, please notify the sender at once so that appropriate action may be
taken to protect the information from further disclosure.
Kevin Powell
-----Original Message-----
Sent: Sun, 31 May 2009 7:56 pm
Subject: Re: Deluxe
I got terminated with no reason, I think the main reason was that I never like ACRF or other charges such
as International Driver license Fee , and Local policy that they were discriminating local renters cuz
Deluxe owner said that they steal a lot of cars, and when he will have so many cars standing n no one
renting then he will welcome local again. I dont like to quit cuz i am a challenger and never give up on
anything. I was fired cuz they manager likes those who listens to his stories of previous jobs n
experiences rather then hard working and dedicated employees. I was the top performer in deluxe and
there best salesman ever. In those 11 months i never ripped off a single customer nor did i steal any
money from company. Deluxe knows about my honesty. but in California they can let u go anytime for no
reason. I personally avoid confrontation with my job place and always leave with good will. I left the
company with respect and i am sure the owner and manager will not say anything bad cuz i never give
them a chance. Anyway u r fighting a just cause and i will do my best i can to help u.
Take that Carrentals.com seriously and do ur best the first thing to take deluxe out of that site. Once
they r out from there then they will be finished.
later
Subject: Re: Deluxe
Date: Sun, May 31, 2009 3:20 pm
that's great work, the way he was scamming customers he deserves that and this is one of the reason i am no
longer in that company, i am honest and straight forward guy and i think working in deluxe for 11 months was still
a lot. The ACRF i removed that on him, i sent him email and told him that when we sell insurance the ACRF goes
high and on some contracts the ACRF was over 200$ and those poor international customer who came to
Deluxe to get a cheaper and better deal the others which carrentals.com advertises would get ripped off in
ACRF . I told the managers a few times about ACRF but even the general manager didn't do anything, and finally
i have to put my job online and send email to owner to remove it or lower it.
If u really want to go after this Scammer John then the best thing will be to do something to remove him from
Carrentals.com web site and once he is out of there, he will have to shut down his business. Carrentals got a lot
of complains from customers but they r still there, u should put the power from Attorney side or any other way to
take Deluxe rent a car out of Carrentals.com then they wont get no customer , they will have to shut down this
scammer company.
thx for the email
later
An Excellent Credit Score is 750. See Yours in Just 2 Easy Steps!
Fraud, Forgery False Advertisement & Deceptive Trade Practices
Here is was my “guaranteed clean, comfortable and affordable vehicle”

This was a “Guaranteed 2007-2008” Vehicle – But was 2006 – With false Registration
RE: Summer Specials at Deluxe Rent a Car (LAX) Page 1 of 3
From: MIODOVSKI, MARK R. <MMiodovski@lawa.org>

To: theplatinumlife@aol.com
Subject: RE: Summer Specials at Deluxe Rent a Car (LAX)
Date: Thu, 26 Feb 2009 7:38 pm
Dear Mr. Powell,

Your request for information was forwarded to our City Attorney's office for a response, since it involves pending
litigation and because their office is the designated point of contact for all such requests. Speaking personally but
not for LAWA, I can say however that LAWA has no contractual relationship with Deluxe rent a car, "special" or
otherwise. This means that 1) Deluxe may not operate its own courtesy shuttle vehicles in the LAX central
terminal area to pick up its customers; and 2) that they may not charge customers a "airport concession fee"
which on-airport rental car concessionaires (e.g. Hertz, Avis, Dollar) are entitled to do. Note that Deluxe utilizes
the services of its sister company - Johnny Park - as a means of picking up its customers at the terminals. We
view this as somewhat of a loophole in Johnny Park's permit which we hope to soon close. Also note that the
"airport concession fee" is defined in Section 1936.1 of the California Civil Code; it allows, but does not require
rental car companies to charge such a fee if they hold a concession contract with an airport wherein they pay the
airport a concession fee. Charging such a fee without holding a valid rental car concession contract would be
considered a violation of the statute, which is why we have forwarded information on companies who have done
this to our City Attorney's Consumer Fraud unit for investigation and possible prosecution. I cannot say however
whether the City Attorney, District Attorney or Attorney General would be the appropriate entity to charge violators
of this state statute.
I am available to speak with you if I can be of immediate assistance. However, a letter from our City Attorney's
office would be much more useful to you in any litigation against Deluxe. Personally I would view the ad below as
deceptive, but technically it doesn't appear to be illegal. However, as a non-lawyer, that's just my personal opinion
- not speaking for LAWA.
-Mark Miodovski
LAWA Concession Services Division
(310) 646-3987
From: theplatinumlife@aol.com [mailto:theplatinumlife@aol.com]

Sent: Thu 2/26/2009 6:56 PM
To: MIODOVSKI, MARK R.; LANGLOIS, MEIGHAN J.; STROUSE, MICHAEL
Subject: Fwd: Summer Specials at Deluxe Rent a Car (LAX)
To: LAWA
Michael Strouse, et al
Fr: Kevin Powell
I have recieved this e-mail today and would like you to please review it. Deluxe is advertising that they have
reached a special agreement with the LAWA and "no longer has to charge any airport fee or taxes". As they never
had to or were even allowed to charge or collect this tax I am confused about this ad. I would like to know officially
if they have truly reached an agreement with the LAWA.
Also, I sent a request for information regarding Deluxe Rent A Car a week ago and I have not recieved a
response or even an acknowlegement of reciept. Please let me know if there is an official channel to request the
information I have requested, and the process to do so.
Thanks
To: Los Angeles World Airport
LANGLOIS, MEIGHAN J. <MLanglois@lawa.org>
MIODOVSKI, MARK R. <MMiodovski@lawa.org>
Michael Strouse, et al
Re: Deluxe Rent A Car – ACRF Fee.
Fr: Kevin Powell

310-259-2240
This is an official request for a statement of facts in regards to “Deluxe Rent a Car”.
Background
I rented a car from Deluxe Rent-a-Car on 6-05-07. I was rented a car with expired tags that
led to me and my children being stopped by the police. I refused to pay the rental as no
manager or owner to this date has ever responded to a single call to address my issue. This
dispute through my credit card resulted in “Deluxe” forging my signature and my bank
declining my dispute. I have since filed a complaint with the LAPD in which Deluxe is trying
to push off on an employee that can’t be found and would have gained nothing from doing so.
In review of the forged documents I noticed a $43 13% ACRF tax I had never paid attention
to and called them. They informed me that it was a Airport Concession Recovery Fee the tax
that the airport charges to everyone. As a Torrance resident I was surprised as I had not used
the airport facility On or about August 4th 2008 I contacted the LAWA and spoke to Michael
Strouse for more information on how this worked. I was informed in no uncertain terms that
“Deluxe” not charged this tax. As they were using Johnny Park’s shuttles to pick up customers
they are charged $1.50 per person on a “Honor System”. After what I have found out about this
company that in itself is a joke, as this company has no ethics. Although the LAWA was aware
of the loophole they were exploiting they were not aware that they were charging this tax. The
LAWA turned this over to the LA City Attorneys office and the criminal aspect is being
handled by James Santistaban. james.santisteban@lacity.org
Other People
After having this issue with “Deluxe” I researched them and found many complaint as to the
unethical nature of this company and many allegations regarding paying more than they agree
through gas scams, additional damage claims, midnight dim lit inspections and subsequent
damage claims. I put up my site to inform people and to find others in the same position. I have
been contacted by multiple persons including Ashley from Texas who came to Los Angeles to
attend a 3 day concert. Ashley like me was also rented an expired tag vehicle and charged a
13.3% ACRF fee. Her guaranteed 2007-8 car was a 2006 with tags that expired 1yr previously
and false documents in the window. This led to her being pulled over, the car being impounded
and missing most of her 1st day at the concert and one of her favorite bands. This vacation long
planned and saved for was ruined. If that wasn’t enough, Deluxe then promised to take care of
the ticket and lied. As it was their car and she had no way to cure the expired tag issue and she
lived 2000 it was fair to believe they would do so. They didn’t and it became a $900 ticket and
a collection notice issued and a threat to suspend her license. This never was corrected by
Deluxe.
I have since been contacted by a few people who have also been charged this fee and have
attached their receipts for your review. This shows a pattern that leads me to believe that they
fully intended to use the tax to enhance the profit margin on their unfairly marketed low prices.
Dani a regular renter of deluxe was charged fees that ranged from 13.3% to 27%. They have
created an unfair advantaged that has taken business away from legitimate car rentals and
worse yet the LAWA. With 450 cars @ $40/day x 13.3% = $2394/day or $873,810 per
year “Bilked” from not only the consumer but also from the LAWA’s fund. With a
revenue of $50,000,000 this still is a large chunk of money that could be allocated
elsewhere.
Legal Issues
My original intent was to file a class action suit and request the Judge to enjoin them from
these practices, order a independent agent to audit and refund the money to all that could be
located and the rest be given to the LAWA and punitive award to be equal to what the
defrauded the public and the LAWA for and give it to the LAWA. I learned that a class action
is difficult to get done and as a private citizen I don’t have the right for that award. I have since
filed a suit in conjunction with Ashley.
Timeline
July 28th 2008 My site went up. http://www.deluxerentacar.info
July 31th 2008 Deluxe became aware of my activities
August 1st 2008 Deluxe threatens to sue me on http://www.youtube.com/deluxerentacar and

call me “a scum bag” and to “have Micky D deliver another big mac to your fat ass.”
August 4th 2008 I am contacted by their Attorney and I inform them about the additional
ACRF violation I discovered and Ashley’s problem. I ask them to make a
fair offer and set up a program that returns the money bilked.
August 8th 2008 I end all communication and continue what I was doing.
August 9th 2008 I videotape their activities and talk to their clients. They are now beginning
to give unexplained ACRF refunds to people returning the vehicles
August11th 2008 Deluxe and Car rentals change the site and remove the ACRF fee.
August 13th 2008 Deluxe reinstates the fee but renames it to an Airport fee in a attempt to hide
the offence and continue to commit consumer fraud
November 26,2008. My attorney gave notice of our intent to sue and to seek an injunction to
prohibit their behavior.
December 15th2008 In a letter in regards to my case they claim “Although in the past Deluxe
did charge an ACRF tax. it has long since changed its policies and no
longer does.”
Here is the really interesting part, in January this year I am contacted by Dani a long time
renter of Deluxe who is upset over her treatment by “Deluxe” She sent me her receipts and the
review was very informative as to the nature of their conduct and ethics. I have included this
for your review. But this is of note :
1) Between 3/10/2008 and 12/17/2008 Dani rented from Deluxe 8 times with these
taxes ranging from 13.3% to 27.62%.
2) Although Deluxe claims to have cease these behavior “a long time ago” they had
manipulated the fee, hidden it renamed it and even increased it to 27.62%.They
continued to do so until 12/11/2008 two weeks after receiving notice of this suit.
I was contacted last month by a person who is a friend who had also rented from “Deluxe”
and was charged an ACRF fee. She also was sent an interesting advertisement which states “
“ Join the Deluxe Rent A Car Revolution and say NO to additional Airport
taxes and fees.”
“ Through special contracts with the Los Angeles Airport, Deluxe Rent A Car at LAX
no longer needs to charge our valued car rental customers ANY additional
Airport fees or taxes that other car rental companys charge.”
“ You will only pay sales tax and the standard California 2 ½ % Tourism fee, this is a
others.”
Conclusion
As Deluxe never had the right to charge people I am concerned about this ad. Through a
concentrated effort and a unfair advantage they have position themselves to be the lowest price
on carrentals.com and with a review section that has no access to add to complain and show
only positive reviews this company has scammed many people. They now solely rent to
travelers eliminating many issues for them. A traveler who must take a flight out of the state or
country is unlikely to fight a charge and less likely to file suit or go through all the steps I have
had to endure. Even with everything I have documented and presented it has taken this massive
undertaking to get here. The horror stories on the internet show a company who has a pattern
of abuse similar to ones you hear about in “Mexico”.
MySpace
Body:
My boyfriend and I decided last minute to attend the Coachella 3 day music festival in Indio,
CA. so we flew into LAX back on April 25th and flew out 4 days later. We were rushed for
time since we missed our original flight on the 24th and we had to pay the airline an
additional $50 each to guarantee us on a flight for Friday and one of the main bands we
wanted to see was Fri. night around 6pm.
We got into LAX around 1pm and immediately went to get the rental car...long story short..
after a long wait to get the car and receiving the car, we drove only 16 miles (hour and a
half in LA traffic) when we got pulled over by CA highway patrol and were told the car had
registration tags that were a year expired. Even after we explained to the cop that it was a
rental and he could see this on the papers he did not care and was overall not friendly. The
car got impounded, I was given a citation and we had to wait over an hour for another car to
be brought to us. We ended up getting to the festival super late and missed all the bands we
wanted to see that 1st day of the festival. This incident pretty much ruined our vacation and
caused stress between my boyfriend and I the rest of the time. When we went to return the
vehicle I told the manager I did not want to pay for the car and that they needed to pay for
the citation. The manager was actually friendly and comped the bill. I brought the car back
on empty and didn't pay that either. A lady from another dept. came out and took all the
info. from the citation and said it would be taken care of.
Three months later I get a notice in the mail for the Superior Court in LA for a bail amount of
$808.00 for failure to show in court or pay the fines and that a hold was on my drivers
license with the DMV and possible suspension if it was not paid. I called someone in the legal
dept. at Deluxe and left a long detailed message and no one called me back. My mom has
worked for many lawyers so she called and spoke to the office manager earlier today about
the situation for me. The manager claims she will take care of the ticket but my mom is
helping me draft a letter to the court to explain that this needs to be redirected to Deluxe
since it is there car. I am also going to try and get compensated for our concert tickets and a
few other things on my own, but if that doesn't work I'm going to try and find a lawyer.
That would be great if somehow there could be a class action lawsuit but I'm not sure how
those work. I honestly don't know how that place stays in business with all the complaints
and negative feedback I have come across online. If I had the money I would hire an
attorney right now to sue them but I live in Texas and cannot afford an attorney :(
I can't believe they forged your name - that is ruthless.
----------------- Original Message -----------------

From: Kevin
Date: Aug 6, 2008 5:31 PM
Tell me what happened and when I'd love to hear. I recieved a letter from their attorney on
monday. Today the detective told me that they have failed to produce the original reciept
that they forged. The more info I have the more I can do. I have the attention from the
LAPD and the LAWA right now.
Kevin
http://messaging.myspace.com/index.cfm?fuseaction=mai...fed=True&MyToken=9a5ffa14-eee6-46d7-ab79-6407ed18d402 (3 of 5)8/6/2008 5:38:56 PM

I formally request a statement of facts from the LAWA which clarifies the following
information and records which should be available to the public.
1) The date in which the unbundling began

2) Deluxe’s legal ability to have charged ACRF tax in the past
3) Deluxe’s past and current standing as being authorized to pick up from the airport
4) All information as to the agreement to which they make claims including date of
resolution
5) The terms, conditions and number of passengers Johnny Park claims per year for
themselves and for Deluxe and the total amount contributed to the LAWA each of the
years post unbundling.
Thank You
Kevin Powell
theplatinumlife@aol.com
310-259-2240
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Automatic Special 10% Discount

Air Conditioning $36.48/day
Unlimited Mileage $32.83/day
Los Angeles International Airport GUARANTEED Total With Taxes $106.62
(LAX) Economy MODEL 2007 Or 2008! Select Vehicle
(2009 Corolla Le (37 Mpg) Or
Similar)

(LAX) Compact MODEL 2007 Or 2008! Select Vehicle
(2009 Toyota Matrix (37 Mpg) Or
Similar)

(LAX) Intermediate MODEL 2007 Or 2008! Select Vehicle
(2008 Civic,Advenger (36 Mpg) Or
Similar)

(LAX) Special MODEL 2007 Or 2008! Select Vehicle
(2008 Honda, Pt Cruiser (36 Mpg)
Or Similar)
Automatic $28.95/day
Air Conditioning Total With Taxes $116.62
Los Angeles International Airport Unlimited Mileage Select Vehicle
(LAX)
Economy
(Hyundai Accent Or Similar)
(LAX)
Compact
(Ford Focus Or Similar)
(LAX) Intermediate
(Dodge Caliber [hwy 29 Mpg] Or
Similar)

(LAX) Standard MODEL 2007 Or 2008! Select Vehicle
(2008 Accord, Charger ( 31 Mpg)
Or Similar)

http://www.carrentals.com/rentalrates.jsp?r=1218408840192 8/10/2008
CarRentals.com - Make Reservation Page 1 of 2
z Car Rentals FAQ

zCustomer Care
z Car Rentals Home
Pick-Up
Sunday, August 17 10:00 AM
LOS ANGELES INTERNATIONAL AIRPORT (LAX)
11101 S HINDRY AVENUE
LOS ANGELES, CA 90045
Drop-Off
Wednesday, August 20 10:00 AM
LOS ANGELES INTERNATIONAL AIRPORT (LAX)
11101 S HINDRY AVENUE
LOS ANGELES, CA 90045
Vendor
Deluxe Rent A Car
Car Type
Full Size Special
2008 Charger/advenger (30 Mpg) Or Similar

* image represents sample car - actual may differ
Features
Automatic
Air Conditioning
Unlimited Mileage
GUARANTEED
MODEL 2007 Or 2008!
Rate Information
3 Days @ $43.81/day
$131.43
Special 10% Discount Rate
3 Days @ $39.43/day
$118.29
Estimated Taxes and Fees
$9.76
Total Price=
$128.05
Deluxe only services clients who are flying into LAX Airport. Renters must have a valid return Airline ticket in their
name departing from LAX. No local renters. After you collect your luggage, please exit the terminal and go to the
middle island. Look for the red sign that reads "Hotels and Courtesy Shuttle." Please wait there for a white shuttle-
van that reads (Johnnypark). The shuttle circles the airport every 15 minutes, and will bring you directly to the
facility. If you have any questions, call 1-800-831-5556 from any phone for information.
Local Policy Information
General Rental Rules
http://www.carrentals.com/order.jsp;jsessionid=BNMGDNBOKJCE?id=50&psid=BNMG... 8/10/2008
Page 1 of 2
Join the Deluxe Rent A Car Revolution and say NO to additional Airport
taxes and fees.
Through special contracts with the Los Angeles Airport, Deluxe Rent A Car at LAX no
longer needs to charge our valued car rental customers ANY additional Airport fees
or taxes that other car rental companys charge.
You will only pay sales tax and the standard California 2 ½ % Tourism fee, this is a
others.
Shop around and compare our TOTAL COST with other car rental companies at LAX,
then return to our site, pick out one of our 16 discount coupons found on our site under
DEALS and book on line and save.
We are still located at our LAX location and

adding even more of the cars you like to rent,
like the new Hondas and Toyotas.
Our new 2,500 sq ft state of the art customer

service lobby should be ready soon to serve our
ever growing customer base.
NEWS FLASH !!!!

Deluxe Rent A Car voted the Best Deal and Fastest Growing car rental company at
the Los Angeles Airport for 2008.
“Book Now” says Jonathon Drake EVP," I have never seen rate increases like this in my
34 years in the business". Mr. Drake goes on saying, “ in the coming months there will be
a large imbalance of supply vs. demand at most airports world wide. The big 3 car
companies have cut production over 50% and the major car rental companies will have a
very hard time finding cars to replace their older fleet. The major car rental
companies will be running older cars with much higher miles, and with most of the them
not having their own maintenance departments, will find managing their fleets to be a
difficult task.
Deluxe is in a great position to take advantage of this as our fleet needs are not as great as
Page 2 of 2
the large car rental companies and as we always have done in the past, we go directly to
the retail dealers and buy new cars right off the lots". Also, says Mr. Drake," Deluxe has
its own in-house, full service maintenance facility, staffed with factory trained and
certified technicians.
With the combined synergy from our sister company "johnnypark" (our airport parking
company) and our new lower cost “no airport fees total pricing”, Deluxe Rent A Car is
your ticket to great savings at the Los Angeles Airport".
You are receiving this one time email because you are a customer of Deluxe Rent
a Car at LAX
Unsubscribe BMICHELSON@BORROWERHOTLINE.COM from this list.
Our mailing address is:

Deluxe Rent a Car
11101 hindry ave
los angeles, ca 90045
Our telephone:
310-338-3370
Add us to your address book
Copyright (C) 2009 Deluxe Rent a Car All rights reserved.
Forward this email to a friend

Update your profile
08/04/08
Fr: Kevin Powell
To: Richelle L. Kemler, et al

John Hennessay
Re: Deluxe Rent A Car aka Netstar
Dear Richelle:
Thank you for your letter. However for us to move further we need to eliminate the untruths, as
that in fact is how we got to this place. I have attached files for you to review carefully. Take into
consideration the following
1) Jonah your operations manager knew since the event occurred and the person I left multiple
calls for, ignored my calls and to this day has never contacted me.
2) The person I spoke to on the phone refused to leave his name and accused me of causing
the flat tire that left me stranded.
3) I was given a car in that condition… and expired tags undisclosed to me. Leading to an
encounter with the police and my 3&5 yr old children leaving them asking if were going to
jail.
4) Jonah is the one who contested my formal dispute…. He was of aware of this and it is my
contention that he or one of his underlings committed the forgery not John. However it’s
irrelevant corporate liability and accountability still stand.
5) Mr. Hennessay is being less than truthful to council when he says he just found out about
this on or about July 30th 2008. BBB Complaint - Company's Initial Response - Posted
06/26/2008 We apologize for the condtion of the car that was rented to Mr Powell.
Sometimes we run very low on cars and we have to rent out cars waiting to be registreded.
Mr. Powell was a local renter so he should have asked to swap out the car when another car
was available. Our Business license is posted in our office. If Mr Powell refused to sign the
rental agreement, they should not have given him a car. We are sorry for any incovenience
that he was caused. We have never forged his name to anything we sent to his credit card.
We answer all chargebacks to the best of our ability.
6) Are you aware of the numerous complaints there are online and at the BBB about your
client.
7) Today I contacted the LAWA regarding the $42 in airport tax charged n my receipt only to
find out that Deluxe is not allowed to pick up from the airport and thereby are not charged
an access fee. I WAS CHARGED 13.1% or $42 in airport fees and I live in Los Angeles.
Deluxe and Johnney Park both owned by Netstar has the clients board the Johnney Park
Bus when they land at the airport. There is in fact a $1.60 charge each way for this trip
totaling $3.20. Imagine the effect of his 450 cars rented to people who were “fraudulently
charged” on average of $25@ 13.1% or $1462.50 per day. That adds up to about $553,812
per year. Please review your case law and statutes when taking issue to my serious
allegations
8) While I can’t prove it, but I’m sure through IP tracing somebody can. Take note to the
response I received for my video by a person who joined within 2hrs and went to my site
and my myspace.com/deluxerentacar page. This person had two video views – that day and
attacked me http://www.youtube.com/watch?v=TK3bFGx_Ajo This was on the same day
your client may have 1st became aware of my decision not to let my self be abused but
definitely “Not of My Issue “
9) I have invested at least 100+ hours in this campaign to expose them, much gas, phone calls,
frustration and aggravation. You client is still claiming that the signature wasn’t forged… I
wont get into details but you can see the obvious on the site as well as the attached file as
would a jury.
10) I agree it was “shear stupidity” that caused someone to forge my signature, however it was
truly done. upon the police receipt of the original as I’m sure you still have in possession,
the handwriting analysis under microscopic analysis will show that it wasn’t me. It simply
doesn’t make sense that I would complain as I have and done and to document what I have
done and then be stupid enough to sign the document. I’m obviously very confident what
the results of the investigation will be. I am glad you are confident in your employees; I
hope you are as confident as to the views of the jury. They will see the reprint that was
submitted by fax violating “wire fraud act” that is missing the coupons as they were
reprinted at another time when I was not there. – the accidental loss of this original would
call into question the validity of you clients claim to innocence. Lets meet at the LAPD
station with the original and turn it in together if you client is so sure. Then we can drop
that issue in its entirety
With that said please re-review the information and if you were me…. How would you feel about
the events as I see them and the work and money invested to get to this point and what it would
take for you to sleep well and at peace at night ?
Then you can make me an offer…
Sincerely
Kevin Powell
Deluxe Rent A Car Page 1 of 3
From: theplatinumlife@aol.com
To: RKemler@GBSJLAW.COM
Subject: Deluxe Rent A Car
Date: Wed, 6 Aug 2008 4:50 pm
This is a rough draft of what I was thinking... I hope it helps to see where I am at .
Attorney Kemler
I have been giving thought to your letter. I understand that your client may or not have been aware of
what was going on at his corporation. Obviously he is a busy man and may not be involved in the day to
day operations of such. This is the reason he hires "Operations Managers" such as Jonah to run his
companies. However this bad choice in of this "Operation Manager" has led to this situation.
I would be hard pressed to believe Mr. Hennassey himself had any direct knowledge of what happened
initially and of course would believe the person he trusted to run his operation over a stranger.
However, I have read multiple complaints regarding Jonah and the way he chooses to operate Deluxe
Rent A Car. I personally have been ignored by him and would bet he is the one who refused to give his
name when I called. I was denied returned calls and it was him who addressed the Better Business
Bureau. He was obviously either the one or the one who had somebody forge my signature. I would
suggest that if they intend to stay in business at all that they start by removing the cancer that exist
within the company and then appoint somebody who has the charm, personality and moral credibility to
turn things around.
Should I find myself without cause to continue my campaign, I would allow my existing site be
changed but left up for 1 year and it would express the company's regret for any persons who have had a
problem with your client's company and the contact person they can call directly to address the situation
and make amends. This would have to be a real commitment and I will retain ownership of the site for
the year and while they can control it and maintain it, I will maintain the right to approve or disapprove
what goes on the site. This would give all injured parties time to find out and for matters to be settled.
There will also be a link from company's main site to this one for people seeking customer resolution.
Deluxe will assign a person responsible for all customer complaints who reports only to John and is
independent from all actions of other employees. This provides transparency between the complaints
and Mr. Hennassey. He will no longer be able to claim lack of knowledge. I will have free access to
those files to guarantee that there is follow through for same 1 year the site is up. I also want a written
and signed apology letter on company letterhead from him, obviously without admitting to issues
creating liability. Also a written letter signed by managementfor any ligitimate claim processed by the
new person
In exchange I will agree to remove all video's, blogs, comments, links, post that are available for me to
do so. Those that aren't I will repost and amend something to the effect of.... "After being contacted by
John Hennassey directly and fully explaining the problems I encountered he has offered me a sincere
apology and has corrected my matter. I believe him to be truthful in his commitment. Further he has
stated "Netstar as the parent company of Deluxe takes responsibility for any and all actions of their
employees, whether known or unknown as a result we have restructured our company to include a
complaints department and changed operations management. We take your complaints seriously. If you
have an issue with billing or any employee conduct please contact this department and we will do a
thorough investigation of this complaint and make ammends". I will stop and drop all complaints
including the impending airport tax issue. I will deny interviews and have no comment or an agreed
http://webmail.aol.com/38265/aol/en-us/Mail/PrintMessage.aspx 8/15/2008
Deluxe Rent A Car Page 2 of 3
script for any of the news organizations, and media I have previously contacted. I would of course sign a
limited confidentality agreement of which we can negotiate.
On my site I promised that this company would do business right or it would not do business at all.
I stand by that commitment.
You ask your client to make an offer of what he believes is fair compensation for emotional damage to
my children, my efforts, time, lack of sleep,ect. to finally get his attention and make Mr Hennassey
aware of these shortcomings within his company.
I believe this is fair and will help Mr Hennassey protect his interest in the long run.
Showing good faith I will stop all planned courses of action I have developed and stop all commenting
on any sites as long as we are in negotiation.
Also to show good faith from your client ....
I was just contacted by a young lady named Ashley from Texas.
ASH
myspace.com/baby_doll_ash
Date:
Aug 6, 2008 3:35 PM
RE: Deluxe Rent A Car....
Body:
I read your story on of those forums and I couldn't believe how many other negative responses were out there
by other people. I will tell you the whole story but I'm actually walking out the door right now to run a quick
errand so when I return I will write back.
Ashley
----------------- Original Message -----------------

From: Kevin
Date: Aug 6, 2008 5:31 PM
Tell me what happened and when I'd love to hear. I recieved a e-mail from their attorney on Monday. Today
the detective told me that they have failed to produce the original reciept that they forged. The more info I
have the more I can do. I have the attention from the LAPD and the LAWA right now.
Kevin
If you approve I will give her your number and have her contact you. Your commitment to make sure her
complaint gets thouroghly investigated and resolved will go a long way in expiditing our negotiation.
Kevin Powell
310-259-2240
Deluxe - Conversation Aug 7th 2008 Page 1 of 1
From: theplatinumlife@aol.com
To: RKemler@GBSJLAW.COM
Subject: Deluxe - Conversation Aug 7th 2008
Date: Thu, 7 Aug 2008 6:29 pm
Attorney Kemler
Re:Deluxe Rent A Car
Per our conversation this afternoon and your company's stance to refuse to present an offer to
me I have contacted council regarding the situation. I had hoped to see a good faith effort from
your client to make amends and had offered an opportunity for client and council to offer a
figure fair for this 16 mo. ordeal. Instead of the originally planned course of action and on the
advice of un-retained council I have been advised to request the sum of $100,000 along with
the previous rough draft demands as needed to modified based on already enacted changes.
The information you seek in regards to the Airport Use Tax, Deluxe's licensing to access
airport property, and Johnny Park's $1.60/ per person fee can be addressed by contacting
Michael Strouse of the Los Angeles World Airport.
Michael Strouse
310.646.2250 Office
310.646.5024 Fax
Los Angeles World Airports-Landside Operations
7301 World Way West
Los Angeles, CA 90045-5828
This is who verified my information regarding the fees and use of Johnny Park's shuttles to
bypass Deluxe's inability to have airport access. And as such their subsequent inability to
charge the 13.1% airport tax they charged me and the 13.3% they charged the person who
contacted me yesterday Ashley. This is a separate issue from the criminal complaint previously
filed for the forgery of my name and it has yet to be formally addressed. As the booking agent I
have as of this time not addressed the relationship with CarRentals.com and the use of this
company to book my rental and what their potential liability for their participation in this and
other similar bookings.
I am giving your client until close of business Friday to at least respond with contact stating his
intensions. If I receive no response I will take it as a denial without counter a pursue my
original plans and explore my other options starting this weekend as to not undue the
momentum begun last week.
Sincerely,
Kevin Powell
It's time to go back to school! Get the latest trends and gadgets that make the grade on AOL Shopping.
consultant’s corner
The ABCs of Access Fees

commercial airline passengers and airlines. • The fee is not discriminatory against
One of them, levied by the Evansville- interstate commerce.
Vanderburgh Airport Authority District, • The fee is not excessive in
was a “use and service charge” in the comparison with the government
amount of $1 per passenger enplaning a benefit conferred.
commercial aircraft operated from Dress
Memorial Airport. The airlines had to Unhappy with the result in this case,
collect and remit the charge, less 6% Congress enacted the Anti-Head Tax Act
allowed for their administrative costs. The the following year. Subject to a variety of
airport authority devoted the revenue from exceptions, that statute prohibits state
the charge to construction, improvement, and political subdivisions from levying or
equipment and maintenance of the airport collecting a “tax, fee, head charge, or
and its facilities. other charge” on any of the following:
BY TERENCE R. BOGA The other charge at issue was a individuals traveling in air commerce; the
“service charge” imposed by the State of transportation of such individuals; the sale
Recently, the Miami-Dade County Board New Hampshire. That charge was levied of air transportation; or the gross receipts
of Supervisors prevailed in a lawsuit on airlines, but they were allowed to pass from that air commerce or transportation.
challenging an access fee for limousines it on to passengers. The charge was in the As explained below, the statute has been
dropping off passengers at Miami amount of $1 or $.50 per passenger invoked unsuccessfully in preemption
International Airport. That fee was $2.50 enplaning an aircraft at any of the state’s challenges to access fees for off-airport
per trip and did not apply to taxis operating public airports, depending on the gross rental car companies.
at the airport. A federal district court ruled weight of the aircraft. Half of the revenue
that the differential treatment was justified went to the state’s aeronautical fund and SETTING THE FEES
by the increased congestion caused by the other half went to the airport
limousines and their need for special operators in the form of unrestricted The Evansville test is highly deferential
parking areas. The court also concluded general revenues. to the business judgment exercised by
that the fee was not an unreasonable The U.S. Supreme Court upheld both airport operators in the establishment of
burden on interstate commerce. charges against constitutional challenges access fees. If a fee passes the test, it is
This decision is one of the latest filed by several airlines. Those challenges irrelevant that some other formula might
additions to a long line of cases involved claims that the charges violated reflect more exactly the relative use of
addressing the legality of access fees for the right to travel, that they intruded into airport facilities by individual users.
off-airport companies. Access fees have Congress’ regulatory jurisdiction over Two federal court cases illustrate this
been contested, on constitutional and interstate commerce, and that they principle. In one, the Eleventh Circuit Court
statutory grounds, in federal and state denied equal protection of the law. The of Appeals applied the Evansville test to the
courts throughout the country. This article court characterized the two charges as a Sarasota-Manatee Airport Authority’s
explains basic principles that are now fee for the use of airport facilities, and its off-airport rental car “user fee” for
settled and offers suggestions for airport analysis focused primarily on the airlines’ Sarasota-Bradenton Airport (SRQ). That
operators who seek to generate revenue interstate commerce argument. In the fee was 10% of gross receipts derived from
from access fees. key passage from its decision, the court automobile rentals to airport passengers.
ruled that a user fee is valid if it satisfies By contrast, hotels and motels were
THE EVANSVILLE TEST three criteria (commonly referred to as charged a “courtesy vehicle fee” of $50 or
the “Evansville test”): $100 (depending on vehicle size) or $800
Modern access fee law largely has per vehicle for an annual fee. The court
developed from a 1972 U.S. Supreme Court • The fee is based on some fair characterized the gross receipts formula as
case involving two government charges on approximation of use or privilege for use. “imperfect.” It upheld the user fee,
64 • ARN NOVEMBER 2OO7
however, on the basis that the formula was been based on the Anti-Head Tax Act. In policy. This exemption applies if
not an unfair approximation of the use one case, for example, a rental car suppression of competition is explicitly
being made of the airport facility. company invoked that statute in an effort authorized by, or is the foreseeable result
More recently, a federal district court in to invalidate the City of Palm Springs’ of, the enabling legislation. The state
Virginia applied the Evansville test to the access fee for the Palm Springs Regional legislature’s intent is critical if the enabling
Norfolk Airport Authority’s off-airport Airport (PSP). The Ninth Circuit Court of legislation lacks explicit authorization.
parking operator “privilege fee” for Appeals concluded that neither the text A comparison of two federal court
Norfolk International. That fee was 8% nor the legislative history of the statute decisions is instructive. One case involved
of gross revenues derived from suggests that it was intended to apply to the City and County of Denver’s access fee
transporting customers to or from the fees on ground transportation service. and operating regulations for off-airport
airport. Limousines, taxis and hotel Federal district courts in Louisiana and parking companies that provided shuttle
vehicles were subject to a different fee. New York have made similar bus service at the former Stapleton
The court concluded that it was rational determinations. International Airport. The Tenth Circuit
for the airport authority to impose a Recently, two preemption claims have Court of Appeals determined that Denver
percentage-based fee on companies that been asserted based on the Interstate was immune from an antitrust challenge
operated almost exclusively to Commerce Commission Termination Act of because Colorado law expressed a state
supplement the airport’s existing services. 1995 (ICCTA). With various exceptions, a policy of displacing competition in the
The Evansville test is not the only provision in that statute prohibits state and operation of airports and related activities,
standard that must be satisfied for access political subdivisions from levying or including off-airport shuttle bus parking. A
fees to survive constitutional challenge. If collecting a “tax, fee, head charge, or other more recent case involved the
such fees are not rationally related to a charge” on any of the following: individuals Susquehanna Area Regional Airport
legitimate government interest, they will traveling in interstate commerce by motor Authority’s award of an exclusive
be invalidated for violating equal carrier; the transportation of such contract for taxi pick up of passengers at
protection rights or for resulting in a individuals; the sale of passenger Harrisburg International (MDT). A
deprivation of property without due transportation in interstate commerce by federal district court ruled that the airport
process of law. This “rational basis review” motor carrier; or the gross receipts from authority was not immune from an
also is highly deferential. that transportation. This provision is similar antitrust claim because the enabling
Airport operators thus enjoy to the Anti-Head Tax in more than just Pennsylvania statute did not explicitly or
considerable discretion with respect to language. Congress enacted this provision impliedly authorize competition-displacing
the amount and applicability of access in response to a U.S. Supreme Court contracts. Ironically, the court still
fees. Appropriate factors to consider in decision upholding an Oklahoma sales tax dismissed the antitrust claim because only
the setting of the fees include: on purchases of interstate bus tickets. monetary damages were sought.
Neither ICCTA preemption claim Airport operators thus should identify
• Fee amounts can be based on an succeeded. In a state court case, the any provisions in their state statutes that
approximation of the overall Appellate Court of Illinois determined that authorize displacement of competition.
commercial benefit derived from the neither the text, structure or history of the In California, for example, the State
exploitation of the airport’s presence. statute indicates a congressional intent to Aeronautics Act actually requires public
• Fee amounts can reflect the airport’s preempt taxes on motor carrier airport operators to limit or prohibit
debt service, equipment, maintenance departures from airports to nearby or out- “destructive” business competition
and planned future development costs. of-state homes, hotels and businesses. when managing their facilities and
• Formulas can be flat rate, per trip or a The First Circuit Court of Appeals later granting concessions.
percentage of gross receipts reached the same conclusion in a federal
attributable to airport customers. court case concerning an access fee on CONCLUSION
• Formulas can vary according to ground transportation providers operating
business type and vehicle size. at Boston’s Logan Airport. Courts nationwide repeatedly have
upheld access fees against constitutional
Neither the Evansville test nor rational ANTI-TRUST DEFENSES and statutory challenges. These decisions
basis review requires airport operators to confirm that access fees are a valuable
make formal findings when access fees are Another, albeit less frequent, statutory means for airport operators to generate
established. Still, airport operators should challenge to access fees is that they revenue for operating, maintenance and
have an articulable and credible justification contravene federal antitrust laws. One capital improvement expenses.
ready in case a challenge is filed. defense available to airport operators is the
Local Government Antitrust Act of 1984. Terence R. Boga is a shareholder of the
THE PREEMPTION MYTH That federal statute precludes claims for law firm Richards, Watson & Gershon in
monetary damages for antitrust violations. the Los Angeles office. He is a member of
The most common statutory challenge State statutes also can provide a the firm’s Transportation Practice Group
to access fees is that they are preempted defense. U.S. Supreme Court precedent and provides general counsel services for
by federal law. Virtually all such makes local government agencies the Burbank-Glendale-Pasadena Airport
challenges have failed. exempt from federal antitrust laws when Authority. He can be reached at
Most preemption claims to date have they implement a clearly expressed state 213.626.8484 or tboga@rwglaw.com.
ARN NOVEMBER 2OO7 • 65
i
.
STATE OF CALIFORNIA
STATE BOARD OF EQUALIZATION

m
m
SESSMENT STANDARDS DIVISION
N STREET, MIC: 64, SACRAMENTO,
IP.0. BOX 942879. SACRAMENTO
CALIFORNIA
, CALIFORNIA 94279-0001)
second Dlarrlct.
Ftnt
BRAD SHERMAN
MEMBER
Los AmJercs
Dlsrrlct
ERNEST J. DRONENBURG. JR
Telephone: (9161 445.4982 Thtrd Dmrrct. San Oqo
MAl7iP.V K. FONG
Fourth Dmrct. Los Arwda
December 16, 1993 GRAY DAVIS

conmllw. s¶clamanm
BURTON W. OLIVER
Erecuvvs Dlmctw
No. 93/75
TO COUNTYASSESSORS:
RECENT COURTDECISIONS RELATING TO INTANGIBLES
Here are four recent court decisions that relate to the issue of intangibles.
Three of the cases dealt with the assessment of possessory interests. The
fourth case involved the valuation of a geothermal power plant.
For your information, copies of the following decisions are enclosed:
Countv of Oranqe v. Oranqe Countv Assessment Aopeals Board No. 1 (American

:elevision and Communications Corporation) (13 Cal.App.4th 524)
2. Emil Shubat v. Sutter Countv Assessment Appeals Board No. 1 (Nor Cal
Cablevision. Inc.) (13 Cal.App.4th 794, as modified February 24, 1993)
3. Countv of Los Anqeles v. Countv of Los Anqeles Assessment Aopeals Board

No. 1 (Dollar Rent A Car Svstems. Inc.) (13 Cal.App.4th 102)
Freeoort-McMoran Resource Partners v. Countv of Lake (12 Cal.App.4th 634;

iodified 13 Cal.App.4th 1066a)
If you have any questions concerning these decisions, please contact our Real
Property Technical Services Unit at (916) 445-4982.
Sincerely,
2LPk
Verne Walton, Chief
Assessment Standards Division
VW:kmc
Enclosures
524 COUNTY OF OlthGE v. ’
ORMUGECOUNTYASSESMENTAPPEUS BD.
13 Cal.@p.4tb 524; - CaLRpdd - [Jan. 1993]
[No. G012151.Fourth Dist., Div. Thre-e.Jan. 28, 1993.1 x

..:$
COUNTY OF ORANGE, Plaintiff and Appellant, v. -,
ORANGE COUNTY ASSESSMENT APPEALS BOARD NO. 1,
Defendant and Respondent;
AMERICAN TELEVlSION AND COMMUNICATIONS
CORPORATION, Real Party in Interest and Respondent.
,
SUMMARY
The trial court denied a county’s petition for a writ of mandamus seeking
to set aside a decision of a county assessment appeals board adopting the
position of a communications company concerning the property tax on its
.---...- -----_c---- -.------._ _-
.a.,--, -~-~---Y.~rl-~.%.\.’ I,,.&%%&&m&faGw -qs&k~--:
- ---m-e -- e-v -I-.----- -....-.-- ----- - Sk-
Jonathan H. Cannon, Judge.)
I The Court of Appeal affirmed. It held that, for purposes of determining

the value of the cable television system, the trial court did not err in
separating the company’s property into land and land improvements, fix-
,
I tures, and personal property, rather than considering all of the company’s
property as one appraisal unit for valuation purposes, since applicable law
suggests there is no wrong in rationally dividing property into component
parts for valuation purposes Further, the court held, the trial court did not
I err as a matter of law in rejecting the comparable sales and income ap-
proaches in establishing the property’s value. The court held that the selec-
tion of a particular method rests in the hoard’s discretion and is constrained
only by fairness and uniformity. The board determined that the income
I capitalization method using the annual franchise rent was appropriate for the
company’s possessory inter- it used the cost rephtcement approach to
value the remainder of the property. The board found that neither the
I
comparable sales approach nor the income approach was a reliable method
for this property, and that the cost method was. When that is so, the court
held, the cost method becomes preferable (Cal. Code Regs., tit. 18, 0 6,
subd. (a)). (Opinion by Wallin, J., with Moore, Acting P. J., and Sonenshine,
I J., concurring.)
I
COUNTYOF ORANGB v. 525
&UNGE COUNTY A!isalw APPEALS BD.
13 CaiAp~.4tb 524; - Cal.Rptr.2d - [Jan. 19931
\
HBXDNOTES
Classified to CMifor~GDigestof Official Reports
(la, lb) Property Taxes 8 42.~Assessment-Valuation-Cable Tele-

vision System-Separation of Property Into Components.-A
county assessmentappeals board, for purposes of determining the value
of a cable television system owned by a communications company, did
not err in separating the company’s property into land and land im-
provements, fixtures, and personal property, rather than considering all
of the company’s property as one appraisal unit for valuation purposes.
Taken as a whole, neither Rev. & Tax. Code, 0 51 (taxable value of real
property), in general, nor Rev. & Tax. Code, 9 51, subd. (e) (“real
property” means that appraisal unit that persons in marketplace com-
monly buy and sell as unit, or which is normally valued separately), in
particular, mandated appraisal of the property as a single unit. Appli-
cable law suggests that there is no wrong in rationally dividing property
into component parts for valuation purposes.
. ,._ _-.__--..-. _ -_._ --.- _---.
^*UI--rl.C s-a c rr-YCr- Y
-- - ___ -em ----
vision System-Valuation Approach-Appeal-Standard of Re-

view.-On appeal from a judgment denying a county’s petition for a
writ of mandate seeking to set aside the decision of a county assess-
ment appeals board adopting the position of a communications com-
pany regarding the property tax on its cable television system, the
appropriate standard of review was whether, as a matter of law, the
board’s valuation method was arbitrary, in excess of discretion, or in
violation of the standards prescribed by law, where the county’s attack
was directed at the validity of that method. The Court of Appeal was
required to look not to whether another approach might also have been
valid or yielded a more precise reflection of the property’s value, but
whether the method chosen was contrary to law.
(3) Property Taxes $42--Assessment-Valuation-Standard of Re-

view.-If a party challenging a property tax assessment claims only
that the assessmentboard erroneously applied a valid method of deter-
mining full cash value, the decision of the board is equivalent to the
determination of a trial court, and the trial court in turn may review
only the record presented to the board. The trial court may overturn the
board’s decision only when no substantial evidence supports it, in
which case the actions of the board are deemed so arbitrary as to
constitute a deprivation of property without due process. On the other
hand, when the party challenges the validity of the valuation method
526 COUNTY
ORANGE COUNTY ASSESSMENT APPEAS BD.
13 Cal.Apjutth 524; - Cal.&mti - [Jan. 19931
itself, the trial judge is faced with a question of law. The question is
whether the challenged method of valuation is arbitrary, in excess of
discretion, or in violation of the standards prescribed by law.
(4) Property Taxes 0 42.2-Assessment-Valuation-Cable Television

System--Valuation Approach .-A county assessmentappeals board,
for purposes of determining the value of a cable television system
owned by a communications company, did not err as a matter of law in
rejecting the comparable sales and income approaches in establishing
the property’s value. The three basic methods of valuation are the
reproduction cost or cost replacement method, the market data or
comparable sales method, and the income capitalization method. The
selection of a particular method rests in the board’s discretion and is
constrained only by fairness and uniformity. The board determined that
the income capitalization method using the annual franchise rent was
appropriate for the company’s possessory interest; it used the cost
replacement approach to value the remainder of the property. The
board found that neither the comparable sales approach nor the income
that the cost method
----------- was.
-.-- -- -._-. --.-When that -is- so,
.--_ ---.
~~~.-CZS.~~,.g@T&-X&~~
(a)). The board’s cost approach yielded a lower value than the other
two approaches, but that was because the assessor’s method had cap-
tured intangibles that were not subject to taxation. I
.*I
.
[See C&Jur3d, Property Taxes, $77; 9 Witkin, Summary of Cal.
Law (9th ed. 1989) Taxation, !$ 178 et seq.] i
f
COUNSEL
Terry C. Andrus, County Counsel, and Thomas C. Agin. Deputy County 1

Counsel, for Plaintiff and Appellant. . I
No appearance for Defendant and Respondent. 1
Shartsis, Friese & Ginsburg, Douglas MO and Paul M. Gordon for Real Party f4
in Interest and Respondent.
1
I
OPINION !
WALLIN, J.-The County of Orange (County) appeals the judgment deny-
ing its petition for writ of mandamus seeking to set aside a decision of the
c
&uN-rY OFLOS ANGELESV. : 103

D
COUNTYOF Los ANGELESASSESSMENT APPEALSBD.
13 Cal.App.rith 102; - CaLRptr.Zd - [Feb. 19931
issue in the present case. Although that determination could not extend to the
1
similar question now posed for the first time with respect to the other two
airports, which were not the subject of the prior action, the court further held
that taxable possessory interests in public property are grounded on physical
1
possession or use of it, and that the further rights granted the firms by the
concession agreements were not possessoryinterests. AccordingIy, the trial
court properly refused to reinstate the county’s theory of valuation and its
resulting assessments.(Opinion by Fukuto, J., with Boren, P. J., and Nott, J.,
I
concurring.)
EIEADN~~S
I
Classified
(I)
to CaliforniaDigest of Official
Judgments 0 81-Res Judicata-Collateral

Reports
Estopped-Doctrine,
I
Collateral estoppel forecloses relitigation of an issue that is identical to
one decided in a prior case involving the same party or parties or those
in privity with them and which resulted in a fina jud,ment on the
merits.
I
[See Cal.Jur.3d, Judgments, $236 et seq.]
(2a, 2b) Judgments 0 97-Res Judicata-Collateral

. .
Estoppel-Matters
I
Concluded-Interest in Real Property-Taxation of pbssessory In-
terest.-In denying a writ of mandate sought by a cbunty challenging
a decision of its assessment appeals board as to the extent of the taxable /
possessory interests of several car rental firms at three airports in the
county, the superior court properly invoked its prior judgment against
the county in an earlier case involving the same parties at one of the
II
I airports. The judgment had become final and the primary issue was
identical, even though the present case concerned later assessmentsand
different agreements, since the terms that generated the possessory
interests in question were the same, as were the facilities, and hence so
were the interests themselves. There had also been no change in the
content or character of the law subsequent to the fast judgment.
However, similar questions posed for the first time with respect to the
other two airports were not precluded.
(3) Judgments $96--Res Judicata-Collateral Estopped--IMatters

Concluded-Interest in Real Property-Questions of Law.-
Whether an arguably precluded issue is one of law or more properly a
mixed question of law and fact is ultimately inconsequential; coIIatemI
* a,.‘I..p-,-(&
-. .
CO7JNrYOFOB&BV. 'I- ' . - , -527
ORANGE COUNTYA.vassmm APPEALS BD.
13 Cal.App.4th 524; - CaLRptr.2d - [Jan. 19931
Orange County Assessment Appeals Board No. 1 (Board), which adopted

the position of taxpayer American Television and Communications Corpo-
ration (American) concerning the property tax on American’s cable televi-
sion system. The County contends the Board erred as a matter of law by: (1)
failing to consider the appropriate appraisal unit as a whole for valuation
purposes: and (2) rejecting the comparable sales and income approaches in
establishing the property’s value. We affirm.
The Board heard several days of testimony and made certain findings. The
trial court relied on that testimony in ruling on the petition for writ of
mandamus. We summarize the Board’s findings:
American owns and operates a cable television system which provides
services for a fee to subscribers in the City of Orange and an abutting
unincorporated area. To do so, it obtained requisite licenses, permits and
approval to operate in that geographical area. It receives television signals
and transmits them to the subscribers through a network of trunk and feeder
cables, some of which are above and some of which are below ground.
-.-.
-.-- - --- -.- -__- _.._
- -------_.-.- -,&m&cm
..;~-~-L;--~~-~L~.-~;;;;r;;-,- ,:-~\?ms
..c-- and- -=*;.
uses-..-
taxable tan@l_e_pEjerty to carry on its business,
=-~------
- r~.*.“.“.e-“...~.~.z4.-. 37
~~&g.+&-.~z;LT&>
-----ll=f=qp=f-flp w-- -
antennas, local origination television equipmknt, furniture and fixtures, con-
verters, and surplus and test equipment. American owned some of its taxable
tangible property when it began operations in 1980 and acquired more later. E
As Dart of the aDDrova1urocess, American entered into a franchise agree- -
ment bith the City and C&mty of Orange which included the right ti use
public property for its cable distribution network. That right constitutes a
taxable possessory interest in public property. (Rev. & Tax. Code, 3 107.7.)
For the lien dates in 1987, 1988, and 1989, the assessorcalculated the full
cash value of American’s property at $30 million, $35 million, and $38
million, respectively,* and American challenged those values before the
Board. To obtain the values the assessor used a “unitary approach,” deter-
mining all of American’s property should be valued as a single appraisal
unit, applying a valuation approach, and allocating the total value among the
various component parts of the appraisal unit.
To support his use of the “unity approach,” the assessor presented evi-
dence of two other methods. First, he presented a comparable sales ap-
proach, which involved taking purchase prices for other cable television
‘Although the assessor determined those values, the amounts actually enrolled were
considerably less due to the constraints of the California Constitution, article XIII A.
popularly known as Proposition 13. The enrolled amounts were approximately $16 million,
$18 million, and $19, million respectively.
a .
, 52.8 Corn OF ORANGE V. .
hANGI t%JNTY ASSESSMBNTAPPEALSBD. a
13 Cal.App.clth524; - CaLRptr2d - [Jan. 19931
I .$
systems in southern California, determinin g the price per subscriber, and ‘48 P
multiplying that figure by the number of American’s subscribers. The Board .@
I found that approach unreliable because it included the value of nontaxable
intangible assets such as existing franchises or licenses to construct, a
’ *
*
subscriber base, marketing and programming contracts, management and ..+
operating systems, an in-place work force, going concern value, and
I goodwill.
The assessor also presented the income approach, which involved multi-
plying American’s net income by a capitalization rate. The Board rejected
I this approach for the same reason it rejected the comparable sales approach,
it did not factor out the value of nontaxable intangible assets. The assessor
did not present evidence as to how the property would be valued using a
third accepted method of valuation, the replacement cost approach.
I
The Board accepted the testimony of American’s three expert appraisers
who identified American’s taxable tangible property and opined as to its
value. For all items except American’s possessory
.
interest, the property was
-- m.-“d.“--7.-- ___
;--- I-u ‘.--“‘“.’ A-u;c..H-... .._- -.. - .- _._....L.- .
.-.‘)-. --. .---_
1-&%?&?&
- - - -
--A..-- -ata--- - ---- _I___ __-___ _----...--.--I_- - -*+v.
personal property.2
I As to the fixtures and personal property, the board considered all three
methods of valuation and determined the replacement cost approach was the
most reliable. It would not include nontaxable intangible value, and it best
I equalized assessmentssince the assessorhad traditionally used that approach

in valuing fixtures and personal property of similar businesses. The Board
used the testimony and data from American’s witnesses to calculate the
appropriate replacement cost for these items.3 it calculated the value for the
I undergrounding, which was categorized as land and land improvements, by

taking its cost and assigning it an infinite life with no trending for the years
in question.4
I For the possessory interest in public property, the Board used the income
capitalization method, which is presumptively correct under Revenue and
Taxation Code section 107.7. It found American’s franchise fees were the
I
market rent which paid for the possessory interest and capitalized them at a
The land and land improvements were comprised of the leasehold improvements and the
undergrounding (the joint trench and back build); the fixtures were comprised of the cable
distribution plant (except for the undergrounding), headend.tower. antenna. and earth station:
I
and the personal property was comprised of the office furmture, computers. tools, csblecast-
ing equipment. radios and test equipment. electronic ad equipment, converters, and supphes.
3Theseitemstotaled$6,695,366 in 1987, $6,404,988 in 1988, and $6,172.436 in 1989.
‘The values were $2,401,080 for !987, $2,671,931 for 1988, and .S2,SO5,000for 1989.
I
COUNTYOFthANGEV.
ORANGBCOUNTYASSESSMENTAPPEALSBD.
13 Cal.App.4th
524; - CaI.Rptr.Zd - [Jan. 19931
10 percent rate; yielding a $5 million value for each of the three years in
question. The Board determined that American’s total value for the years in 0
question was greater than that &rolled, due to the effect of Reposition 13,
and that the enrolled value should remain unchanged.5 The assessor was
ordered to change the assessed values for the years in question to those e
found by the Bo&d.
(la) The County argues the Board erred as a matter of law by failing to
consider all of American’s property as one appraisal unit for valuation
purposes. In other words, the County claims the Board should not have
separated the property into land and land improvements, fixtures, and per-
sonal property in determining the value of American’s property. We con-
clude the Board acted properly, but first we must consider the applicable
standard of review.
,“,-.-- _.e... -- - _ _- - - _ -_ . __ _”
(2a) American asserts the Board’s determination, and that of the trial
- w-o--. -.-a----... ,P..ly .-_
-----
Cal.Rptr. 154, 544 P.2d 13541, set out the proper standard. (3) “If the
[petitioner] claims only that the [board] erroneously applied a valid method
of determining full ce .‘: value, the decision of the board is equivalent to the
determination of a trial court, and the trial court in turn may review only the
record presented to the board. [Citations.] The trial court may overturn the
board’s decision only when no substantial evidence supports it, in which
case the actions of the board are deemed so arbitrary as to constitute a
deprivation of property without due process. [Citations.] On the other hand,
when the [petitioner] challenges the validity of the valuation method itself,
the trial judge is faced with a auestion of law. [Citations.] That question . . .
is whether the challenged method of vaiuatlon is arbitrary, in excess ot
discretion, or in violation of the standards prescribed by law.” (Id. at p. 23;
see also County of Stanislaus v. Assessment Appeals Bd. (1989) 213
Cal.App.3d 1445, 1450 [262 Cal.Rptr. 4391.) I
(2b) The County’s attack is directed at the Board’s method of valuation,
so we and the trial court look to see whether, as a matter of law, the method
was arbitrary, in excess of discretion, or in violation of the standards I
prescribed by law. (Bret Harte Inn, Inc. v. City and County of San Francisco,
The totals were $14.096.446in 1987, $14,076,919 in 1988,and 13,977,436in 1989.These
amounts are less than amounts actually enrolled. At oral argument the County conceded the
Board’s ruling would actually lower the enrolled amounts to these levels. I
530 Courm OF OIUNGE v.
ORN~GE CotMTy ASSESSMENTAPPEALS BD.
13 Cal.App.dtb 524: --cahRptr.2d - [Jan. 19931
supra, 16 Cal.Sd at p. 23.)6 In this regard we look not to whether another

approach might also have been valid or yielded a more precise reflection of
the property’s value, but whether the method chosen was contrary to law.
(Trailer Train Co. v. State Bd. of Equalization, sup-a, 180 Cal.App.3d at p.
585 [selection of a particular method of valuation from among valid methods
rests in the board’s discretion]; see also, Union Pacific Railroad Co. V. State
Bd. of Equalization (1991) 231 Cal.App.Sd 983, 992 [282 Cal.Rptr. 7451
[inappropriate application of an otherwise valid valuation method could be
considered a factual question].) “The law requires only that an assessor
adopt and use a reasonable method-neither a trial court, nor this court, can
reject a method found by the board to be reasonable merely because, in [its]
nonexpert opinion, another method might have been better.” (Texaco, Inc. v.
County of Los Angeles (1982) 136 Cal.App.Sd 60, 63 [ 186 CaLRptr. 161, fn.
omitted.)
Relying on Revenue and Taxation Code section 51, subdivision (e),

(lb)
the County says the Board erred as a matter of law by failing to value
American as one unit, “the whole system itself.” That subdivision is of no *
and sell as a unit, or which are normally valued separately.”
Subdivisions (a) and (b) deal with the determination of a property’s value
as the lesser of its full cash value and its base year value (1975) enhanced by
an inflation factor. Those subdivisions, say nothing about the propriety of
dividing the appraisal unit into components to determine its value. Further,
subdivision (e) states, albeit ungrammatically, that an “appraisal unit” can be
that “which are [sic] normally valued separately.” Taken as a whole, neither
section 51 in general, or subdivision (e) in particular, mandates appraisal of
the property as a single unit.
Rule 22(b) of the Orange County Assessment Appeals Board and Assess-
ment Hearing Officer Rules is similarly of no avail. That rule provides that
We reach this conclusion recognizing there is often a fine line between a challenge to an
application of a valuation method and a challenge to the method itself. (Trailer Train Cu. v.
State Bd. ofEqualizarion (1986) 180 Cal.App.3d 565,582 [225 Cal.Rptr. 7171; seealso People
v. Louis (1986) 42 Cal3d 969, 984-988 [232 Ca1.Rpt.r.110, 728 P.2d 1801[discussing mixed
questions of law and fact].) Here, the Board opted to value American’s property in separate
sub-units and to apply the cost method of valuation, after determining the ssessor’sapproach
to valuation improperly captured intangibIe asset value. That determmation involved at least
a mixed question of law and fact and, basedupon the Board’s expertise. should be adopted by
the courts in reviewing the propriety of the method selected. (See Shell WesrernE & P. Inc.
v. Counfy of Luke (1990) 224 Cal.App.3d 974, 979 1272 Gl.Rptr. 3131 [assessmentappeals
boards have special expertise in property valuation and their factual determinations are
entitled to deference].)
--
I
COUNTYOFORANGE v. 531 l I
ORANGE COUNTY ASSESSMENTAPPEALSBD.
i$ 13 Cal.App.4th 524: - Cal.Rptr.2d - [Jan. 19931
p. - I
ki.
in considering a reduction in assessed value, the Board must “make
8-, a
determination, of the’ full value of the whole property.” Nothing in the rule
‘says how the Board must make that determination, let alone that it may not I
value components separately. It does provide the Board may “adjust the
value of the parts,” a task seemingly impossible unless the parts have been
separately valued. And, contrary to the County’s assertion that “the most
appropriate unit for valuation is the whole system itself,” the testimony I
before the Board established that the cable distribution plant of cable
television companies is valued separately, usually using the cost approach.
Further support exists for the concept that the components df taxable I
property may be separated for valuation purposes. Revenue and Taxation
Code section 107.7 deals with valuation of cable television possessory
interests and provides the preferred method of valuing that portion of a cable
I
television company’s property shall be capitalizing the annual rent. (Rev. &
Tax. Code, 0 107.7, subd. (b)(l).) It says nothing about changing the pref-
erable methods for valuing other types of taxable property. (Cal. Code Regs., I
. ..--_--
.A-*.
__...ti
m,b-rC-lr:~lL-
_..- .._._
r I .
. _
..\..-er*
. .-.._-
-..a.Azm..~
. _-.-
--we.-
--_A.- tit.
-
18.L 3.$,.4,-6 &S ~i&tk&gx&md
Y.*N~L~~~~~~~~~~~-~~t~~~o~~~~~
m@wds~ under_ m!xr-cb?x!w%w. _
-. li
2m_-_-C--__.-. A- --
+%EF=--
other asp% of the property when the preferred methods differed would
require separating the two facets of the property for valuation purposes, as
was done here.’ I
Title 18, section 461, subdivision (d) of the California Code of Regula-
tions states that where there are declines in value (here, the fixture portion of _
the cable distribution plant), “Land and improvements constitute an appraisal @I
unit . . . [and] fixtures and other machinery and equipment classified as
I
‘The Legislature’s observation in enactmg Revenue and Taxanon Code sectlon 107.7 that
“[p]ossessory interests of cable television systems do not sell by themselves” does not alter
the analysis. (Stats. 1988, ch. 1630. $ l(d).) The section codified the holding in Cox Cable
San Diego, Inc. v. County ofSun Diego (1986) 185 Cal.App.3d 368 I229 CaLRptr. 8391 that
possessory interests of cable television companies constitute taxable property. (Cowry of I
Sranislaus v. AssesstnenrAppeals Bd., supra. 213 CaLApp3d at p. 1452, fn. 3.) The Legisla-
ture’s observation in the enabling legislation merely justifies use of the income capitalization
method so the value of such property can be captured and assessed.(See id. at p. 1455.)
The County reasonedat oral argument that becausethe possessoryinterest is worth nothing
without cable in place along the right-of-way, the value of the cable was wedded to the
possessoryinterest and should not have been valued separately. But the preferred method of
capitalizing that portion of the franchise fee attributable to the possessoryInterest takes the
County’s reasoning into account. A cable television company would not “rent” the nght-of-
way unless it intended to use it. Thus, capitalizing that portion of the franchise fee reflects the
value to the cable company of having the right-of-way with cable in place. I
532 Corn OF OIUNGE r;.
. ORANGECO- -
13 C~I.A~~AUI 524; - GdPpu.2d - [Jan. +31
a improvements constitute a separate appraisal uniL” The rule contemplates a ”

division in the appraisal unit for valuation ~urposes.~ 1
Other sources rebut the County’s claim that a taxpayer’s property cannot
be separated for valuation purposes. Title 18, se&m 3 of the California
Code of Regulations provides than an assessor“shall consider one OTmore”
of the three acceptable valuation approaches. (Italics added.) Similarly, title
18, section 324 provides the board “shall determine whether the method(s) ’
used was (were) properly applied,‘* and “[t]he findings shall also include a
statement of the method or merhodr of valuation used . . . .” (Cal. Code
Regs., tit. 18, 0 324, subds. (a) and (e), italics added.) One way to use ;
multiple methods would be when value is best calculated by breaking down :-
the property into component parts.
To summarize, applicable law suggests there is no wrong in rationally

dividing property into component parts for valuation purposes. (Compare .
_ McDonnell Douglas Corp. v. County of Los Angeles (1990) 219 Cal.App.3d ’
-----e-----e
‘I--.-&-- .-WI.-
---- -c-.,.-
---
_
-rl--.--
-2--=
1
_*-- --~~J&J&pg.-.29ikarate~
m--v-__ pmcehdw@-~~:operly Vahd aS -3
ceE~=,T&f$&j-*m-
-
economiGiiii~i~&~ssessor was not GGGiGiX EFE

its individual &Xrictions].) The Counb has provided no -authority to the
contrary. The Board was within its discretion to separate the property as it
II
(4) The County urges the Board erred as a matter of law by rejecting the
comparable sales and income approaches in establishing the property’s
value. Using the same review standards discussed above, we conclude it did :
not.
The three basic methods of valuation are the reproduction cost or Cost
replacement method, the market data or comparable sales method, and the
income capitalization method. (Pacific Mutual Life Ins. Co. v. County of
Orange (1985) 187 Cal.App.3d 1141, 1147 [232 Cal.Rptr. 2331.) The selec-
tion of a particular method of valuation from among the valid methods rests
in the Board’s discretion. (Trailer Train Co. v. State Bd. of Equalization,
supra, 180 Cal.App.3d at p. 585.) It is constrained only by fairness and
uniformity. (ZTT World Communications, Inc. v. County of Santa Clara
(1980) 101 Cal.App.3d 246, 252 [I62 Cal.Rptr. 1861.)
*By engaging in this reasoning, we do not hold fixtures must always be valued apartfrom
the land and land improvements. We merely provide an example which helps refute the
County’s assertion that the converse is true.
COUNTY OF O~UNGE v. 533
ORANGECOUNTYASSESSMENTAFFEALS BD.
13 Cal.App.4th 524; - Cal.Rprr.2d - [Jan. 19931
*
Here, the Board determined the income capitalization method using the
annual franchise rent was appropriate for American’s possessory interest. It
was tbe’preferred method (Rev. & Tax. Code, 3 107.7, s&d. (b)(l)), and the
County does not contend it was improper.
The County does attack tbe Board’s use of the cost replacement approach
to value the remainder of the property, contending we held in Pacific Mutual
Life Ins. Co. v. County of Orange, supra, 187 Cal.App.3d 1141 that the
income capitalization approach was “a preferred method for valuing all
income producing real property . . . .” Not so. All we held there was that
the cost reproduction approach was not appropriate where it was “designed
solely to capture the specific utility of property to a particular owner. . . .”
(Id. at p. 1149.)
Several cases have upheld the validity of the cost replacement approach
for tangible taxable property. (Bret Harte inn, Inc. v. Cit> and County of San
Francisco, supru, 16 Cal.3d at pp. 21-23,25 [cost approach is not inherently’
arbitrary although it was in that instance]; May Depurtment Stores Co. v.
--Be -&.-“>*I
-__,------..- -
-- . e--e.-s-.-_.... County of Los Angeles
-__ ---- (-1987) 196 Cal.App.3d
-._- ___- .__.. _. . _. 755,
-_ --.-769-7721242 Cal.R~tr.
--_a, *_...--- --
I-..-- .u---.--..~T. ,:-~~~~~~~~~~~{~~-~~~~~~~~~~-.
5835; Midstate fheatres, I&. I. Co&y of Staklaus (1976) 55 Cal.Apg3d
864, 882 [ 128 Ca1.Rpt.r. 541; Guild Wineries & Distilleries v. County of
Fresno (1975) 51 Cal.App.3d 182, 188-189 [ 124 CaLRptr. 961 [single open
market sale does not bar use of replacement cost approach]; Western Title
Guarunry Co. v. County of StanisZaus(1974) 41 Cal.App.Sd 733, 739-741
[116 Cal.Rptr. 3511.) The County argues the other two methods were
preferable. The comparable sales method is preferable “when reliable market
data are available.” (Cal. Code Regs., tit. 18, $j4.) The income method is
preferable “when reliable sales data are not available and the cost ap-
proaches are unreliable.” (Cal. Code Regs., tit. 18, 0 8, subd. (a).)
Here, the Board found that neither the comparable sales approach nor the
income approach was reliable and that the cost method was. When that is so,
the cost method becomes preferable. (Cal. Code Regs., tit. 18, $ 6, subd.
(a).)
The County seems to reason that because the cost approach yielded a
lower value than the other two approaches, it did not yield an assessmentat
full value as required by law. (Rev. & Tax. Code, fi 110.) But the Board
correctly reasoned why the values differed. The assessor’s method captured
intangibles which are not subject to taxation such as existing franchises or
licenses to construct, a subscriber base, marketing and programming con-
tracts, management and operating systems, an in-place work force, going
concern value, and goodwill.
rpnlnrfimt2nt snnrnach --
534 COUNTY OF ORANGE v.

ORANGE COUNTY ASSBSSMENTAFFEALS BD.
13Cal.AppAtb524; - CaJ.Rptr.2d - [Jan 19931
The assessorand board may apply a method of assessmentwhich reflects

the value enhancement of tangible taxable property due to the presence of
intangible property. (County of Stanislaus v. AssessmentAppeals Bd., supra, _
213 CaLApp13d at pp. 1454-1455.) The Board did so here when it applied
the income capitalization method prescribed by Revenue and Taxation Code
section 107.7 to value the possessory interest. (Zbid.) Any additional value
must have been attributable to intangibles which enhanced the value of the
business, not the propert>: e.g., m-place work force, going concern value, .:.!
and goodwilL 4
-.*
The Board’s choice of the cost replacement method for fixtures and
personal property was not arbitrary, an abuse of discretion, or contrary to
law. (Bret Harte Inn, Inc. v. Ciry and County of San Francisco, supra, 16
Cal.3d at p. 23.) The Board considered all three methods and selected the
cost replacement method because it best expressed the value of American’s
property and was necessary to achieve fairness and uniformity by equalizing
assessments.(ITT World Communications, Inc. v. County of Santa Clara,
The judgment is affied.
Moore, Acting P. J., and Sonenshine, J., concurred. .
9At oral argument, the County conceded there would be a problem if the assessorbad
enrolled the entire $38 million value he had calculated because it might have included
impermissible business value intangibles such as good will. The County assertedthis potential
problem was avoided becausethe assessoronly enrolled a value of $19 million, and reasoned
that figure eliminated any business value intangibles.
But the $19 million figure was arrived at by taking the 1975 base value pursuant to
Proposition 13 and adding new property acquisitions and the permissible inflation enhance-
ment. It did not purport to have anything to do with scientifically eliminating business value
intangibles from the total properry value. Conversely, American presentedexpert testimony,
which the Board accepted, affiatively showing the value of the property apart from
business value intangibles. Thus, the Board only had one analytically and procedurally proper
valuation before it. The County admitted as much in oral argument when it reasonedthat if
the assessorerred, it was in assuming (as opposedto proving) that the $19 million reduction
in the enrolled value accounted for all business value intangtbles.
794 SHUBATV. SUTTERCOUNTYASSESSMENTAPPEALSBD. 1
[No. C011938.Third Dist. Jan. 28, 1993.1
[As modified Feb. 24,1993.]
EMIL G. SHUBAT, as Assessor, etc., Plaintiff and Appellant, v.

SUTTER COUNTY ASSESSMENT APPEALS BOARD NO. 1,
Defendant;
NOR CAL CABLEWSION, INC., et al., Real Parties in Interest and
Respondents.
After a corporation purchased the outstanding shares of entities involved

in the cable television business, a county assessorreassessedthe value of the
local cable television service. The assessor allocated a portion of the total
calculated value to tangible assets and the remainder to an intangible asset
identified as the service’s taxable possessory interest in the public rights-of-
way. The service objected to the reassessmentand filed an application for
reduction. The assessmentappeals board generally agreed with the assessor
on the total value, but also determined that the value included certain
nontaxable intangibles. The assessor filed a petition for a writ of adminis-
trative mandamus challenging the board’s allocation of value to nontaxable
intangibles. The trial court concluded the record supported the allocation and
denied relief. (Superior Court of Sutter County, No. 40970, Terence J.
Keeley, Judge.)
The Court of Appeal affirmed. Initially, the court held that an assessment
appeals board’s factual determinations are entitled to the same deference and
respect due a judicial decision. The court also held that the record supported
the board’s determination that the cable television service’s right to do
business, as well as the “enterprise value” of it as a going concern, had a
separate value. Thus, the court held that the board’s method of allocating
one-third of the residual value, after assigning amounts to the tangible assets,
to the possessory interest and the remainder to other nontaxable intangibles
was reasonable under the circumstances. (Opinion by Puglia, P. J., with
Blease and Sparks, JJ., concurring.)
SHUBATv SUTTERCOUNTYASSESSMENT APPEALSBD. 795
13CalApp.4th794; - Cal.Rptr.Zd- [Jan.19931 .;
'ill
HEADNOTES
Classifiedto California Digestof Official Reports
(1) Property Taxes 0 33-Assessment-Validity of Assessment-Coun- 1:

ty Tax Assessment Appeals Board-Judicial Review.-The factual 1
determinations of a county assessmentappeals board, as an agency of ,.u
constitutional origin, are entitled to the same deference and respect due II
a judicial decision. Where it is claimed the board applied an improper ; , l!
method of valuing a taxpayer’s assets, a question of law is presented, 1)
and a court may determine whether the challenged method of valuation
is arbitrary, in excess of discretion, or in violation of the standards
prescribed by law. Where it is claimed the board erroneously applied a /(/I
proper method of valuation, the decision may be overturned only when
no substantial evidence supports it, in which case the actions of the ’i
1lr II
board are deemed so arbitrary as to constitute a deprivation of property _
without due process.
%I! ii
I
(2) Property Taxes 0 U-Subjects of Taxation--Real Property-Pos-
sessory Rights-Cable Television Service: Radio and Television
0 6-Cable Television-Franchises-Components.-A cable televi-
sion service’s possessory interest in the public rights-of-way for trans-
mission of its service, although intangible, is taxable. However, the
right profitably to use public easements is not the only intangible asset
such a service possessesby virtue of its franchise rights. Cable televi-
sion franchises consist of two primary components, the right to use the
public streets to lay the cables and the right to charge a fee to
-.---------- ----. y-T-;‘
‘f-l’“--~:~-~-y~.~--. _- _.__
2
.
(3) Property Taxes 8 U-Subjects of Taxation-Intangible Assets-
Right to Conduct Business.-In an action challenging a county as-
sessment appeals board’s allocation of value to a cable television
service’s tangible and intangible assets, the board properly concluded
that the cable television service’s right to do business had a separate
value. The right to do business is an intangible asset exempt from
property taxation. Moreover, the board’s conclusion that favorable
franchise terms, which made the cable television service more econom-
ical than was typical, had no value separate from the right to do
business, was effectively a conclusion that the favorable terms were
subsumed within, and enhanced the value of, the cable television
service’s right to do business.
(4) Property Taxes 9 42.2-Assessment-Valuation-Cable Television

Service-Intangible Assets-Enterprise Value.-In an action chal-
lenging a county assessmentappeals board’s allocation of value to a
796 SHUBAT v. SUTTER COUNTY A~~IXSMENT APPEAU BD.
13 CaLAp~.ti 794; - Cal.RptrsZd - [Jim 19931
I 11::
!, : cable television service’s tangible and intangible assets, the record
I’
/[,I
contained substantial evidence that the service had value apart from the
franchise and tangible assets. Whether labeled as a subscriber list,
IN going concern value, or enterprise value, the record supported the
ij existence of value attributable to the operational nature of the service.
I 3
I 1
I These intangibles relate to-the business and relate to real property only
I
in their connection with the business using it. Thus, although intangible
)!
values may be reflected in the value of a possessory interest, they are
/
I
not necessarily subsumed as a matter of law.
I
(9 Property Taxes 0 33-Assessment-Validity of Assessment-Coun-
lrlh
i, ty Tax Assessment Appeals Board-AllocaCion of Value.-In au
action challenging a county assessment appeals board’s allocation of
II . value to a cable television service’s tangible and intangible assets,
ceedings before an assessmentboard, the officers are presumed to have

properly performed their duties, and the taxpayer has the burden of
showing that the assessments were not fair and equitable. A State
Board of Equalization rule enumerating the permissible modes of
assessing possessory interests does not purport to be exclusive, and
when no sound or practicable basis appears for apportionment of
income as between enterprise activity and the property itself, then a
method may be employed which imputes an appropriate income to the
property. After assigning amounts to the tangible assets, the board
reasonably allocated one-third of the residual value to the possessory
interest and the remainder to other intangibles. None of these intangi-
bles had value to the service independent of the others; there was no
basis for attributing a higher value to any one of the intangibles, and no
basis for attributing a higher value to the possessory interest.
[See Cal.Jur.3d, Property Taxes, $78; 9 Witkin, Summary of Cal.

Law (9th ed. 1989) Taxation, 0 180.1
Darrell W. Larsen, County Counsel, and Ronald S. Erickson, Assistant

County Counsel, for Plaintiff and Appellant.
No appearance for Defendant.
Douglas MO, Shartsis, Friese & Ginsburg and Paul M. Gordon for Real
Parties in Interest and Respondents.
SHUBATv SUTTERCOUNTYASSESSMENT APPEALSBD.
13Cal.App.4th794; - Cal.Rptr.Zd- [Jm 19931
OPINION
PUGLIA, P. J.-Plaintiff Emil G. Shubat, the Sutter County Assessor

(Assessor), appeals from the judgment of the trial court denying his petition
for writ of administrative mandamus. The Assessor challenges the determi-
nation by defendant Sutter County Assessment Appeals Board No. 1 (Board)
of the taxable value of real party in interest Nor Cal Cablevision, Inc. (Nor
Cal). The Board found a portion of Nor Cal’s overall value attributable to
non-taxable intangible assets. The Assessor contends this determination is
(1) contrary to law and (2) not supported by substantial evidence. We
disagree and shall affirm.
Effective October 1, 1986, respondent and real party in interest Continen-

tal Cablevision, Inc. (Continental) purchased the outstanding shares of sev-
eral subsidiaries of McClatchy Newspapers involved in the cable television
business, including Nor Cal. Nor Cal provides cable television service to
residents in both Sutter and Yuba Counties. After certain postsale adjust-
ments, the total purcjase price paid by Continental was $127.648.647.
In order to fulfill his statutory obligation to assessproperty at its full value

(Rev. & Tax. Code, 0 401), the Assessor reassessedthe value of Nor Cal at
the time of transfer. The computation of property value normally i&olves
one or more of three general methods of valuation. The “market’* approach
looks at recent sales of ComDarableoroDertv. including that beine valued.
of-the property. This present value depends-upon not only-the magnitude and
duration of the projected income stream but the discount rate used. The
higher the discount rate the lower the present value of the property. (Cal.
Code Regs., tit. 18, 0 8, subd. (d).) The third method of valuation, the “cost”
approach, looks at the cost of replacing the property less accrued deprecia-
tion. (Cal. Code Regs., tit. 18, 0 25, subd. (c).)
In computing a total value for Nor Cal, the Assessor used a market
approach based on the price paid by Continental. Beginning with the amount
reported by Continental as attributable to the purchase of Nor Cal, and
making certain adjustments not relevant to this dispute, the Assessor arrived
at a total value of $37,872,000.’ Of this amount, $16,226,260 was allocated
to tangible assets, such as land, buildings, equipment and other personal
‘The total assessmentwasapportionedbetweenSutterand Yuba Countiesto arrive at a
taxable value in SutterCountyof $19,887,206.
Thereis no dis
I, ;
: i I,
IllI. i 798 SHUBAT Y.
111
! property: the remainder was allocated to intangibles. The only intangible
1i identified by the Assessor was Nor Cal’s taxable possessory interest in the
i(; public rights-of-way for delivery of cable signals, to which the entire
residual amount was allocated.
i,i.
Ill I
Nor Cal objected to the reassessmentand filed an application for reduc-
tion.2 The Board was convened to hear Nor Cal’s application. At the hearing
before the Board, Nor Cal presented the report and testimony of its expert
John E. Kane, Kane used both a market and income approach to arrive at a
total value for Nor Cal of $28 million. For the income portion of his
analysis, to which Kane assigned the greatest weight, a discount rate of 16
percent was used based on the risk associated with the business and the
corresponding cost of capital.3
-~~~~~,~~~sa~~~~~-~~~~-~~---..--.-~---.=.T~r~of - - 1I
“excess earnings” method to allocate value to the intangibles. This metho&
required computation of the projected income attributable to the tangible
assets by multiplying the total value of such assets by a discount rate of 13
percent, which Kane determined to be an appropriate rate of return based on
the lower risk associated with tangibles. This income amount was then
subtracted from the total projected income to come up with an income
amount attributable to the intangibles.
Kane identified six intangible assetsof Nor Cal, to wit: (1) sub&iber list,
(2) franchise operating rights, (3) a lease (not pertinent to this dispute), (4)
assembled work force, (5) noncompete agreement, and (6) going concern.
The second of these, the franchise rights, Kane further subdivided into (1)
the right to conduct business, (2) favorable franchise terms, and (3) the
possessory interest in the public rights-of-way.
The subscriber list referred to by Kane was actually the subscriber base,
i.e., Nor Cal’s customers. Using an income approach, Kane determined an
income amount appropriate to this asset and applied a discount rate of 16
percent to compute a present value. After subtracting this amount from the
value between the two counties. Although, this appeal involves only the assessmentfor Sutter
County, for the sake of convenience, we shall refer throughout this opinion to the combined
value of the vanous assetsof Nor Cal.
2The original application was actually filed on behalf of Continental. However, the matter
was thereafter prosecuted in the name of Nor Cal.
‘As explained by Kane, the discount rate fluctuates with the level of risk associated with
the property or business. It representsthe expected return on investment. The greater the rusk
associated with the property or business, the greater the return demanded by mvestors and
hence the greater the discount rate. The greater the discount rate, the lower the present value
of the asset.
SHUBATv. SUTTERCOUNTYASSESSMENT APPEALSBD.
13CaI.App.4th794, - Cal.Rptr.Zd- [Jan.19931
total attributable to intangibles, Kane applied the remaining income to the

three franchise rights in equal proportions. Kane then computed a present
value for these intangibles using a higher discount rate than that applied to
the tangible assetsbecause of the higher risk involved. Nineteen percent was
used for the right to conduct business and favorable franchise terms, while
twenty percent was used for the possessory interest in public rights of way
because of the added need to compensate for property taxation of this asset.
Through this income valuation method, Kane arrived at values for these
intangibles as follows:
Subscriber list $5,202,124

Right to conduct business $4,272,884
Favorable franchise terms $4,272,884
Possessory interest in public
rights of way $4,059,929
Of th&e amounts, Kane independently computed values for the favorable
franchise terms and possessory interest using other methods. The amounts
computed cqr-roborated his one-third allocation. The remaining value of Nor
Cal was divided among the other intangible assets by various methods, with
going concern allocated the residual of $518,155.
The Board generally agreed with the Assessor on total value of Nor Cal.
However, the Board agreed with Kane this figure includes certain non-
,taxable intangibles. After subtracting the value of tangible assets and the
subscriber list, the Board arrived at a residual value of $18.242.130. The
do business and the going concern value, to which the Board allocated the
residual equally in accordance with the methodology used by Kane. In order
to determine final taxable value, the Board added one-half of the present
value of future franchise fees to the possessory interest.”
The Assessor initiated this proceeding challenging the Board’s failure to

allocate all residual value to the taxable possessory interest. The trial court
4Futur.efranchise fees are estimated from projectedrevenue.Theseare consideredanother
cost paid for the right to operate Nor Cal. The present value of such future payments is thus
computed and added to total value of the system. The Board concluded only half of this
amount is attributable to the possessoryinterest, with the other half attributable to the right to
do business.
We note a possible discrepancy in the Board’s computation. The Board purported to divide
the residual of $18.242.130by three to arrive at an allocation to the three intangibles. Before
addition of one-half the value of future franchise fees to the possessoryinterest, the Board
assigneda value to the threeintangiblesof $6.072.212.However, one-third of $18.242.130 is
800 SHUBAT~V.
SUTTERCOUNTY ASSESSMENT APPEALS BD.
13 Cal.AppAth 794; - Cal.Rptr.2d - [Jan. 19931
concluded the record substantiated allocation of value to the nontaxable

right-to-do-business and going concern. The court further concluded the
record adequately supported the specific amounts allocated. However, the
court remanded to the Board to answer four questions: “(1) in valuing the
‘possessory interest’ held by Nor Cal did the Board consider the extent to
which the naked ‘possessory interest’ is enhanced by nontaxable [sic]
‘intangibles’? (2) what income does the Board ascribe to the ‘possessory
interest’? (3) in determining the income stream to be ascribed to the ‘pos-
sessory interest’ does the Board impute to the ‘possessory interest’ any
income directly related to nontaxable [sic] ‘intangibles,’ and, if so, to what
extent? and, (4) what capitalization rate did the Board rely upon in deter-
mining the value of the ‘possessory interest,’ together with the basis for the
utilization of said rate?”
On remand, the Board responded that it had considered the extent to

t ----==-~~tiT”,,1,,
!l!zkL
particular, the Board noted all the income allocated tothe$&&ory &ter%st---‘--
1 was related to the nontaxable intangibles “because none of it could be earned
;!I absent Nor Cal’s franchise, subscriber base, and other intangible assets that
I,
make Nor Cal a going concern.” However, the Board further noted the extent
81
rl‘8I ( of such contribution by the nontaxable intangibles “is not ascertainable.”
i/l: Regarding income stream attributable to the possessory interest, the Board
1,
A indicated it “did not and could not rely on an income approach” for such
valuation because of the unavailability of a suitable capitalization rate. Thus,
the remaining questions posed by the court could not be answered although
the Board noted that use of an income stream of $531,008 (one-third the
residual income) and a capitalization rate of 8.744 percent (the overall
system rate) results in a possessory interest value substantially equivalent to
that arrived at by the Board.
l!i’\
11 Upon review of this supplemental decision. the court concluded the

Board’s findings were supported by substantial evidence and denied writ
I)! relief. Judgment was entered accordingly.
/I1,:
(1) As an agency of constitutional origin (Cal. Const., art. XIII, 5 16;

Kaiser Center, inc. v. County of Alameda (1987) 189 Cal.App.3d 978, 982
[234 CaLRptr. 6031). the Board’s factual determinations are entitled to the
same deference and respect due a judicial decision. (Strumsky v. San Diego
Count Employees Retirement Assn. (1974) 11 Cal.3d 28, 36 [ 112 CaLRptr.
actually $6.080.710. The parties raise no contentlons regarding this apparent computational
error. We shall therefore accept the Board’s computations for purposes of this appeal.
SHUBATLJSUTTERCOUNTYASSESSMENT APPEALSBD 801
13CalApp4th 794, - Cal.Rptr.Zd- [Jan 19933 ’ I
‘1E
805, 520 P.2d 291.) Review of a board determination may therefore involve
two distinct standards. Where it is claimed the Board applied an improper
method of valuing a taxpayer’s assets, this presents a question of law. We
determine “whether the challenged method of valuation IS arbitrary, In
excess of discretion, or in violation of the standards prescribed by law.”
(Brer Hurte Inn, Inc. v. City and County San Francisco (1976) 16 Cal.3d 14,
23 [ 127 CaLRptr. 154, 544 P.2d 13541.) Where it is claimed instead the
Board erroneously applied a proper method of valuation, the decision may
be overturned “only when no substantial evidence supports it, in which case
the actions of the board are deemed so arbitrary as to constitute a deprivation ‘II
of property without due process.” (Ibid.)
/’
iill
The Assessor challenges the Board’s allocation of value to nontaxable 1II
intangibles on two grounds. He contends all of the intangibles are taxable - hilI
either in their own right or as they add value to the possessory interest. He
further contends the Board’s allocation to intangibles other than the taxable
possessory interest was arbitrary and not supported by substantial evidence. m:II
These challenges implicate both standards of review. II1
!I
III
We first consider the Assessor’s claim all intangibles identified by the

Board are taxable. Unless exempt under federal or state law, all property in
California is subject to taxation according to its value. (Cal. Const., art. XIII,
I; Rev. & Tax. Code, 0 201; County of Stanislaus v. AssessmentAppeals
----.- ..._._.
ownership.” (Rev. & Tax. Code, Q 103.) Real property inclubes any posses- -t.
sory interest in real property which is defined as any right to possession of i/j/
land, except where coupled with actual ownership of the land, or taxable i:))
1j
improvements on tax-exempt land. (Rev. & Tax. Code, $0 104, 107.) id
The Board acknowledged and allocated value to four intangibles: right to I

ii
do business, possessory interest, going concern, and subscriber list. (2) It
is undisputed Nor Cal’s possessory interest in the public rights-of-way for
transmission of its service is taxable. (Cox Cable San Diego, Inc. v. County of
San Diego (1986) 185 Cal.App.3d 368, 378 [229 Cal.Rptr. 8391.) However,
the right profitably to use public easements is not the only intangible asset
obtained by Nor Cal by virtue of its franchise rights. Franchises such as at
issue here consist of two primary components: “the right to use the public
strbets to lay the cables and the right to charge a fee to subscribers for their
use of the cable facilities.” (County of Stanislaus v. AssessmentAppeals Bd.,
supru, 213 Cal.App.3d at p. 1452.)
802 S~BATY. S~~~RC~~NTYASSEFSMENT APPEALS BD.
13Cal.App.clth
794; - CaLRptr.Zd- [Jan.19931
(3) The right to do business has been recognized as an intangible asset

exempt from property taxation. (County of Stanislaus v. AssessmentAppeals
Bd., supra, 213 Cal.App.3d at p. 1454.) The Assessor nevertheless contends
Nor Cal’s right to engage in a cable television business has no value because
this is a right available to anyone and only has meaning when coupled with
a right to use the public easements.This argument is frivolous. If it is open
to anyone to conduct a cable television business, it is also open to anyone to
use the public easements for this purpose. The two rights are concomitant
and follow from the acquisition of a franchise. (Id. at p. 1452.) Obviously
the Assessor would not argue the right to use public easementshas no value
merely because this right is open to everyone.
Cable operators “pay local entity franchise fees up to 5 percent of their

gross receipts for the privilege of operating their businesses. They also are
b$1 subject to income tax on their corporate franchise earnings under the Bank
and Corporation Tax Law (pursuant to Cal. Const., art. XIII, $ 27). Thus, it
-I!!
p.&z&---L~,~& -
-----
I
__.- -----.-v-w-_ ~~~~~&~he-ca~~lerrision,
--,,.-‘. e-m 3- E. I----Y-*-
-------me -.- _.
business under the property tax laws.“(Id. at p. la54.)
‘I
1 Nor Cal’s general right to do business is further enhanced by favorable
//ii franchise terms identified by Kane. These Kane defined as terms of the
/,!.I
,i’a franchises making them more economical than typical cable franchises. For
!I! example, Nor Cal is not required to fund a local public access corporation or
provide service to low density areas. By concluding these favorable terms
have no value separate from the right to do business, the Board effectively
concluded they were subsumed within, and enhanced the value of, Nor Cal’s
right to do business. Thus, the Assessor’s contention the right to do business
had no separate value is unavailing.
(4) The Assessor also disputes separate valuation for the subscriber list
and going concern. According to the Assessor, neither item exists separate
from the possessory interest. However, regardless of the label used, the
record contains substantial evidence Nor Cal had value apart from the
franchise and tangible assets. According to Kane, Nor Cal had value by
virtue of the integration of the various elements of the business. These
elements he described as including “business and technical procedures,
accounting and billing systems, programming contracts, FCC licenses (5)
and relationships with local advertisers.” Nor Cal also had a trained work-
force in place and procedures for operating its business.
At the time of purchase by Continental, Nor Cal had a customer base of

26,075 basic subscribers out of 34,162 homes passed, or a 76 percent
saturation rate. There were also 10,675 total pay channel units. Kane indi-
cated this saturation rate was higher than average. The Assessor cannot
SHUBATv SUTTERCOUNTYASSESSMENT APPEALS BD.
13Cal.App4th 794, - Cal.Rptr.Zd- [Jan 19931
reasonably argue this customer base had no value to Nor Cal separate from
use of the possessory interest. Were this true, a cable system with no
customers would be as valuable as a comparably sized system with many
customers, Admittedly, the customers are of no value without the possessory
interest. However, the converse is also true. Thus, whether labeled a sub-
scriber list, going concern value, or enterprise value, the record amply
supports the existence of value attributable to the operational nature of Nor
Cal. The question to be resolved therefore is not whether these assets have
value, for clearly they do. We must decide, instead, whether value was
properly allocated.s
IV
Despite separate existence, the Assessor contends the franchise rights and
going concern value of Nor Cal must be subsumed within the possessory
interest. According to the Assessor, these assets are no different from other
intangible attributes of real property such as location, zoning, view, archi-
tecture, etc. which would not be separated from the real property for
valuation purposes.
This argument too is frivolous. There is a fundamental distinction between

the attributes identified by the Assessor and the intangibles involved in this
dispute. Zoning, location and other such attributes relate directly to the real
property involved. They are an integral part of and effectively define it. By
contrast, intangibles such as going concern or franchise rights relate to the
.D& .
-Me.coti&d, on. the reabroperty. They relate to the real
-..-.-.- ____ .-- -.-_.d- _ _-.+yaw-.-~&,~~-~
-.- - -____ y-.
property only m their connect~an-wiitrt~~~~~~~-~~~.~== -- --------- .____ b.
SAlthough arguably not applicable to this dispute becauseits effective date came after the
date of purchase, Revenue and Taxation Code section 107.7 provides further support for the
separate existence and property tax exemption of the Intangible assets recognizedby the
Board. Subdivision (d) provides: “Intangible assetsor rights of a cable television system are
not subject to ad valorem property taxation. These intangible assetsor rights, include. but are
not limited to: franchises or licenses to construct, operate, and maintain a cable television
system for a specified franchise term (excepting therefrom that portion of the franchise or
license which grants the possessory interest), subscribers, marketing, and programming
contracts, nonreal property lease agreements,managementand operating systems, a work
force in place, going concern value. deferred, startup, or prematurity costs,covenants not to
compete,and goodwill. However,a cabletelevisionpossessoryinterest may be assessedand
valued by assuming the presence of intangible assetsor rights necessary to put the cable
television possessoryinterest to beneficial or productive use in an operating cable television
system.”
This legislation was intended “to clarify the application of existing law and provide
uniformity and certainty in the assessmentof cable television possessoryinterests.” (Stats.
1988, ch. 1630, 8 3, p. 5940.) In County of Smanislausv. Assessmenr Appeals Bd., supra, 213
Cat.AppJd 1445, 1452, footnote 3, the court indicated this section “is not considered a
change in the law.**
804 SHUBAT Y. SLMTER Cornrry ASSESSMENT APPEAU BD.
13 Cal.App.4th 794; - CaLRptr.Zd - [Jan. 19931
The Assessor nevertheless contends many cases have held intangibles

such as involved here do not exist separate from the possessory interest and
must therefore be assessedas part of it. In Scott-Free River Expeditions, Inc.
v. County of El Dorado (1988) 203 Cal.App.3d 896 [250 Cal.Rptr. 5041, this
court held the right of a commercial rafting outfitter to exclusive commercial
use of the flow of water in a river is a possessory interest subject to property
taxation. The Assessor contends Scott-Free stands for the proposition the
right to take a profit from the use of public property cannot be separated
from the possessor-yinterest in the property. However, in Scott-Free no issue
was raised regarding the value to be placed on the possessory interest or
whether the commercial rafting outfitter had value distinct from its tangible
assets and the possessory interest. The sole issue raised was whether the
taxing authority had the power to tax the possessory interest, an issue not
disputed here. “ ‘[Cl ases are not authority for propositions not considered
therein.’ ” (Worthley v. Worthfey (1955) 44 Cal.2d 465, 472 [283 P.2d 191.)
- .-_. __ _.--.-- _ -.._ _____
-icJ~z.ig~~ -...m- _- 1 - -c28sms~%~~
the court indicated: “Intangible values . . . that cannot be separately taxed
as property may be reflected in the valuation of taxable property. Thus, in
determining the value of property, assessing authorities may take into con-
sideration earnings derived therefrom, which may depend upon the posses-
sion of intangible rights and privileges that are not themselves regarded as a
separate class of taxable property. [Citations.]‘* (Accord, Michael Todd Co.
v. County of Los Angeles (1962) 57 Ca!.2d 684, 693 [21 Cal.Rptr. 604, 371
P.2d 3401; IIT World Communications, Inc. v. County of Santa Clara (1980)
101 Cal.App.3d 246, 257 [162 Cal.Rptr. 1861.)
While we agree intangible values may be reflected in the value of a

possessory interest, it does not follow such values are subsumed as a matter
of law. In County of Stanislaus v. Assessment Appeals Bd., supra, 213
Cal.App.3d 1445, the assessor apphed to the board to increase the value of
the taxpayer cable television system to $18,350,000. It was argued this value
was justified by the effect of nontaxable intangibles on the other assets of the
business. The board concluded the intangibles could not be taxed and
reduced the assessedvalue to $5,455,599. The trial court denied relief. (At
pp. 1448-1449.)
The appellate court concluded the value of taxable assets may be en-
hanced by the nontaxable intangible assets. The court explained: “Without
the right to put its possessory interest to beneficial or productive use by
soliciting subscribers and charging them a fee for transmitting a signal, i.e.,
the right to engage in business, [the taxpayer’s] possessory interest would
have little or no market value.” (At p. 1456.) The court concluded: “In
SHUBATv. SUTTERCOUNTYASSESSMENT APPEALSBD. 805
13Cal.App.4rh794: - Cal.Rptr.2d- [Jan.19931
valuing [the taxpayer’s] possessory interest on remand, the assessor shall

consider the intangible right to do business as required by the above author-
ities. In so doing, the assessor may impute to the possessory interest an
‘appropriate’ income from the right to engage in business. [Citation.]” (Ibid.)
Significant to this ruling was the appellate court’s failure to direct valua-
tion at the full value of the cable system despite a stipulation that such value
was $19.4 million. In effect, the court concluded the full value of the
intangible right to do business need not be imputed to the possessory
interest. Instead, the court remanded to permit the assessorto decide whether
and to what extent the value of the possessory interest should be enhanced
by the right to do business.
The trial court here did likewise. From the record before it, the court
apparently could not determine if and to what extent the Board took into
consideration the nontaxable intangibles in computing a value for the pos-
sessory interest. The court posed four questions to the Board primarily to
clarify this point. In response to the question whether nontaxables were
taken into consideration in valuing the possessory interest, the Board indi-
cated: “Nor Cal’s possessory interest would be of little or no value if Nor
Cal did not also possess non-taxable intangibles such as its subscriber list,
the right to operate a cable television business, and going concern value. The
Board’s $6,072,211 possessory interest value represents the ‘in use’ value of
the possessory interest when put to beneficial and productive use along with
and enchanced [sic] by Nor Cal’s non-taxable intangibles.‘* The Board
zz~~inzz~e-fs a-g_uestionabout the income attributed to II
.-w-e..-A‘--____ -‘Lr-,-zLy-=‘-
the. possessq mterest:mge in~.*~~~~~~~~~~~~~~~~~~~~-~
interest is $53 1,008. All of this income is directly related to Nor Cal’s - ,i
non-taxable intangibles because none of it could be earned absent Nor Cal’s /\
franchise, subscriber base, and other intangible assets that make Nor Cal a ‘I
going concern. The converse is also true. The intangible assets enhance the I,;:i’
value of each other and none of them standing alone have [sic J any substan-
tial value. All of the income of the possessory interest is directly related to
and dependent upon the non-taxable intangibles and the taxable tangibles
and intangibles. To what extent the income attributable to the possessory
interest is directly related to the non-taxable intangibles is not ascertain-
able.” In our view, the record sufficiently establishes the Board considered
the effect of intangibles on the value of the possessory interest. It was
required to do no more.
(5) The Assessor contends the Board’s allocation of value to the right to 11’1
I;:,
do business, possessory interest and going concern is not supported by
substantial evidence. According to the Assessor,
III divide the residual into equal proportions was arbitrary and not within the
]j / permissible valuation methods. Instead, the Board should have adopted the
Assessor’s allocation of all residual to the taxable possessor-yinterest.
tj!/ i;
‘i, !
,’ ! In proceedings before an assessment board, “the assessing officers are
I presumed to have properly performed their duties: the taxpayer has the
burden of showing that the assessmentswere not fair and equitable.” (IIT
World Communications, Inc. v. County of Santa Clara, supra, 101
I Cal.App.3d at p. 252; Cal. Code Regs., tit. 18, 0 321, subd. (a).) “Revenue
1 and Taxation Code section 1610.8 requires the applicant for a reduction in
an assessment to establish the full value of property by independent evi-
II,,/I dence.” (County of San Diego v. AssessmentAppeals Bd. No. 2 (1983) 148
I Cal.App.3d 548, 559 [195 CaLRptr. 8951, italics in original.)
1
-----_..-__._ ._Of
__ the three intangibles assigned a portion of the residual by the Board,
:-- -!~?k-~.~-Tk~~r’~~t~-..-..--- -SW-.-,.?M
-----e----.-;- .--------.-- --- .-_
Ill! with the Board’s allocation of only one-thud of the residual to-tGosses-
sory interest. How the Board allocated the other two-thirds is irrelevant.
State Board of Equalization rule 25 enumerates permissible modes of

assessing possessory interests. Included are the three methods described
earlier, the comparable sales approach, the income approach, and the cost
approach. (Cal. Code Regs., tit. 18, $25.) None of these methods was used
by the Board. However, this rule does not purport to be exclusive. It
indicates possessor-yinterests “may” be measured by one or more of the
enumerated methods.
The Assessor himself acknowledges a cable television possessory interest,

“[b]y its nature,” may not be measured by one of the approved methods.
However, this does not mean, as the Assessor concludes, the full residual
value must be apportioned to the possessory interest. As the court in
California Portland Cement Co. v. State Bd. of Equalization (1967) 67 Cal.2d
578 [63 Cal.Rptr. 5, 432 P.2d 7001, indicated: “When no sound or practica-
ble basis appears for apportionment of income as between enterprise activity
and the property itself, then a method may be employed which imputes an
appropriate income to the property.” (Id. at p. 584, italics added and
citations omitted; accord, County of Stanislaus v. Assessment Appeals Bd..
supra, 213 Cal.App.3d at p. 1455, and cases cited therein.)
Nor Cal relied almost exclusively on the testimony of its expert Kane.
Kane determined the intangibles could be separated into six general catego-
ries: subscriber list, right to do business, favorable franchise terms, posses-
sory interest, work force and noncompete agreement. Using an income
SHUBAT Y. SLITTER COUNTY ASSESSMENT APPEALS BD. 807
13 Cal.App.4th 794; - Cal.Rptr.2d - [Jan 19931
approach, Kane allocated an amount to the tangible assets and subscriber

list. The remaining income was allocated In equal proportlons to the right to
do business, favorable franchise terms and possessory interest. After com-
puting a present value for these and the other assets and including an
allocation for the noncompete agreement, the residual value of Nor Cal was
assigned to going concern.
The Board adopted Kane’s approach to valuing intangibles with certain

modifications. First, the Board rejected a separate allocation for favorable
franchise terms, treating them instead as part of Nor Cal’s right to do
business. The Board also rejected Kane’s allocation of the residual value to
the going concern. According to the Board, going concern should have been
assessedequally with the right to do business and possessory interest. Thus,
after assigning appropriate amounts to the other assets, the Board allocated
the residual one-third to the possessory interest and two-thirds to the remain-
ing intangibles. The Board also allocated one-half of the present value of
future franchise fees to the possessory interest and the other half to the right
to do business.
In our view this methodology is reasonable and appropriate under the :ij
circumstances presented. As previously indicated, the Assessor himself ac-
knowledged none of the traditional methods of valuation was possible. d
Nevertheless, Kane indicated the possessory interest, right to do business I*
and going concern operated together to impart value to Nor Cal. None had
Kane opined the possessory interest contributed approximately one-third

of Nor Cal’s residual income after deducting that attributable to tangible
assets and the customer base. Applying a discount rate of 20 percent, this
resulted in an allocation of $4,059,929, which Kane corroborated with an
independent valuation based on franchise fees paid.6 Although Kane attrib-
uted the other two-thirds of the residual income to a different mix of
intangibles than did the Board, this is of no concern to our analysis. None of
these intangibles is taxable. The difference in value attributed to the posses-
sory interest, $4,059,929 by Kane
moment. This discrepancy reflects merely a different total valuation of the
business and different residual value, neither of which is challenged here.
The record also supports the Board’s allocation of the present value of
future franchise fees. Kane opined the two parts of the franchise, the
Wsing a SOpercent profit margin, which Kane identified as typical in the industry, income
attributable to the S percent franchise fee was determined. From this, a present value of
$4,335,24Swascomputed.
Illif,I 808 SHUBAT v. SUTTER COUNTY ASSESSMENT APPEALS BD.
, :j/ 13 Cal.AppAth 794; - CaLRpnld - [Jan 19931
11
‘1
* _I
~’ i, ,i
possessory interest and right to do business, contribute equally to Nor Cal’s
* :;
/ 1_/, income stream. Thus, the Board’s allocation of value to the possessor-y
interest, and corresponding exclusion from total taxable value for other
1)
!i intangibles, is supported by substantial evidence.
: ,I
None of the intangible assets identified by Kane and the Board has value
to Nor Cal independent of the others. Each contributes to the total business.
On the present record, there is no basis for attributing a higher value to any
one of these intangibles and certainly no basis for attributing all value to the
possessor-y interest. On the contrary, the opinions of Nor Cal’s expert
provide substantial evidence to support the allocation arrived at by the
,.Y Board. In our view, the Board used an acceptable method of valuation and
imputed an “appropriate”
. value to the possessor-yinterest.
----.--._e_.
*.*T.Tl-\*-.-e- _-._-___--l~-_-_--_l-_-l _.-__--_-__I
.%rZI--YC-*ma.?.- . _-.e---
-.------lv---*m-- -e-i-- ----e -- -----I_ w-_-m---.
1ne Juagmenc is arrirmea.
Blease, J., and Sparks, J., concurred.

the state and carmot be modified by the parties without governmental
approval. In light of this regulation, capitalization of the income to be
generated under the contract properly measures the value of appellant’s
property because it is the income a prospective purchaser of the property not
only could anticipate but would be guaranteed. It would appear obvious that
if the situation were reversed and the SO4 contracts prescribed a below-
market rate of income, appellant would be advancing precisely the position
taken by the county here-and, in that situation, would be entitled to the
benefit of the decrease in property value.”
This modification does not effect a change in the judgment.

-- _,-.._- - . .
102 COUNlYOF~SkVGELE5 v.
COUNNOFL~SANGELESASSESSS~EHTAWEALSBD.
I3 Cal.App.4th 102; - cal.RpuZU-fib.19931
[No. B06512SSecondDisk. Div. Two. Feb. 10, 1993.1
COIINTY OF LOS ANGELES, Plaintiff, Cross-defendantand Appellant,
&JNTY OF LOS ANGELES ASSESSMENT APPEALS BOARD NO.

1, Defendant and Respondent;
DOLLAR RENT A CAR SYSTEMS, ENC., Real Party in Interest and
Respondent;
GRAND RENT A CAR CORPORATION et al., R& Parties in Interest,
Cross-complainants and Respondents.
The trial court denied a writ of mandate sought by a county challenging a

decision of its assessment appeals board as to the extent of the taxable
possessory interests of several car rental firms at three airports in the county.
The firms, operating under concession agreementswith the airports, main-
tained counters in the terminals and, at two of the airports, spaces in
“ready/return” parkin,Q lots. They agreed to pay, subject to guaranteed
minimums, a percentage of gross receipts from all car rentals delivered in
the airports’ areas. The county began assessingthe firms’ airport possessory
interests by capitalizing their guaranteed or prpjected payments to the air-
ports, on the premise that these payments constituted rent for possessory
interests in the airports as business premises. This greatly multiplied the
appraised value of the interests. The firms obtained a favorable decision
from the superior court rejecting this method of assessmentat one airport,
which decision was not appealed and became final. The county nonetheless ,
continued assessing the firms’ posWsory interests using the rejected con-
cepts and formulae for subsequent years, and the furns obtained a ruling
from the assessment appeals board that the piior judgment controlled and
preclusively determined by collateral estoppd the extent of the&interestsand
the invalidity of the assessments.The county then petitioned for a tit of
mandate. (Superior Coti of Los Angeles County, No, C 708538, William
W. Huss, Judge.)
The Court of Appeal affirmed. It held-that the trial court properly invoked
its prior judgment to resolve adversely to the county the issue of the extent
of the firms’ possessory interests at the airport concernedfor the tax years aI
i
104 ckKNl”f OF@S &GEL?3 v.
Corn OF Los ANGELES Asmmm AppEhLs BD.
13 cal.App.4LtI 102; - (;zI.R;tl.2d - [Feb. 19931
estoppel yet applies to “legal” issues, albeit with more qualifications

than in cases of factual issues.
(See 7 Witkin, Cal. Procedure (3d ed. 1985) Judgment, 5 274 et

seq.1
Property Ta,,es $ IGSubjects of Taxatio&Real Property-Pos-
sessory Rights-Requirement of Physical Possession.-Just as pri-
vate possessory interests in public property are a species of taxable
property, the possession or use grounding these interests means and
requires not just some benefit from the public property, but physical
possession or use of it. Hence, in a mandamus action brought by a
county challenging a decision of its assessmentappeak board as to the
extent of the taxable possessory interests of severalcar rental fums at
airports in the county, the trial court properly rejected the county’s
- assessment, which was based on the firms’ “use” of the airports as a
whoie, valued by capitalizing the firms’ concessionfees (a percentage
of gross receipts), rather than on their possessionand exclusive use of
their counters and reserved pa&kg lots. Further rights granted by the
firms’ agreements with the airports, to do businessat the airports and
their environs, were not possessoryinterests; they were intangibles, not
subject to prooerty tax. Moreover, the firms’ income stemmedlargely
from commer&al endeavors other than their physical facilities there.
COUXSEL
De Witt W. Clinton, County Counsel, Albert Ramseyer and Paul I.

Yoshinaga, Deputy County Counsel, for Plaintiff, Cross-defendantand Ap-
pellant.
Kelvin H. Booty, Jr., County Counsil (Alameda), JamesF. May, Assistant
County Counsel, Thomas F. Casey RI, County Counsel (San Mateo), Mary
K. Rafter-y, Deputy County Counsel, Steven Woodside, County Counsel
(Santa Clara), and Karen Heggie, Deputy County Counsel,as Amici Curiae .
on behalf of Plaintiff, Crossdefendant and Appellant,
NO appearance for IL+ndant and Respondent.
Rintala, Smoot, Jaexicke e(. Brunswick, Peter C. Smoot and Robert W. ’

Hodges for Real Party in Interest and Respondent.
0 Mr,mger, Tolles & Olson, Gregory P. Stone, Latham & Watkins, Robert D,
Crockett, Jayne Fan, O’Melveny & bieyers, Thomas M. McCoy and Marcy
Jo Mandel for Real Phes in Interest, Cross-complainantsand Respondents. c
I
Courim 0FLOS AuGELEsv. 105
COUNTYOFL~SAUGELESASSESSMENTAPPEALS
BD:
13 Cal.App.4th 102; - Cal.Rptr.‘Ld - [Feb. 19931
I
OPINION r.
I
FUKUTO, J.-The County of Los Angeles (County) seeks reversal of a
judgment which denied its petition for writ of mandate against the County’s
f.I
assessment appeals board (Board) and awarded possessory interest tax re-
funds to car rental companies that operate at the three major airports within
:
the County. The Board and the trial court rejected the County’s contention
that the rent-a-cars’ possessory interests extend to the use of each airport
a
generally, not simply the areas the companies occupy (principally service
counters}, and also disapproved the County’s method of valuing the inter-
ests, by capitalizin,0 concession fees which were based on and included
enterprise income. We conclude that the trial court correctly resolved these
!Is-
issues, which to some extent had already been conclusively determined by
another superior court judgment in 1986. The judgment consequently will be t:
affirmed. !I
FACTS :.
This case concerns ad valorem .property tax assessmentsof possessory
interests of four car rental companies (Dollar Rent A Car Systems, Inc.
:I
(Dollar), Grand Rent A Car Corporation (Avis), The Hertz Corporation
3:
(Hertz), and National Car Rental System, Inc. (National), hereafter collec-
tively the rent-a-cars) at Los Angeles International Airport (LAX), Burbank-
Glendale-Pasadena Airport (Burbank), and Long Beach Municipal Airport
(Long Beach), for tax years 1985-1987 with respect to LAX and 1983-1987
1F
with respect to Burbank and Long Beach. Except for Dollar with respect to
Long Beach, each of the rent-a-cars has operated under “concession agree-
ments” or (in the case of Burbank) “leases and concession agreements”
(hereafter collectively the agreements) with the airports’ respective owners, !
the City of Los Angeles, the Burbank-Glendale-Pasadena Airport Authority,
~ and the City of Long Beach. 1
The agreements grant both the right to conduct a car rental business at the
particular airport and the right to occupy and use certain limited portions of
it, namely designated counters or booths, and, in the case of Burbank and
more recently Long Beach, spaces in a “ready/return” parking lot. The
I
__
Burbank agreements also grant a nonexclusive right to use common areasto
be designated, as weil as terminal public areas such as restroomsand waiting
areas; the Long Beach agreements authorize joint use of walkways surround- 1
ing the rental booths, as well as “the use o . . on [sic] the Airport” to .
conduct the car rental concession. In exchange for these rights, the rent-a-
cars have agreed to pay the airport authorities, subject to guaranteed &i- :
mums, 10 percent of gross receipts from all car rentals deIivered jn the i
1
106 COLNTYOFLOSANGELES v.
COUNTY OFLOSANGELES ASSESSMENTAPPEALS BD.
13Cd.App.kh102; - CdRptrJd -(Feb. 19931
airports’ areas, whether or not arranged through the booths. Burbank sepa-
rately charges specified “rent” for the booths and lot spaces.
1. The Prior Litigation.
The present case is the second to review the propriety of the County’s
assessments of the rent-a-cars’ airport possessory interests. In 1982 the
County Assessor began assessingthese interests by capitalizing the rent-a-
cars’ guaranteed or projected payments to the airports under the agreements, ,
on the premise that these payments constituted “rent” for possessoryinter- ;
ests in the airports as business premises. This change,from previous assess- ti
ment of the rent-a-cars’ possessory interests as comprising only their exclu-
sive counter spaces,increased the appraised value of the interests,in the case
of LAX, by rbughly 5,000 to 10.000 percent.
The rent-a-cars sought redetermination of the 1982 LAX assessments

before one of the County’s assessmentappeals boards. That board rejected
the County’s assertion that the taxable possessoryinterests extended further
than the airport counters (and related telephone reservation boards), and
reduced the appraisals, although not as much as the rent-a-cars had re-
quested.
The parties then commenced a series of actions and proceedings in Los

Angeles Superior Court, to review the administrative decision. The cases :
were ordered consolidated and tried before a single judge. (Hertz Corpora- . :
tion v. County of Los Angeles (Super. Ct. L. A. C&n;y, 640.C537445).j The ,
court rendered a statement of decision and judgment in favor of the rent-a-
cars, embracing the following principal determinations.
(1) The rent-a-cars’ possessory interests at LAX included only their

counters, telephone boards, and signs, the latter two nor having significant
value. ’
(2) The taxable value of theseinterests was fair market rent, which wouid
be no greater than the assessedvalue of airline counter spaceat the airport,
then $15 per square foot. However, the rent-a-cars having sought reduction
only to $45 per foot, they would receive that measure.
(3) The County’s conw method of valuation, based on capitalized :

j’ ’
concession fees, was invalid for two further reasons. First, it produced
i G‘.
valuations of similarly situated, like-kind-and-character properties that $i
widely differed between the rent-a-m, in violation of constitutional re- ‘.-L.
k.
--*a
quirements of uniform, equal taxation. Second, it improperly included in- _ r-r
-*
* $2.
come and value derived not from the property but from the rent-a-cars’ ,c *
: ??
&$$
i
*.
I..
5.:’
::
,.*
5 Coux~Y OF Los ANGELES Y. --_
10;
‘ COUNTY OF Los AXGELES ASSESSMENT APPEALSBD.
r:
,? 13 Cal.App.4th 102: - Cal.Rptr.Zd - [Feb. 19931
overall enterprises-i.e., business produced not by the airport counters but

through advertising, goodwill, national reservation systems, and the like.1
The judgment, rendered August 27, 1986, ordered reduction of the LAX
assessmentsaccordingly, together with refunds.
2. The Present Case.
The County did not appeal from the 1986 judgment, and it became fma].
Nevertheless, the County continued to assess the rent-a-cars’ possessory
interests, at all three airports, usin g the same concepts and formulas he
superior court had rejected. The County did so under the premise, as stated
by its counsel at administrative hearings, that ‘The superior court decision is
not binding authority. . . . And the assessor does not have to follow a
superior court decision . . . .”
The rent-a-cars again sought reduction of their assessments,this time at all
three airports, for various years including and following 1983. After an
extended hearing, the Board ruled that the prior judgment controlled and
preclusively determined, by collateral estoppel, the extent of the possessory
interests, as well as the invalidity of the assessmentsbecausethey attributed
unequal values and included enterprise value. After resolving adversely to
the rent-a-cars a separate issue concerning the projected duration of their
interests, the Board reassessedthe various values at levels amounting to only
a few percent of those the County had advanced.
The County then commenced this litigation, by petition for writ of man-
date (Cod= Civ. Proc., 5 1094.5) against the Board. As real parties m
interest, the rent-a-cars answered, alleging collateral estoppel by the prior
judgment as a defense. All but Dollar also filed cross-complaints seeking tax
refunds.
At the hearing on its motion for peremptory writ, the County argued,“[A]t
Somepoint . . . the County of Los Angeles has to be able to go to court and
get review of what we consider a patently erroneous decision; . ~ . We’re
appealing the 1986 decision here today, your Honor.” The court denied the
County’s petition, holding that the prior jud,gment controlled the case, and
rejecting the County’s contention that there had been a subsequentchangein
the law of possessory interests, justifying a different result.
The County moved for reconsideration, based on a new appellate decision,
announced two weeks after the court’s tentative decision. (United Air Lines,
Inc. v. county of Sun Diego (1991) 1 Cal.App.4th 418 [2 CaLRptr.2d 2121
Tke court furtker found that the Board’s reduced valuations-roughly onequarter of the
assessor’s-were unsupported by evidence.
108 cOUl4l-Y OF IAS iLVGEUts v.
Cotnrry OF Los ANGELESASSESSMEXTAPPEALS
&I.
13CaLApp.4th
102; - Ca1.Rptr.U - [Feb. 19931
[hereafter United Air Lines].) The court granted reconsideration, but adhered
to its ruling denyin,* the petition. The subsequentjudgment also awarded
Hertz, Avis, and National refunds, as sought by their cross-complaints, but
denied, without prejudice to other tax years, their further claims that the
Board had improperly judged their remaining terms of possession.*
DISCUSSIONS
As reflected above, the primary basis for both the judgment below and the
Board’s determinations which it affied was the superior court’s prior,
1986 jud,grnent, in proceedings between the same parties, rejecting the
County’s method of assessingthe possessoryinterestsat LAX. We therefore
turn first to the question af collateral estoppel, prompted also by consider-
ations of judicial economy’that in part animate that doctrine.
(1) Collateral estoppel forecloses relitigation of an issue that (l)‘is

identical to one decided in a prior case (2) involving the same party or
parties or those in privity with them and (3) which resulted in a final
judgment on the merits. (E.,.,0 bdud V. Bank ofAmerica (1942) 19 CaI.2d
807, 813 [ 122 P.2d 8921.) @a) In the present case the second and third
criteria plainly appear: the County and the rent-a-carsall were parties to the
prior litigation, which ended in a final judgment on the merits that the
County chose not to appeal. The remaining inquiry concerns the identity of
issues between the two cases.
(3)(secIn. 4~) The primary issue determined in the prior litigation was that
the rent-a-cars’ possessory interests at LAX extendedto no more than their
counters (and insignificant boards).4 (2b) With respect to LAX, this
issue is identical to the threshold one in the present case. Although the two
ZAtthe conclusion of the hearing on the writ petition, tit cow directed thoserent-a-cnrs
with cross-complaints pending to file a motion for summaryjudgment on that phaseof the
case. The record on appeal does not reflect any suchproceedings,but the County as appellant
does not complain of any such proceduralomission.
ane County has requested judicial notice of certain congressionalhearings that were
conducted and published well before the hearingsin the trial court:,but were not offered there.
We deny this untimely request to expand therecord.(SeeCode Civ. Proc., 3 1094.5.subd-
(e).) The rent-a-cars’ request for judicial notice of portions of the administrative recordin the
prior cxse also is denied. (See Evid. Code,5 352.)
Whether this issue is one of law, as the parties assert,or moreproperly a mixed question
of law and fact, is ultimately inconsequential. Theparticscite a series of casesthat chamc-
te&e khether or not a taxpayerhas any possessory interestas a question of law, indcpcn-
dently reviewable regade’ss of its treatment at the administrative level. (E.g., fczcifi
Grove-Adomar Operating COT. v. Counryof Monterey (1974) 43 Cal.App.3d 675, 680-683
[117 CaLRptr. 8741.) Collatenl estoppedyet applies to “legal” issues, albeit with more
qualifications than in cases of factual issues.(See 7 Witkim. CaI. Procedure(3d ed. I9851
ciit.in~ OFLos ANGELESv. 109
co-UYTYOFLos ANGELESASSESSMENT APPEAU BD.
13Cd.App.4~h 102; - Cal.Rptr.2d- [Feb. 19931
ases involve different tax years and, for some of them, different agree-
ments, the agreements with respect to LAX are materially identical, as is the
physical situation to which they apply. The prior judgment’s determination
of the extent of the rent-a-cars’ possessory interests at LAX therefore
appears to preclude the County’s present effort to claim and assessbroader
possessory interests there.
Apparently having abandoned the untenable position that a superior court

jud,oment cannot be “binding” beyond its immediate case, the County pro-
pounds two principal objections to application of Collateral estoppedin this
context and fashion. The first is that the present case concerns later assess-
ments, of interests for the most part created by different agreements than
those at issue in the prior case. As already stated, this is not decisive. The
terms of the several LAX agreements that generated the po$sessoryinterests
in question are the same, as are the faciiities in question, and hence so are
the interests themselves. That this case involves later tax years does not
seuarate the issues or render them nonidentical. (Cf. Months v. United
S&es (1979) 440 U.S. 147, 158-162 [59 L.Ed.2d 210, 219-222, 99 S.Ct.
9701 [determination that tax was constitutional applied by collateral estoppel
to subsequent suit involving different contracts].)
Second, the County seeks to invoke the doctrine that collateral estoppel as
to legal issues should not apply where the content or character of the l%whas
changed since the frost judgment, so that application of it would produce
obsolete, inequitable administration of the laws. (See Montana v. United
S;ares, supra, 440 U.S. at pp. 161-162 [59 L.Ed.2d at pp. 221-2221; Com-
missioner v. Sunnen (1948) 333 U.S. 591, 599-601 [92 L.Ed. 898.906-908,
68 S.Ct. 7151; Rest.2d Judgments, 0 28(2)(b).) In this regard, the County
contends that, following the prior judgment, the law governing the issue of
the extent of the rent-a-cars’ possessory interests changed, favorably to the
County’s “airport as a whole” theory. To this alleged effect, the County
relies on a Court of Appeal decision recognizing a possessory interest in
Commercial river-rafters’ rights to use a river (Scott-Fve River Expeditions,
Inc. v. County of El Dorado (1988) 203 Cal.App.3d 896 12.50CaLRptr. 5041
[hereafter Scott-Free]), another such decision concerning aircraft landing
rights (United Air Lines, supra), a federal Court of Appeals case involving a
$& - possessory interest in an experimental fusion device (US. V. V. County of San
Diego (9th Cir.
:+$!. Diego Cb. 1992) 965 F.2d 691), and finally, the Supreme Court’s
5%;’ depubl&tion decision by the Fourth District Court
depublication of a decision Court of Appeal that had
*W’z:’ rejected contentions
contentions similar
similar to the County’s with respect to car rental
-3%. _
~$2: Judgment,$8 274276, pp. 714-717.)As discussed,the County’sefforts to invoke someof
I&%$,theserestrictionsare unavailing.
=y$. .:.
#- .
p&;
-a-*’
110 COIJXl-YOF~ShG~~Y.
CO~~~YOFLOS~GELESASS~APPEZLLSBD.
13 CaLAFpAth 102; - CaLRprr2d - [Fci 15931
possessory interests at San Diego’s Lindbergh Field (Hertz Corporutian v.

County ofSun Diego (NOV. 28, 1990) D010144).
The County’s attempted use of the last-noted depublication is baseless.

(Cal. Rules of Court, rule 979(e).) And, as we shall explain shortly, none of
the substantive decisions on which the County relies altered or upset the law
the prior judgment followed. Accordingly, there is no impediment to appIy-
ing collateral estoppel by that judgment to its full reach in this litigation. The
superior court properly invoked its prior judgment to resolveadverselyto the
County the issue of the extent of the rent-a-cars’ possessoryinterests at LAX
for the tax years here in issue.
That determination cannot, however, extend to the similar question now

posed for the first time with respect to Burbank and Long Beach, which were
not the subject of the prior action. The prior action determined the extent of
the rent-a-cars’ possessory interests at LAX. Although the agreementsbe-
tween the rent-a-cars and the authorities at Burbank and Long Beach are
similar to those with respect to LAX, they are not identical. Nor are the
physical situations coterminous. Most prominently, the limited possessory
interests which the rent-a-cars admitted at the other two airports include not
only different counters at different facilities but also “ready/return” parking
spaces, not implicated or .addressed in the prior case. In light of these
differences,. the prior judgment cannot be deemed to have decided the issue
of extent of possessory interests at Burbank and Long Beach.
Similarly, we do not perceive collateral estoppel to obtain with respect to

the prior judgment’s conclusions that the County’s method of valuation case
was improper. Those determinations related to the particular facts of that
case, involving the 1982 LAX assessments.Although the County employed
the same valuation techniques in the present case,the holding of unlawfully
unequal taxation involved, and requires, comparison of particular assess-
ments; and the fading that enterprise value was improperIy included for
LAX in 1982 cannot be transposed to later tax years, and operationsin other
locations, without evidence of the nature and source of the income and v&e
appraised in those years.
Accordingly, the correctness of the judgment below cannot be fu!Iy

decided by invocation of the prior jud,gment. (4) However, we are con-
vinced that the trial judge here, like his predecessor in the prior case,
correctly resolved the dispositive issues on the merits. We begin wirh the
question of the extent of possessory interests at Burbti and Long Beach.
Possessory interest law and taxation implicate T;rivateinterests in-public

property, which is not itselfsubject to property tax. The statutory derrmdon
c
Coum~ OFLQS ANGELESv. 111

Cotir~ OFLos ANGELESASSESSMENTAPPEALSBD.
13 Cal.App.4th 102; - CaLRph2d - [Feb. 19931
of a possessory interest is “Possession of, claim to, or right to the possession

of land or improvements, except when coupled with ownership of the land or
improvements in the same person.” (Rev. & Tax. Code, $ 107, subd. (a).)
Other definitions add “exclusive use” to “possession.” (Cal. Code Regs., tit.
1S, 3 21, subd. (a), (e).) In recent years there has been much litigation
concerning the nature and degree of “exclusivity” of use necessaryto create
a possessory interest. The consistent trend of decisions has been to favor
assessors’ claims, by holding that possessory interests may arise from lim-
ired or concurrent exclusive uses, so long as they involve a grant of rights
not shared by the general public. (See, e.g., Freeman v. County of Fresno
(198 1) 126 Cal.App.3d 459 [ 178 Cal.Rptr. 7641.) But none of these holdings
impairs or retreats from the basic principle that, just as possessoryinterests
are a species of taxable property, the possession or use which grounds them
means and requires not just some benefit from the pubhc property, but
physical possession or use of it.
This is the fundamental flaw in the County’s claim that the rent-a-cars
own or hold possessory interests “in the airport as a whole,” or in their “full
bundle of rights in the airport locations.” Under the agreementsand evidence
concerning Burbank and Long Beach, as at LAX, there is no dispute that the
rent-a-cars enjoy possession and exclusive use of their counters (booths) and
ready/return spaces. But that is the full extent of the rent-a-cars’ rights of
possession or use of airport property, except in common with, and coequal
to, everyone else. And this means that the County’s concept of a broader
possessor-yinterest cannot be sustained.
The cases the County principally relies upon illustrate and confirm the
foregoing. In Scott-Free, supra, 203 Cal.App.3d 896, numerous commercial
river-rafters challenged the assessor’s determination that their use permits,
authorizing exclusive commercial use of the river, created possessor-yinter-
&s in it. Rejecting the challenge, the court confiied that although the river
was not taxable property, the plaintiffs* use of it was. Further, the court held,
these rights of use were exclusive even though multiple, becauseplaintiffs,
but not the public, had “a special right of access for profit.” (rd. at p. 910.)
Both of these holdings were based on the facts that the plaintiffs physically
used--i.e., rafted upon-the river.
S~ilruly instructive is United Air Lines, supra, 1 Cal.App.4th 418. There,

a divided court sustained a claim of possessory interests in several airlines’
use of airport landing areas and related facilities (runways, wash racks, etc.),
finding that the airlines were a distinct category of exclusive users(regularly
scheduled passenger carriers). But both the claim of interest and the holding
112 COUNIYOF Los AXGELES Y.
COUNTY OFLOS~IGELES Amsnm-r APPEALSBD.
13 ‘2aLXppAtb102; - CalJlptr.Zd - (Feb. 19931
concerned physical occupancy and use of specific facilities. There was no

suggestion that the airlines, primary and pervasiveusers of the airport, held
a general possessory interest in “the airport as a whole.” ,
Thus, even apart from the issue of enterprise, the mere fact that the
rent-a-cars derive customers and revenues through the gates of an airport
terminus or “system” does not define the existence and extent of their
possessory interest in the airport property. The County’s colloquial concept
of airport “use” does not account for possessionor occupancy, and thus
misconceives the elements and requisites of a possessoryinterests
In a further attempt to expand the meaning of poss&ory interest, the
County cites US. v. Count of San Diego, szqra, 965 F.2d 691,694, for the
proposition that “[A] license or permit is a taxable possessoryinterest in
property.” This contention too is exaggerated.The quoted statement-made
in a case approving taxation of a possessor-yinterest in a fixture subject to
taxpayer use-inaccurately paraphrasedthe California authority on which it
relied, Stadium Concessions, Inc. V. Ctiy of Los AngeIes (1976) 60
Cal.App.3d 215 [ 131 Cal.Rptr. 4423. Stadium Concessions recognized pos-
sessory interests in food concession standslocated in sports arenas.Holding
that the underlying agreement and facts satisfied the possessoryinterest test,
including exclusive use, the court stated, “[A] concessionagreementmay, in
a particular case, prodzce a possessory interest in pubIic premises by the
concessionaire.” (Id. at p. 225, italics added.)6
That indeed has occurred under the rent-a-cars’ concession agreements
with Burbank and Long Beach (and LAX)-but only with respect to the
property exclusively possessedand used. The further. rights granted by the
agreements, to do business at the airports and their environs, are not posses-
sor-y interests. They are intangibles, not subject to property (possessory
interest) tax. (Accord, Coltnfy of Sfanislaus V. AssessmentAppeals Bd. (1989)
213 Cal.App.3d 1445, 1452-1454 [262 CaLRptr. 4391.)
For related reasons, the Board and the trial court also properly disap-
proved the County’s method of valuation, which involved capitalizing the
rent-a-cars’ concession fees, which are measuredas a percentageof their
income from their airport area operations. The County seeksto justify this
approach by characterizing these payments as “rents” and asserting they
This misconception also pemdes the arguments of amici curiae in supportof the County.
Vimilarly, the portion of Stcdi~n Conces~imscited by the Ninth &wit was a treatise’s
sntement t&t a possessoryicterestmaybeheld by ” ‘a merepermitter or Lkenset.“’ (Id. at p.
222, original ialics.) (But seeKaiser Co. v. Reid (1947) 30 Cal.2d 610,619 [I84 P.2d 8791,
cited by both Sradirun Comessiom and US. v. Countyof SanDiead [a “right to use[which is]
no more than a permit cr lic:nse” could not give rise to a p~~ssessary interest or ‘be
responsible for a ‘proFe*?’ tax”].)
COUrJTYOFLOS ANGELESY. 113
COUNTY OF Los ANGELESASSESSMENT
APPEALS!
BD.
13 Cal.App.4tb 102; - Cal.Rptr.Zd - [Feb. 19931
were arrived at through a market process by which the rent-a-cars evaluated

and agreed to pay reasonable value for their possessory interests. But this
analysis again fails to differentiate between the possessor-yinterests in
question and the valuable but intangible business opportunities for which the
agreements provide and the concession fees also pay.
Furthermore, the County’s argument cannot overcome the evidence and

determination below that the income the rent-a-cars earn at their airport
locations stems largely from commercial endeavors other than their physical
facilities there, i.e., enterprise. There was substantial evidence that most of
the income upon which the concession fees and hence the County’sv&a-
tions were based derived not from the rent-a-cars’ limited physical presence -
at the airport but from remote and extensive business techniques to draw
*. customers and reservations. But that is neither an accurate nor a proper basis
to determinethe value of taxable property, even if the property is a posses-
sory interest lease providing for percentage rentals. (California Portland
Cement Co. v. State Bd. of Equalization (1967) 67 Cal2d 578, 584 [63
CaLRptr. 5,432 P.2d 7001; Counry of Riverside v. Palm-Ramon Development
Co. (1965) 63 CaL2d 534, 538 [47 CaLRptr. 377, 407 P.2d 289J.)
“4
Accordingly, the trial court properly refused to reinstate the County’s
theory of valuation and its resultin,0 assessments.’ This does not mean that
valuation of the rent-a-cars’ possessory interests may not consider their
airport locations, as contributing to and enhancing their independent valueas
business properties. (Cf. County of Stanislaus V. Assessment Appeals Bd.,
supra, 213 Cal.App.3d at pp. 14551456.) That factor, which the rent-a-cars
have represented their own appraisals took into account, remains appropriate
for consideration in any reassessment. However, as between the possessory
interest concepts and valuation methods adduced below, the Board and the
trial court properly disapproved the County’s.
I
hS?OSITION
The judgment is affmed.

‘7
-.:’
-4 Boren, P. J., and Nott, J., concurred.
:.
c
it
;;:,
Le.
i.’I-
L..
5
$>.
If
‘h
$f wc: find it unnecessaryto consider the ConStitUtiOnal
qUeStiOn
of unequal taxation.
is;, :
FREEPORT-MCMORAN RESOURCE PARTNERS v.
COUNn OF LAKE
12 Cal.App.4th 634; - Cal.Rp!dd - [Jan. 19931
llll CNo.A055683. Fust Dist., Div. Two. Jan. 19. 1993.1
FREEPORT-McMORAN RESOURCE PARTNERS, Plaintiff and

Appellant, v.
COUNTY OF LAKE, Defendant and Respondent.
SUMMARY
_I --- _._- --- Z~anxtim in .which a Peothetmal newer &+.nt owner challenged the
county’sasses-g~~-~~~~~~~~~~l. ..--L
county summary judgment. The owner had acquired long-term contracts to
sell electricity to a power company for a fixed price. This particular type of
contract was subsequently disapproved by the California Public Utilities
Commission, but existing contracts remained in force. In assessing the value
of the owner’s plants, the county assessor calculated the income stream for
the years of the contract by reference to the fixed energy price in the
contract. The owner challenged the assessment,asserting that the valuation
should have been based on the market price for energy, an amount lower
than the contract price. The county board of equalization upheld the asses-
sor’s method of forecasting income. The owner brought its action in superior
court for refund of taxes and declaratory relief. The trial court found that the
income approach was the appropriate method by which to determine the fair
market value of the property, that the assessor’s and the board’s valuation
method was valid, and that substantial evidence supported the board.5
determination concerning the proper application of the income approach to
valuation. (Superior Court of Lake County, No. 26135, Robert L. Crone, Jr.,
Judge.)
The Court of Appeal affirmed. It held that the full value of the property
included projected income at the contract rates, rather than market rates,
since a prospective purchaser would be willing to pay more for the plant
with the existing contracts. The court also held that the contracts were the
. means by which the property was put to beneficial use for purposes oi
:t assessing the property’s full value. It preliminarily held that the question
presented was one of law, and thus it reviewed the trial court’s decision de
novo. (Opinion by Kline, P. J., with Smith and Benson, JJ., concurring.)
FREEPORT-MCMORAN RESOURCE PARTNERS v. 635
COUNTY OF LAKE
12 Cal.App.4th 634; - CaLRprr 7d - [Jan. 1993)
HEADNOTES
Classified to Califorma Digestof Offhal Reports
(la, lb) Property Taxes $ 33-Assessment-Validity-Standard of Re-

view-Challenge to Method of Assessment Used.-On appeal of a
summary judgment, by which the trial court ruled that a county asses-
sor’s method of valuation of certain property was valid, the issue was
one of law, and thus a de novo standard of review was applicable. The
property owner, who operated geothermal plants, had acquired con-
tracts to sell eleccriclty to a power company at a fixed price. This
particular type of contract was disapproved by the California Public
Utilities Commission, but existing .cootracts remained in force. The
county assessor calculated the income stream for the years of the
contract by reference to the fixed energy price in the contract. The
owner asserted that the valuation should have been based on the market
price. The parties disputed which method of determining the income
stream was the more appropriate, but there were no disputed issues of
fact. The parties agreed even on the amount of the valuation under
either approach. Thus, the question presented was one of law.
(2) Property Taxes 9 33-Assessment-Validity-Standard of Review.

-Where a taxpayer challenges the validity of the valuation method
used by an assessor, the trial court must determine as a matter of law
-- -‘-....-....
l%lgemEe*-
violation of the standards pre&ibed bj; law. Thb --
appellate court’s review of such a question is de novo. By contrast,
where the taxpayer challenges the application of a valid valuation
method, the trial court must review the record presented to the board of
equalization to determine whether the board’s findings are supported
by substantial evidence but may not independently weigh the evidence.
The appellate court also reviews a challenge to application of a valua-
tion method under the substantial evidence rule.
(3) Property Taxes 0 42-Assessment-Valuation-Full Value or Fair

Market Value: Words, Phrases, and Maxims-Full Value-Fair
Market Value.-For purposes of Rev. & Tax. Code, 0 401 (all prop-
erty subject to general property taxation must be assessed at its full
value), full value, or fair market value, is a measure of desirability
translated into money amounts, and might be called the market value of
property for use in its present condition.
(4) Property Taxes 6 42-Assessment-Valuation-Methods-Income

Method.-In assessingproperty for tax purposes, the income method is
636 FREEWRT-MCMORAN F&SOURCE PARTNERS v.
COUNTY OF LAKE
12 Cal.App.4tb
634; - Cal.Rptr.2d - [Jan. 19931
one of three basic methods for determining full cash value, the others
being the comparative sales approach and the reproduction and replace-
ment cost approach. The income method rests upon the assumption that
in an open market a willing buyer of the property would pay a willing
seller an amount approximately equal to the present value of the future
income to be derived from the property. Under this approach, an
appraiser values an income-producing property by estimating the
present worth of a future income stream. The income approach may be
called the capitalization method because capitalizing is the process of
converting an income stream into a capital sum, i.e., value. The asses-
sor capitalizes the sum of anticipated future installments of net income
from the property, less an allowance for interest and the risk of partial
or no receipt. Since a property’s full value must be determined by
reference to the price it would bring on an open market, the net
earnings to be capitalized are not those of the present owner of the
property, but those that would be anticipated by a prospective
_.--_-- .-. .. .
.*.A=% -,.-.,-,,,,.,,------~----“-----
--.----.
-. purchaser. .-
- __-_- -.-A-~-.--.-w--- - -r_ .--t--.-t. d.IL_..______I_
- __e-___
e-- uI-r.Mcc- __4-a---
I_ me.-. - .,,UZi.A--.--...
U,..C
@a-Sc) Property Taxes 9 42.2-Assessment-Valuation-Capitaliza-
tion of Geothermal Plant’s Income.-In valuing geothermal power
plants for property tax purposes, the county assessor properly capital-
ized the plant’s income from fixed-priced contracts under which the
plant sold electricity to a power company at rates above market price.
, The plant’s owner had acquired the long-term contracts to sell electric-
ity for a fixed price. Although this particular type of contract was
subsequently disapproved by the California Public Utilities Commis-
sion, existing contracts remained in force and could be transferred to
subsequent purchasers. Even though the contracts were no longer
jn available, the full value of the property included projected income at
:/ the contract rates, rather than market rates, since a prospective pur-
.I i
chaser would be willing to pay more for the plant with the existing
contracts. Also, the contracts were the means by which the propert!
was put to beneficial use for purposes of assessing the property’s full
I value. Moreover, the higher price received under the contracts was not I
the result of successful operation of the plants but of the regulatory
scheme that allowed the owner the benefit of a long-term fixed contract
I price.
#”
LL [See Cal.JurJd, Property Taxes, Q78; 9 Witkin, Summary of Cd.
J. Law (9th ed. 1989) Taxation, 8 ISS.]
(6) Property Taxes § 12-Subjects of Taxation-Personal Property-

Intangible Values .-Although only tangible personal property is sub-
ject to taxation under Cal. Const., art. XIII, p 2, intangible values that
FREEPORT-MCMORAN RESOURCE PARTNERS w. 637
COUNTY OF LAKE
12 CaLApp.4th 634. - Cal.Rptr.2d - IJan 1993)
cannot be separately taxed as property may be reflected in the valuation

of taxable property. Thus, in detertinlng the value of taxable property,
assessing authorities may take into consideration earnings derived
therefrom, which may depend upon the possession of intangible rights
and privileges that are not themselves regarded as a separate class of
taxable property.
(7) Property Taxes 0 42-Assessment-Valuation-Methods-Income

Method-Earnings From Enterprise Activity.-Under the income
approach to valuation of taxable property, only earnings from the
property itself or the beneficial use thereof are to be considered.
Income derived in large part from enterprise activity may not be
ascribed to the property. When no sound or practicable basis appears
for apportionment of income as between enterprise activity and the
property itself, then a method may be employed which imputes an
appropriate income to the property. c
COUNSEL .
Crosby, Heafey, Roach & May, Peter W. Davis, John E. Carne and Peter L.
Shaw for Plaintiff and Appellant.
Cameron L. Reeves, County Counsel, and Anita L. Grant, Deputy County

Counsel, for Defendant and Respondent. __ ____ _.r-_y-- ‘--‘--~sax.w.~-w.z<M~~
-.---0I a..- __-
;---..---- .__-- -.-w--.--c _^ --I---“-.-“-I----“-
-p----=““q- e-.-.-z-
_--. ..UP%-.
. &:a.*#p=b~++G-=z=--nv- .-----
.^--_- m.I.-.-.,^*.--. ___- --. -------.
--
Endman, Lincoln, Turek & Heater; Donald R. Lincoln, Henry E. Heater,
Thomas M. Fries and Allen Lenefsky as Amici Curiae on behalf of Defend-
ant and Respondent.
OPINION
KLINE, P. J.-This case arises from a dispute regarding the property tax
assessmentof geothermal power plants owned by appellant Freeport-McMo-
ran Resource Partners (Freeport). Appellant contends the county overvalued
the property by basing its assessmenton capitalization of the income stream
of fixed price contracts under which appellant sells electricity to Pacific Gas
and Electric Company (PG&E) at rates well above present market rates.
STATEMENT OF THE CASE AND FACTS :i
.”
I,
Under the Public Utility Regulatory Policies Act of 1978 (PURPA), 16
United States Code section 796 et seq., and Federal Energy Regulatory
Commission (FERC) rules, utilities are required to purchase electricity from
“qualifying facilities” (facilities that meet FERC requirements) at a price no
greater than the utility’s “avoided cost” (the cost the utility would have
incurred by generating the electricity itself). (16 U.S.C. $ 824a-3 (1985); 18
C.F.R. 9 292.1Ol(b)(6)(1990).) As a result of PURPA, the California Public
Utilities Commission (CPUC) approved “standard offer” contracts to en-
courage qualifying facilities to sell energy to public utilities on standardized
terms. The energy prices in these contracts were developed by public utilities
and approved by the CPUC in 1983 based on then current forecasts of future
market prices for fuel. Four types of standard offer contracts were devel-
\ oped, of which two are relevant here. Standard Offer 1 agreements (Sol)
provided for payments to be adjusted throughout the contract term to reflect
changes in the utility’s short-run avoided costs; Standard Offer 4 agreements
(SO4) were long-term energy supply contracts that contained various pay-
ment options including a fixed price option.
PURPA (West Ford Flat and Bear Canyon Creek). Appellant had previously
acquired from third parties SO4 contracts with 20-year terms and the plant-s
began supplying energy to PG&E under the terms of these contracts in
1989.’ The contracts provided for a fixed price for the first 10 years based
upon 1983 projections of PG&E’s avoided costs over the contract term, the
principal component of these long-run avoided costs being the market price
of natural gas purchased by PG&E to generate electricity. Payment during
the subsequent 10 years was to be based cn PG&E’s short-run avoided
operating costs, which are adjusted from time to time to reflect changes in
the market price of natural gas.
In 1985, the CPUC suspended approval of new SO4 agreements with

fixed energy prices, after determining that the fixed prices did not reflect
market prices for energy because they were based on overestimates of the
utilities’ long-run avoided operating costs due to incorrect assumptions that
market prices for natural gas would continue to rise. As of March 1, 1989,
the only new standard offer contracts available to geothermal plants from
PG&E were the adjustable SO1 agreements. Existing SO4 contracts re-
mained in force.
The county’s witnesses testified before the Lake County Board of Super-
visors, acting as the Board of Equalization (Board) that the terms of the SO4
‘Appellant ongmally aqulred SO4 contracts for supply of energy from as yet unbullt
facilities m Sonoma and Lake counties; PG&E consented to transfer of the contracts to
appellant’s propertles.
~REEPORT-MCMORAN RESOURCE PARTNERS v. 639
&UNIT OF LAKE
12 Cal App 4th 634. - Cal Rptr.Zd - [Jan 1993)
contracts could not be changed during the contract term: that the contractc
were abslgnable; that appellant’s properties would be offered for sale only in
conjunction with the SO4 contracts that provided the terms for sale of
electricity and so were necessary to make the projects economically viable;
that a project with an SO4 agreement would sell at a higher price than one
with an SO1 agreement because the former guarantees a higher income; and
that an SO4 contract in and of itself (not attached to a project) would not
have value in the marketplace. Appellant’s witness testified that geothermal
plants and SO4 contracts are distinct assets that can be sold separately and
have separate values, but acknowledged that as a general rule purchasers of
Itic pro]ccts Si-muflaneous~ypurchase the Contracts.
In determining the assessed value of appellant’s plants, the assessor

calculated the income stream for the years 1989-1998 by reference to the
fixed energy prices in the SO4 agreements, The West Ford Flat plant was
valued at $166,163,000, and the Bear Canyon Creek plant was valued at c !j
$100,630,000. Appellant applied for changed assessment, contending the ‘I
assessor should have based his valuation on the market prices for energy in
effect in 1989, which were much lower than the prices in the SO4 contracts.
According to appellant, the two plants should have been valued at
$55,412,000 and $22,908,700 respectively. The Board held a hearing on
appellant’s applications on November 29 and 30, 1989, and issued findings ;
of fact on May 22, 1990, upholding the assessor’s method of forecasting I
income. The Board determined that the taxable values of the plants were I
_.---- ------
qgg&&&~~~~~~=~__..c---- _-- --_--&y=-q&Tp= .----
_I c______.__ ..-_ .NI.. ,.J....e..~s-~~
--...----.---.----~-
On November 13, 1990, appellant filed a complaint in superior court for 1

refund of taxes and declaratory relief. The parties stipulated to the relevant
facts and submitted the matter on cross-motions for summary judgment. The
parties agreed that the capitalized income approach was the proper one to
use in determining the value of geothermal properties but disagreed as to the
proper method for determining the income stream to be utilized under this /
approach. The parties further agreed that if appellant’s method of determin-
ing the income stream was accepted the correct values of the two properties
would be $55,412,000 and $22,908,700, while if the Board’s method was
accepted the correct values would be $157,108,287 and $93,801,278.
On August 28, 1991, the court granted the county’s motion for summary
judgment, ruling that the income approach was the appropriate method by
which to determine the fair market value of the properties, that the assessor’s
and Board’s valuation method was valid and that substantial evidence
supported the Board’s determination concerning the proper application of
the income approach to valuation.
440 FREEPORT-MCMORAN RESOURCE PARTNERS v.
bJNTY OF LAKE
12 Cal.App.4th 634; - CaLRpcr.2d - [Jan. 19931
A timely notice of aooeal was filed on November 15, 1991.
(la) The patties dispute whether this court should employ a de nova or
a substantial evidence standard of review in this case. (2) Where a
taxpayer challenges the validity of the valuation method used by an assessor,
the trial court must determine as a matter of law “whether the challenged
method of valuation is arbitrary, in excess of discretion, or in violation of the
standards prescribed by law.” (Bret Harte Inn, Inc. v. City and County of San
Francisco (1976) 16 Cal.3d 14,23 [127 Cal.Rptr. 154,544 P.2d 13541.) Our
review of such a question is de novo. (Dennis v. County of Santa Clara
the trial coc must review-the record presented to the Board to determine
whether the Board’s findings are supported by substantial evidence but may
not independently weigh the evidence. (Bret Harte Inn, Inc. v. City and
County of San Francisco, supra, 16 Cal.3d at p. 23; Dennis v. County of
Santa Clara, supra, 215 Cal.App.3d at p. 1026.) This court, too, reviews a
challenge to application of a valuation method under the substantial evidence
rule. (Dennis v. County of Santa Clara, supra, 215 Cal.App.3d at p. 1026.)
(lb) In the present case, the assessoremployed the income approach to

valuation, which “estimates current fair market value of a property by
attempting to determine the amount that an investor would be willing to pay
for the right to receive the future income the property is projected to
produce.” (Union Pacific Railroad Co. v. State Bd. of Equalization (1991)
983, 989-990 [282 CaLRpu. 7451.) The parties stipulated
that they “%&reethat the ‘income approach to value,’ referred to in Rule 8,
18. CCR $ 8, is the proper approach for assessing properties of this kind”
and that the only dispute in the case is “about the proper method for
determining the income stream for these properties under an income ap-
proach to valuation.” Appellant views this as a case for de novo review,
characterizing the issue as whether the valuation method used by the county
and Board was proper; the county views the disputed issue of which income
stream to utilize as a question of “application” of the income method of
valuation.
The determination whether a challenge is to “method” or “application” is

not always easy. In Union Pacific Railroad Co. v. State Bd. of Equalizatron,
supra, 231 Cal.App.3d 983, 989, railroad operating assetshad been assessed
FREEPORT-MCMORAN KESOURCE PARTNERS v. 641
COUNTY OF LAKE
I? Cal App 4th 634. - Cal.Rptr.Zd - [Jan. 19931
by means of the “ ‘income’ or ‘capitalized earnings ability’ approach.” The

parties agreed this wac; the hest general approach for valuing the assets in
question but disputed issues regarding the size of the income stream-
whether certain costs should be deducted as expenses and whether the
income stream should be projected as a perpetuity or a limited lifetime. (id.,
at pp. 989-990.) With respect to the standard of review, the court stated: “A
valuation method may be recognized as theoretically coherent and logical,
yet be so inappropriate to the type of property being assessedas to ensure,
for all properties of that general kind, that the results reached will not
approximate fair market value. A claim of this kind could be termed a
challenge to the ‘application’ of the method, presenting a factual question.
But where the claim is that, due to the basic undisputed characteristics
shared by an entire class of properties, the challenged method will produce
systematic errors if applied to properties in that class, the issue is not factual
but legal. The issue is not whether the assessor misunderstood or distorted
the available data, but whether he or she chose an appraisal method which by
its nature was incapable of correctly estimating market value.” (231
Cal.App.3d at p. 992; see Southern Pac[fk Transportation Co. v. State Bd. of
Equalization (1987) 191 Cal.App.3d 938, 956 [237 Cal.Rptr. 1911.)
Similarly, here, the parties dispute which of two possible methods of

determining the income stream to be used in an assessmentunder the income
approach to valuation is the more appropriate given the nature of the
properties and industry in question. There are no disputed issues of fact; the
parties JlfAhewtia&
a~re-~e_n~JMunomu-- -L--.4--.
..-.,;;n-,-c~.~.-rrr.;-~ - 2 _cc__..__e.--ru.
=-- ‘Z;. _.‘;. _____-
Bz?fson -presented%7@s&Bffawa.iWiiE~~r~~.the cow-
II.
(3) Revenue and Taxation Code section 4012 requires that all property
subject to general property taxation be assessedat its “full value.” “ ‘[FJull
cash value’ ” or “ ‘fair market value’ ” is defined 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 advan-
tage 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 purpos-
es.” (3 110, subd. (a); see De Luz Homes, Inc. v. County of San Diego (1955)
45 CaL2d 546, 563 [290 P.2d 5441; Cal. Code Regs., tit. 18, p 2.) Fair
market value “‘is a measure of desirability translated into money amounts
2All statutory references will be to the Revenue and Taxation Code unless otherwise
specified.
642 FREEPORT-MCMORAN RESOURCE PARTNERS v. I
“V”‘.. . Y.
II 12 Cal.App.4th 634; - Cal.Rptr.2d - {Jan. 19931 I
[citation], and might be called the market value of property for use in ifs
present condition.’ ” (Union Pacific R.R. Co. v. State Bd of Equalization
(1989) 49 CaL3d 138, 148 [260 CaLRptr. 565, 776 P.2d 2671, quoting De
Luz Homes, Inc. v. County of San Diego, supra, 45 Cal2d at p. 562, italics
added in Union Pacific.)
The income method is one of three basic methods for determining

full cash value, the others being the comparative sales approach and the
reproduction and replacement cost approach. (Cal. Code Regs., tit. 18, $ 3;
Bret Harte inn, Inc. v. City and County of San Frncisco, supra, 16 Cal.3d
14, 24.) “The income method rests upon the assumption that in an open
market a willing buyer of the property would pay a willing seller an amount
approximately equal to the present value of the future income to be derived
from the oroDertv.‘* (Bret Harte Inn. Inc. v. City und County of San Francisco,
income stream. “Ihe ‘income- approach may called the capitalization

method because capitalizing is the process of converting an income stream
into a capital sum, i.e., value.’ [Citations.] The assessorcapitalizes ‘the sum
of anticipated future installments of net income from the property, less an
allowance for interest and the risk of partial or no receipt.’ [Citation.]”
(Union Pacific R.R. Co. v. State Bd. of Equalization, supra, 49 Cal .3d at p.
148; see Cal. Code Regs., tit. 18,s 3, subd. (e) (defining income approach as
“[tlhe amount that investors would be willing to pay for the right to receive
the income that the property would be expected to yield, with the risks
attendant upon its receipt”].) Since a property’s “full value” must be deter-
mined by reference to the price it would bring on an open market, “[tlhe net
earnings to be capitalized . . . are not those of the present owner of the
property, but those that would be anticipated by a prospective purchaser.”
(De LK Homes, inc. v. County of San Diego, supru, 45 Cal.2d at p. 566.)
(5a) Appellant contends that assessment of the value of its properties

based upon the income to be generated under the SO4 contracts violated the
requirement that an objective, market based standard be used to determine
the income to be capitalized. According to appellant, because SO4 contracts
wcrc no longer available as of the lien date, the value of the properties must
be determined by reference to the market price for electricity reflected in an
SO 1 contract.
Appellant relies upon cases holding that the value of properties subject to
below-market rate leases must be determined by reference to the income the
properties could generate on the open market rather than the income gener-
ated under the actual contracts. (Clayton v. County of Los Angeles (1972) 26
;~ -.---I.. -- _-
FREEPORT-M&IoR 1~: KEWI RCI- PAR: ::iR, 643

COUNTY OF LAM.
12 CaLhpp 4th 63-l - Cal Kptr 7d - [ian lYY3\
Cal.App.3d 390 [ 103 Cal.Rptr. 6X7]; Dentus v. County of Santa Clara, supra,
215 Cal.App.3d 1019.) These cases rest upon the premise that property
owners cannot deflate the value of their properties for tax purposes by
entering “had” leases. (Cluyton v. County oj Los Angeles, supra, 26
Cai.App.3d at pp. 392-393; Denrlis v. County of Santa Clara, supra, 215
Cal.App.3d at pp. 1029-1031; see Carlson v. Assessment Appeals Rd. I
(1985) 167 Cal.App.3d 1004 [213 Cal.Rptr. 555) [improper to consider
privately imposed restrictions on use of property in determining value].) As
explained in De Luz Homes, Inc. v. County of San Diego, supra: “The present
owner may have invested well or poorly, may have contracted to pay very
high or very low rent, and may have built expensive improvements or none
at all. To value property by capitalizing his anticipated net earnings would
make the value of property equal to the present value of his profits; since,
however, the lcgislatrve standard of value is ‘full cash value,’ it is clear that
whatever may be the rationale of the property tax, it is not the profitableness
of property to its present owner.” (45 Cal.2d at p. 566.)
The cases do not, however, require that valuation be based on market
rather than actual income forecasts in all circumstances. In De Luz Homes,
Inc., the court determined that the value of a housing project located on a
military installation should be determined by capitalizing expected future
actual income, noting that future income could be expected to remain stable
because rents were controlled by the government and occupancy was assured
by the fact that the project was located on a permanent military installation.
(45 Cal.2d at pp. 571-572.3 Host International, Inc. v. County of San Mate0
(1973) 35 Cal.App.3d 286 [llO CaLRptr. 6521, involved valuation of the
possessory interest under a lease of space for food concessions at San
valuation -based on its actuai rental Faymeni was improper because these
payments exceeded the income that could have been obtained if the lease-
hold was sold on the open market. The court held it proper to use Host’s
experience as a guide to market value, as there were no sales of comparable
leases and no evidence other ooerators would not assume the existing lease.
(35 Ca.l.App.3d at p. 289.)
In the present case, appellant owns a geothermal plant and a contract
guaranteeing for 10 years an income that exceeds the income obtainable
3De Luz Homes, Inc. did not mvolve a question of market versus above- or below-market
rents; the alternatIve means of determinmg future income considered by the court was to
impute an amount of mcome equal to a mmimum reasonable return on estimated market
value. (45 CaL2d at p. 565.) The court indicated that the imputed income method should be
used where future income could not be estimated with reasonable accuracy or could not be
ascrlbed
. . entirely
._. to -_-
the property,
---. as when actual income is derived largely from enterprise
absent the contract. Appellant’s argument that its future income must be
determined based on current market prices because SO4 contracts are no
longer available ignores the obvious fact that appellant’s income for the ten
year period in question is fixed by the SO4 contract at a level above the
current market price. The evidence in this case showed that appellant’s plant
would only be offered for sale in conjunction with the SO4 contract because
the contract is integral to the economic viability of the plant and that a
prospective purchaser would be willing to pay more for a plant with an SO4
contract than for a plant without one because the SO4 contract guarantees a
higher income. As stated in Host fntemational, Inc., “De Luz permits refer-
ence to appellant’s operation in determining what another lessee would pay
for the same space upon like terms. It recognizes also, as a factor in market
value of the possessory interest, governmental control of the project and
stability of income . . . .” (35 Cal.App.3d at p. 290.) Since the “full value”
of appellant’s property must be taxed (0 401), and “full cash value” must be
italizing the net earnings
-----
a-==@=@- .--A-
supra, 45 Cal.2d at p. 566), to ignore the SO4 contracts would be to
artificially deflate the value of appellant’s properties.4
Indeed, appellant’s characterization of the “market” to which reference

must be made in determining the value of its properties is misguided. While
appellant stresses that only SO1 contracts are currently available from
PG&E, this simply means that a purchaser negotiating with PG&E for a new
power purchase agreement would only be able to obtain an SO1 contract.
The evidence showed that a purchaser could obtain an SO4 contract in a
transaction for an existing power project with an SO4 contract, and that no
SO1 contract projects were in operation in PG&E territory. Since some 60 to
70 percent of the 1,300 to 1,500 qualifying facilities in California operate
I 4Appellant’s reliance on the board of equalnatlon’s property tax rule 8. suhdlvlslnn rd) I\
unavailing. Rule 8, subdivisIon (d), provrdes: “ln valumg property encumbered by a lease. Lhc
I net income to be capltabzed IS the amount the property would yield were tt noI so encum-
!I bered, whether this amounts exceeds or falls short of the contract rent and whether tbe lessor
or the lessee has agreed to pay the property tax.” (Cal. Code Regs., tit 18. 5 8. subd. (d) )
Appellant extrapolates from this a rule rhat property must be valued without conslderatlon of
any type of contract pertammg to income to be denved from property. We are unwilimp to
accept appellant’s broad defimtlon of rule 8. subdivlslon (d). Tbe rule is by its terms
addressed specifically to leases: It serves the purpose of precludmg potential manlpulatlon by
property owners of tbe taxable value of their property (See Clayton v County of Los Angdrs.
supra, 26 Cal.App.3d 390; Denms v. County of Sanfa Clara, supra, 215 Cal.App 3d 1019 )
f II The present case presents no posslblllty of such mampulatlon. smce the Income to be
r generated by the property IL I’LXL~by CUIIKLLC~ terms tha cannot tw altered CdpltJlzattclll clt
. ii the Income to be generated under the contract properly measures the value of appellant’s
property because it. 1s. the mcome a prospective purchaser of the property not only could
I!‘+
-
FREEPORT-MC-MORAN RESOURCE PARTNERS 1’.

COCNTY oF LAKE
12 Cal App.4th 634. - Cal.Rptr.Zd - [Jan. 19933
w1t.hSO4 contracts, the assessordetermined that the market for SO4 projects
constituted a market for prospective purchasers. The evidence thus shows
that the proper market against which to judge the value of appellant’s plants
was that consishng of existing facilities with SO4 contracts.
We are not persuaded by appellant’s ‘argument that consideration of the

SO4 contract income impermissibly taxes nontaxable intangible property.
(6) Only tangible personal property is subject to taxation. (Cal. Const., art.
XIII, $ 2; ITT World Communications, inc. v. County of Santa Clara (1980)
101 Cal.App.3d 246, 251 [I62 Cal.Rptr. 1861.) But “‘[i]ntangible values
. . . that cannot be separately taxed as property may be reflected in the
vufuarion of taxable property. Thus, in determining the value of [taxable]
property, assessing authorities may take into consideration earnings derived
therefrom, which may depend upon the possession of intangible rights and
privileges that are not themselves regarded as a separate class of taxable
property.’ ” (County of Stanislaus v. Assessment Appeals Bd. (1989) 2 13
Cal.App.3d 1445, 1455 [262 Cal.Rptr. 4391, quoting Roehm v. County of
Orange (1948) 32 Cal.2d 280,285 [ 196 P.2d 5501, italics added in County of
Sfanislaus.) “ ‘[MJarket value for assessmentpurposes is the value of prop-
erty when put to beneficial or productive use.’ ” (County of Stanislaus v.
AssessmentAppeals Bd., supra, 213 Cal.App.3d at p. 1455, italics in origi-
nal.) For example, County of Stanisfaus, supru, involved taxation of a cable
television franchise. The franchise was viewed as consisting of two compo-
nents, the right to use public streets for cables and the right to charge fees to
subscribers for use of the cable facilities. The former component, the
~.R.. ----W=snrr-~~~~~~.:~~~~~~
- ...-_.-v .-. ,~s‘k..n-z
r-~~sliie~~~_~~-iii;cTt:~‘C~~less~~e court concluded that the value of the
intangible right-without which the possessory interest could not be put to
beneficial or productive use-should be considered in valuing the possessory
interest. (213 Cal.App.3d at pp. 1451-1456.) (Sb) In this case the SO4
contracts are the means by which appellant’s properties are put to beneficial
use and must be considered in assessing the properties’ “‘full value.”
We are similarly unpersuaded by appellant’s argument that valuation on

the basis of the SO4 contract improperly taxes appellant’s enterprise activity
or business skill. (7) Under the income approach to valuation, only
“‘earnings from the property itself or the beneficial use thereof’ are to be
considered: income derived in large part from enterprise activity may not be
ascribed to the property. (California Portland Cement Co. v. State Bd. of
Equalization (1967) 67 Cal.2d 578, 584 [63 Ca1.Rpt.r. 5, 432 P.2d 7001;
United Air tines, Inc. v. County of San Diego (1991) 1 Cal.App.4th 418,438
[2 Cal.Rptr.‘Ld 2121.) “When no sound or practicable basis appears for
apportionment of income as between enterprise activity and the property
itself, then a method may be employed which imputes an appropriate income
to the property.” (California Portland Cement Co. v. State Bd of Equaiiza-
tion, supra, 67 Cal.2d at p. 584; United Air Lines, Inc. v. County of San
Diego, supm, 1 Cal.App.4t.h at p. 438.) In California Porthd Cement Co.,
the owner of a quarry and adjacent cement factory contended that profitabil-
ity of its manufacturing business could not be considered in valuing the
property. The court rejected the owner’s argument that its business profits
were not relevant to determining the “full cash value” of the cement mill as
“a play on words which lacks persuasion,” noting that the quarry and cement
mill were “operated as a unit, with each contributing to the economy and
profitability of the other.” (67 Cal.2d at p. 585) (SC) In the present case,
because the SO4 contract is the means by which appellant can sell the
electricity it produces, the income generated by the SO4 contract is inextri-
Moreover, there is no evidence the increased value of the SO4 contract

over an SO1 contract’s market rate is due to appellant’s enterprise activity:
The higher price received under the SO4 contract is not the result of
appellant’s successful operation of its plants but of the regulatory scheme
that allowed appellant the benefit of a long-term fixed contract price.
‘Ihe judgment is affirmed.
Smith, J., and Benson, J., concurred,

.. . __- -.. _ _ --.-- ____ -_- -..,-- -
I____ ---.-
FREEPORT-MCMOIUN RESOURCE PARTNERS
Y. 1066a
[No. A055683. First Disc, Div. Two. Feb. 18, 1993.1
FREEPORT-McMORAN RESOURCE PARTNERS, Plaintiff and

Appellant, v.
COUNTY OF LAKE, Defendant and Respondent.
[Modification* of opinion (12 CaLApp.4th 634; 16 Cal.Rptr.2d 428) on

denial of petition for rehearing.]
KLINE, P. J.-The opinion filed on January 19, 1993, is hereby modified

as follows:
At puge I3 [ 12 Cal.App.4th 644, advance report]: Footnote 4 is deleted.

The following is inserted at the end of the page [12 Cal.App.4th 644,
advance report, foll. line 191 as a new paragraph
“Appellant’s reliance on the board of equalization’s property tax rule 8,

bdivision (d), is unavailing. Rule 8, subdivision (d), provides: “In valuing
e operty encumbered by a lease, the net income to be capitalized is the
amount the property would yield were it not so encumbered, whether this
amounts exceeds or falls short of the contract rent and whether the lessor or
the lessee has agreed to pay the property tax.” (Cal. Code Regs., tit. 18,s 8,
subd. (d).) Appellant extrapolates from this a rule that property must be _-- ;
-m_&&&*F”“~~~~-~y- 7,*
z?%?%&i %%ii-p%~~~%&?&e unwilling‘ to accept appellant’s broad 1i I
interpret&on. Rule 8, subdivision (d), is by its terms addressed specifically
to leases; it serves the purpose of precluding potential manipulation by
property owners of the taxable value of their property. (See Ctayton v.
County of Los Angeles, supra, 26 Cal.App.3d 390; Dennis v. County of Santa
Clara, supra, 215 Cal.App.3d 1019.) The present case presents no possibility
of such manipulation, since the income to be generated by the property is
fixed by contract terms that cannot be altered. Unlike leases (Chytok v.
County of Los Angeles, supra, 26 Cal.App.3d 390; Dennis v. County of Santa
Chzra, supru, 215 Cal.App.3d 1019) or deed restrictions (Curlson v. Assess-
meti Appuh Bd. I, supra, 167 Cal.App.3d 1004), the contracts that deter-
mine the income to be produced by appellant’s properties are regulated by
yThis rnoditicationrequire movementof text affecting pages 637-646 of the bound
-.- -.- -___A
Doc 2006-1081 (16 pgs)
(C) Tax Analysts 2006. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
Special
Reports
Taxation Silos: Embedded Intangibles and
Embedded Services Under U.S. Law
by Richard L. Doernberg
foreign related party for the U.S. taxpayer to per-
Richard L. Doernberg is the K.H. Gyr Pro- form research and development for the foreign re-
fessor of Law at Emory University School of lated party. The R&D services lead to the develop-
Law in Atlanta. This article was prepared for ment of know-how, which is memorialized in
the 2005 George Washington University/IRS technical documentation provided to the taxpayer.3
18th Annual Institute on Current Issues in The example concludes that the arm’s-length pricing
International Taxation. of the know-how element must be determined under
the rules governing intangibles.4
Copyright © 2005, Richard L. Doernberg.
Treasury has received comments on why this
‘‘embedded intangible’’ rule should be changed.5
Those who work in transfer pricing are concerned
about the transfer pricing implications, but there
T he U.S. Treasury has gotten the international
tax community’s attention by promulgating a
proposed transfer pricing regulation containing a
are also significant implications in other areas of an
approach that disaggregates services and intan-
special rule for services transactions that effect a gibles. Before looking at those implications, consider
transfer of intangible property.1 The proposed regu- another recent development.
lation provides that a transaction structured as a The American Jobs Creation Act of 2004 estab-
services transaction may ‘‘result in a transfer, in lished a new deduction for some domestic production
whole or in part, of intangible property, or may have activities. Internal Revenue Code section 199 allows
an effect similar to the transfer of intangible prop- a deduction for qualified production activities in-
erty, or may include an element that constitutes the come. Qualified production activities income in-
transfer of intangible property.’’ In that situation, cludes gross receipts from a ‘‘lease, rental, license,
the intangible element would be analyzed under the sale, exchange, or other disposition’’ of computer
applicable transfer pricing rule for intangibles.2
The following example illustrates the proposed

rule. A U.S. taxpayer enters into a contract with a 3
Prop. reg. section 1.482-9(m)(6), Ex. 4.
4
The result may be more income allocated to the U.S.
taxpayer for U.S. tax purposes.
5
1
See, e.g., ‘‘Deloitte Criticizes Proposed U.S. Services
Prop. reg. section 1.482-9(m)(2). Transfer Pricing Regs,’’ 2004 WTD 61-17 or Doc 2004-6535
2
Prop. reg. section 1.482-4. (Mar. 30, 2004).
Tax Notes International February 13, 2006 • 561

Doc 2006-1081 (16 pgs)
Special Reports
Software payments may be made under mixed A. Employment Taxes
contracts. Examples of such contracts For example, in IRS CCA 200305007, the IRS
include . . . concessions of the right to use soft- ruled that when a taxpayer tried to disaggregate a
ware combined with the provision of transaction into a service and a royalty component,
services. . . . Where necessary the total amount the entire transaction would be treated as a pay-
of the consideration payable under a contract ment for services. In that ruling, the taxpayer was
should be broken down on the basis of the an accountant who provided both services and his
information contained in the contract or by own customer list to related entities that employed
means of a reasonable apportionment with him. To the extent that payments for the customer
appropriate tax treatment being applied to list were considered royalties, no employment taxes
each apportioned part.34 or income taxes would be withheld. The ruling
determined that the economic substance of the
But that same OECD Commentary appears to transaction revealed that all payments received by
restrict disaggregation when possible in favor of a the taxpayer were for services rendered and were
unified single characterization by referring to that subject to withholding. Stated differently, in this fact
portion of the commentaries dealing with distin- pattern the taxpayer was claiming that there was an
guishing know-how from services.35 embedded intangible being provided to his employer
— a customer list — but the IRS was unwilling to
In business practice contracts are encountered disaggregate the transaction:
which cover both know-how and the provision
Taxpayer was performing accounting services
of technical assistance. . . . The appropriate
for ABC PC under an employment contract.
course to take with a mixed contract is, in
The ABC PC tax return listed him as spending
principle, to break down, on the basis of infor-
90% of his time performing services for ABC
mation contained in the contract, and then to
PC. Whether as an employee, shareholder and
apply to each part of it so determined the
President of ABC PC, or as a limited partner to
taxation treatment property thereto. If, how-
ABC LP he was performing accounting duties.
ever, one part of what is being provided consti-
The flow of funds from the accounting clients
tutes by far the principal purpose of the contract
through ABC PC and ABC LP and finally to
and the other parts stipulated therein are only
Taxpayer was generated by accounting services
an ancillary and largely unimportant charac-
personally performed by Taxpayer as an em-
ter, then the treatment applicable to the princi-
ployee of ABC PC. Applying the economic sub-
pal part should generally be applied to the
stance test, we are satisfied that there was no
whole amount of the consideration.36 [Empha-
economic substance to the purported sale of
sis added.]
accounting client lists and subsequent royalty
Unfortunately, the OECD Commentaries provide payments to the Taxpayer. Given the signifi-
no guidance as to when a part of a contract is ‘‘an cant amounts reported as royalty payments by
ancillary and largely unimportant character.’’ For the Taxpayer, both individually and by ABC PC
example, if in a contract the provision of services and ABC LP, it is apparent that the classifica-
accounts for 90 percent of the contract value and the tion of these amounts as royalty payments was
provision of an intangible (for example, sale, license, merely a recharacterization of wages in order
or lease of copyrighted property) accounts for 10 to avoid employment taxes.
percent of the contract, should the payment in its The ruling does not foreclose disaggregation in all
entirety be treated as a payment for services? What cases, suggesting instead that the taxpayer may
if the split were 75/25 or 60/40? The resolution of have overclaimed. Nevertheless, the ruling does
that issue is really a function of tax administration evidence a reluctance to divide what is inherently a
rather than tax policy. services contract into a services contract and a
royalty contract.
As the tax system struggles with characterization
and disaggregation issues involving services and B. Tax-Exempt Entities
intangibles in the international tax context, we The ruling in the employment tax area relies
should recognize that those issues have also arisen heavily on a well-developed series of cases and
in other areas in the U.S. tax system. rulings involving similar issues (services versus
rents/royalties) with tax-exempt entities. IRC sec-
tion 511 imposes a tax on the unrelated business
34
taxable income of exempt organizations. IRC section
OECD Commentaries, art. 12, para. 17. 512(a)(1) defines the term ‘‘unrelated business tax-
35
OECD Commentaries, art. 12, para. 11. able income’’ as the gross income derived by any
36
OECD Commentaries, art. 12, para. 11.6. organization from any unrelated trade or business
566 • February 13, 2006 Tax Notes International

Doc 2006-1081 (16 pgs)
Special Reports
CFC1 may be subpart F income. To illustrate, sup- royalty income, then USCO might have a withhold-
pose that the IRS were to conclude that some or all ing obligation and Forco might have U.S. tax liabil-
of the payment was really either a royalty for the use ity.16
of a copyright right (for example, the right to use and If Forco were providing contract R&D services to
manipulate the software) or was a rental payment USCO, a determination that part of the payment
for the use of a copyrighted article (for example, use was a payment for know-how may well impose a
of the software for a limited period of time). Then the withholding obligation on USCO and a U.S. tax
fees received by CFC1 would most definitely be obligation for Forco if the know-how were considered
subpart F income.11 Both rental payments and roy- licensed to USCO.17
alty payments fall into the foreign personal holding
Both of those examples (that is, turning non-
company category of subpart F income. Even if subpart F into subpart F income and turning no
CFC1 were actively producing the software or mar- withholding obligation into a withholding obliga-
keting the software, no exception would be available tion) involve situations in which the IRS might find
for rents or royalties received from related parties.12 an embedded intangible in what is intended to be a
services contract. To be sure, there are many other
A variation of this first example might be a
situations when changing services income to royalty
situation in which CFC1 provides contract R&D or rental income may present an unpleasant sur-
services for CFC2. If, under the reasoning of the prise for taxpayers. But the reverse is also true.
proposed transfer pricing regulations, the IRS were There are many times when a taxpayer may think
to find that part of the payment to CFC1 was for the that the income generated is royalty or rental in-
acquisition of know-how, then subpart F income may come when the potential for an embedded service
result.13 Because subpart F income would probably may have unintended consequences.
be includable in USP’s tax return,14 the effects of
what may go on inside the section 482 or the section In the third example, suppose that USCO li-
censes, leases, or sells software to non-U.S. custom-
199 silos may be pronounced.
ers. USCo takes the position that the income gener-
Consider a second example not involving a sub- ated is foreign-source income.18 That position allows
part F determination. Suppose that USCO, a U.S. USCO to maximize the use of its foreign tax credits.
corporation, pays a fee to Forco, an unrelated foreign As part of the license, lease, or sales agreement,
corporation, for the same back-office functionality USCO and its customers enter into a separate
described in the previous example. If the fee paid is software maintenance contract under which USCO
treated as a payment for the provision of services
and the services are considered performed where the
server is located, then USCO has no withholding 16
obligation and Forco has not generated income tax- Both rental and royalty income would be subject to 30
percent U.S. withholding under IRC sections 881 and 1442 if
able in the United States.15 However, if the income is payments were deemed to be U.S.-source income. However, no
considered in whole or in part to be either rental or withholding would be required if USP received a Form
W-8ECI from Forco. Then Forco would file a Form 1120F and
report the income as income effectively connected with the
conduct of a U.S. trade or business. See IRC section 864(b). If
11
For this example, there is no need to distinguish between USP does not receive the Form W-8ECI, then there will be 30
whether the payment is a rental payment or a royalty percent withholding unless USP receives a Form W-8BEN
payment, because either category would constitute foreign indicating that a reduced rate of withholding under an
personal holding company income. applicable treaty applies. Here, it may be important to
12
determine whether the payment is rent or royalty, because
IRC section 954(c)(2)(A). treaties typically reduce the withholding rate for royalties,
13
Prop. reg. section 1.482-9(m)(2). If the know-how were but not for rental payments.
deemed to be licensed, then IRC section 954(c)(1)(A) would 17
If the know-how were deemed sold to USCO for a
result in subpart F income. There would be no active trade or noncontingent amount, withholding should not be required.
business income exception for royalty income from a related 18
party. For purposes of this article, it is not necessary to decide
14
among license, lease, or sales characterization. Assume that
Assuming that high tax exception or de minimis rules do under all three characterizations, foreign-source income
not apply. IRC section 954(b)(4) (high tax exception) and would result. IRC section 861(a)(4) (for license or lease
section 954(b)(3)(A) (de minimis rule). payments, the place where the property is used determines
15
Presumably, Forco would not be engaged in a U.S. trade source); IRC section 861(a)(6) (for purchased inventory, where
or business from this particular activity; even if Forco were title passes); IRC section 863(b) (for manufactured inventory,
engaged in a U.S. trade or business, the services income 50 percent of income sourced where title passes). Under IRC
would be foreign-source income, which would not be effec- sections 904(d)(2)(A) and 954(c), for this discussion assume
tively connected. See IRC section 864(c)(4). No gross base that any rental or royalty income generated would meet the
taxation would arise under IRC section 881 because the active rents and royalties exception in reg. section 1.954-
services would generate foreign-source income. 2(b)(6).

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promises to provide users with upgrades or updates ment), the customer, in one sense, acquires the
to the software and to provide technical support.19 services that went into making the product, the
Typically, industry practice is to provide updates component parts that make up the product, the
and technical support under a single agreement financing that made production possible, the intan-
with a single price.20 gibles used in the production process, and the trade-
The proposed regulations put taxpayers on notice mark stamped on the product. In general, the U.S.
that under IRC section 199, a software maintenance tax system recognizes that it is not desirable to
contract between USCO and a foreign customer may break up every transaction into many parts.
contain an embedded service.21 If so, then the tech- In Rev. Rul. 75-254,23 the IRS ruled that income
nical support aspect may be treated as a service from a trademarked product should not be disaggre-
provided in the United States (for example, a U.S. gated for sourcing the income on a sale to a distribu-
help desk) rather than a foreign-source payment for tor. The IRS reasoned that the sale of a trademarked
software acquisition.22 While that embedded service product carries with it the right to use the trade-
rule is aimed at IRC section 199, there should be mark on resale.24 Because there was no specific
concern about the effect of that disaggregation in grant of trademark rights by the seller to the dis-
other areas (for example, foreign tax credit use). tributor, no imputed (that is, embedded) royalty was
The three examples illustrate three different con- appropriate. The logic of the ruling is present in the
cerns apart from transfer pricing under section 482 section 482 regulations.25 Those provide that trans-
and apart from the section 199 domestic production fer of tangible property is not considered a transfer
activities. The embedded intangible (or service) is- of a related intangible ‘‘if the controlled purchaser
sue may affect subpart F inclusion, withholding tax does not acquire any rights to exploit the intangible
liability, and foreign tax credit use. In the first two property other than rights relating to the resale of
examples, purported services income may in part or the tangible property under normal commercial
in whole be treated as income generated by an practices.’’
intangible. In the third example, income generated Similarly, when a customer acquires an intan-
purportedly by an intangible may be recharacterized gible product (for example, by license or purchase
in whole or in part as income from services. Differ- agreement), the customer, in one sense, acquires the
entiating between services and property transac- services that went into making the intangible, but
tions (whether intangible or otherwise) is not new generally the U.S. tax system does not, for example,
and is not a uniquely international tax issue. A require a licensee to disaggregate the license into
review of how the issue arises and how it has been component parts to evaluate the source and charac-
approached in other areas may shed light on current ter of any payment. That approach is captured in the
thinking. regulations dealing with the characterization and
sourcing of income in connection with software.
I. To Disaggregate or Not to The determination of whether a transaction
Disaggregate involving a newly developed or modified com-
Every transaction can be divided into parts. puter program is treated as either the provi-
When a customer acquires the use of a tangible sion of services or another transaction . . . is
product (for example, by rental or purchase agree- based on the facts and circumstances of the
transaction including, as appropriate, the in-
tent of the parties (as evidenced by their agree-
ment and conduct) as to which party is to own
19
The upgrades consist of new software that supplements the copyright rights in the computer program
the original program, often providing new features that and how the risks of loss are allocated between
improve the functionality of the program. The technical the parties.26
support aspect provides customers with assistance required
to use the software. The support may be offered by e-mail or That is not to suggest that disaggregation is never
phone or through online databases. Typically, technical sup- appropriate. Indeed, the software regulations do
port does not include user training, which might be provided provide for disaggregating a transaction when the
by separate contract. transaction consists of more than one category of
20
See, e.g., ‘‘Attorneys Address Treatment of Software
Under U.S. Domestic Production Activities Provision,’’ 2005
WTD 73-14 or Doc 2005-7517 (Mar. 31, 2005). Users do not
distinguish between the software acquired and maintaining 23
its functionality. Sellers find value in having users enjoy the 1975-1 C.B. 243.
24
full functionality of the product. Sunbeam Corp. v. Payless Drug Stores, 113 F. Supp. 31
21
Prop. reg. section 1.199-3(h)(4). (ND Cal. 1953).
25
22
IRC section 861(a)(3) (services performed at place of Reg. section 1.482-3(f).
26
performance). Reg. section 1.861-18(d).

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Special Reports
regularly carried on by it, less the allowable deduc- transaction, the mailer’s rental payment com-
tions that are directly connected with the carrying pensates petitioner for the mailer’s use of peti-
on of that trade or business, both computed with the tioner’s list and, also, compensates Names,
modifications provided in section 512(b). IRC section Triplex, and the list brokers for their partici-
512(b)(2) excludes royalties from the computation of pation in the transaction. Certain of these
unrelated business taxable income, whether mea- activities exploit and protect the intangible
sured by production or by gross or taxable income (i.e., the list). We have held that the owner of
from the property, and all deductions directly con- an intangible may engage in certain activities
nected with that income. to exploit and protect the intangible which do
In Sierra Club, Inc. v. Commissioner,37 the court not change the nature of the payment received.
stated that income derived from the Sierra Club’s See Wm. J. Lemp Brewing Co. v. Commis-
rental of its mailing list was royalty income under sioner, 18 T.C. 586, 596 (1952) (payment to the
IRC section 512(b)(2) and not payment for services. owner of the intangible was a royalty even
For income derived from the Sierra Club’s affinity though the owner reserved the right to super-
credit card program, the court remanded for find- vise the advertising, marketing, and quality of
ings of fact on whether the amounts constitute the product which was to bear the trademarked
royalties under section 512(b)(2). The Tax Court name); see also Mississippi State Univ. Alumni,
subsequently concluded that those amounts were Inc. v. Commissioner, T.C. Memo 1997-397 (re-
royalties and therefore not taxable under section view of marketing material and endorsement
511.38
of an affinity credit card program bearing the
In Oregon State University Alumni Association, name of an exempt organization were not ser-
Inc. v. Commissioner and Alumni Association of the vices provided to the card issuing company). To
University of Oregon, Inc. v. Commissioner,39 the hold otherwise, it seems to us, ‘‘would require
court held that payments made by a bank to the us to hold that any activity on the part of the
alumni associations were not payments for promo- owner of intangible property to obtain a roy-
tional and management services associated with alty, renders the payment for the use of that
their mailing lists, but were royalty payments ex- right UBTI and not a royalty.’’ Sierra Club, Inc.
cluded from unrelated business taxable income un-
v. Commissioner, 86 F.3d at 1536. Accordingly,
der IRC section 512(b)(2).
in the instant case, we carefully scrutinize the
In Common Cause v. Commissioner,40 the court activities of each of the parties compensated in
found that list rental transaction activities were the list rental transaction to ascertain whether
royalty-related and that each rental payment there- they are undertaken to exploit or protect peti-
fore constituted a royalty excluded from unrelated tioner’s list.
business taxable income under IRC section 512(b)(2)
even though there were some list maintenance ac- The characterization and disaggregation issues
tivities in connection with the lists. The court found involving intangibles and services have grown in im-
that the parties involved in the transaction engaged portance with the growth in the role of intangibles in
in activities to exploit and protect the mailing list; the U.S. economy. However, an intangible is simply
thus, the activities were royalty-related. The court one type of property. Conceptually, the disaggrega-
appeared reluctant to disaggregate the payment tion analysis involving intangibles could benefit from
received even when services may be rendered in
similar issues involving services and tangible prop-
connection with the transfer of the intangible.
erty. Three areas in which characterization (disag-
In the instant case, we must decide whether gregation) issues have arisen involve inventory ac-
any part of the mailing list rental payments counting, the investment tax credit, and FSC
constitutes compensation to petitioner for benefits.
goods or services. In each mailing list rental
C. Inventory Accounting
The following cases typify the struggle to distin-

37
86 F.3d 1526 (9th Cir. 1996), aff’g T.C. Memo. 1993-199 guish transfers of property (in these cases, sales)
and rev’g 103 T.C. 307 (1994). from the provision of services. In Wilkinson-Beane,
38
See T.C. Memo. 1999-86. Inc. v. Commissioner,41 the IRS argued that the
39
193 F.3d 1098 (9th Cir. 1999). taxpayer should separate services from property for
40
112 T.C. 332 (1999). See also Planned Parenthood Fed-
eration of America, Inc. v. Commissioner, T.C. Memo. 1999-
206 and Rev. Rul. 81-178, 1981-2 CB 135. For private letter
41
rulings dealing with the same issue, see LTR 200303062 and Wilkinson-Beane, Inc. v. Commissioner, 420 F.2d 352 (1st
LTR 200149043. Cir. 1970).

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Special Reports
income.27 Of course, the recognition in the regula- A third case raising the same issue is Karrer v.
tions that some transactions should not be disaggre- U.S.31 A Swiss scientist contracted with a Swiss
gated, but others should, raises the question of how employer to provide basic research in return for a
to distinguish between them. portion of the patent royalties generated from that
research. Although the patents were applied for in
As noted above, the disaggregation issue is really the taxpayer’s name for legal reasons, the applica-
a subset of the characterization issue. A transaction tions were assigned to a U.S. company. The licensee
that purports to involve a services (intangibles) made royalty payments to both the scientist and his
contract may contain an imbedded intangible (ser- Swiss employer. The royalties paid by the U.S.
vice). If so, it may be appropriate to disaggregate the company to the Swiss scientist were held to be
transaction and treat each aspect separately. If that nontaxable compensation for services provided by
embedded intangible (service) constitutes 100 per- him outside the United States.
cent of the contract, then the disaggregation is
essentially 100 percent to the embedded aspect and The embedded intangible (or
0 percent to the purported characterization.
embedded service) issue can have
Well before the software regulations were promul- profound implications for more
gated,28 the IRS and courts were confronted by generalized international tax
characterization issues (for example, distinguishing issues.
between services and some type of transfer involving
an intangible). For example, in Ingram v. Bowers,29 In those cases, the taxpayers contractually agreed
the court held that Enrico Caruso’s contract to to perform services leading to the creation of an intel-
record master discs at Victor Talking Machine Co.’s lectual property right owned from its inception by the
New York studios resulted in income from the ren- other contracting party. Suppose the contract from the
dition of personal services in the United States. beginning is a contract involving property rather than
Because Caruso never obtained an interest in the services. If a nonresident creates an intellectual prop-
record matrices that were distributed worldwide for erty right and then sells or licenses it, the resulting
copying, the court found irrelevant the contractual income should be gain from a sale or royalty income.
requirement that he be paid a portion of the royal- Even if the nonresident transfers ownership rights in
ties received from the license of that property. For property before creating it, so that the creator is never
tax purposes, the source of Caruso’s income was the the owner of the property, the income might be treated
place his voice was recorded and not the place where as gain from a sale or royalty income if the nonresident
the records were sold. is not obligated to perform. For example, a fee paid to
an author for the exclusive right to publish in the
Boulez v. Commissioner30 presented a similar case United States all books and stories written by the
in which the Tax Court again held that the payments author was held to be royalty income rather than
received by the taxpayer were compensation for per- service income.32 Because the customer had no control
sonal services rather than royalty income. Boulez, a over the subject matter of the author’s product or the
musical conductor who resided in Germany, made schedule of production, the source of the income was
recordings under a contract with CBS Records in determined by the end product rather than by the
which his compensation was tied directly to the pro- creative process.33
ceeds received by CBS Records from sales of the re- The OECD Model Income Tax Convention, like
cordings. The court found that the parties intended U.S. domestic tax law, has wrestled with character-
a personal services contract and that the taxpayer ization issues involving intangibles and services.
had no property right in the recordings that he could The OECD Commentary on article 12 provides:
license.
31
27
152 F. Supp. 66 (Ct. Cl. 1957).
Reg. section 1.861-18(b)(2). The subpart F regulations 32
parallel the software regulations by first recognizing that it Rev. Rul. 74-555, 1974-2 C.B. 202, modified, Rev. Rul.
may be necessary to determine the character of a transaction 76-283, 1976-2 C.B. 222.
33
by looking at more than the label in the contract. Reg. section See also Rev. Rul. 84-78, 1984-1 C.B. 173 (payments
1.954-1(e)(1). But at the same time, when a single transaction received by a domestic corporation — which owned rights to
consists of separable parts, disaggregation may be appropri- broadcast and record a prizefight — for another corporation’s
ate. Reg. section 1.954-1(e)(2). right to broadcast the fight in a particular foreign country
28
Reg. section 1.861-18. was royalty income and not service income because the fight
29
was not exclusively performed for the foreign corporation’s
57 F.2d 65 (2d Cir. 1932). benefit and the foreign corporation did not obtain the benefit
30
83 T.C. 584 (1984), cert. denied, 484 U.S. 896 (1987). of the domestic corporation’s labor).

Doc 2006-1081 (16 pgs)
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applying the appropriate accounting method to re- stances of the taxpayer, and the manner and context
flect income.42 The taxpayer provided a complete in which the taxpayer operated the business.
funeral service, including the casket, which could
not be purchased separately. Related services in- While those cases support disaggregation, other
cluded the use of the funeral home, hearse, motor section 471 cases reach an opposite result. In Hon-
vehicles, funeral personnel, and management. A eywell, Inc. v. Commissioner,46 the taxpayer was
single unitemized price was charged for the com- engaged in the business of maintaining and servic-
plete service. The commissioner recomputed the ing computers that were either sold or leased to its
taxpayer’s income using the accrual method rather customers. The taxpayer also entered into mainte-
than the cash method for the caskets. The Tax Court nance agreements with the customers to whom it
ruled against the taxpayer, and the First Circuit leased or sold computers. Under the maintenance
affirmed the decision on the basis that the caskets agreement, the taxpayer was obligated to provide
were plainly both merchandise and a substantial labor and materials necessary to repair the com-
income-producing factor.43 puters. The fee charged by the taxpayer was fixed
and was the same regardless of whether the cus-
tomer leased or owned its computer. The taxpayer
In general, the U.S. tax system established and maintained a pool of replacement
recognizes that it is not desirable parts that the field engineers used to repair the
to break up every transaction into computers. The replacements parts pool consisted of
expendable and rotable parts.47 The taxpayer used
many parts. the fixed asset method of accounting for the replace-
ment parts pool. The commissioner issued a notice of
In Surtronics, Inc. v. Commissioner,44 the tax- deficiency to the taxpayer based on the taxpayer’s
payer was required to maintain inventories of met- incorrect use of the fixed asset method for the
als used in the electroplating process. The Tax Court rotable parts rather than the inventory method of
concluded that metals were inventories on the basis accounting. The Tax Court ruled in favor of the
that the taxpayer purchased the metal from a sup- taxpayer, reasoning that the taxpayer and its cus-
plier and sold it to the owner of the component to tomers viewed the transaction as involving the sale
which it was electroplated for approximately the and purchase of a service and not a product. The
cost of the metal. Although the metal was combined customers’ main concern was not what parts were
with the electronic component, the court thought the inside the computer, but whether the computers
transaction was governed by the Wilkinson-Beane remained operational.
case because the cost of the metal represented a
substantial income-producing factor. Likewise, in Hospital Corporation of America v.
Commissioner, the taxpayer’s business was the own-
In Knight-Ridder Newspapers, Inc. v. U.S.,45 the
ership, operation, and management of hospitals.48
taxpayer was in the business of selling newspapers.
As part of its business, the taxpayer used various
The Tax Court, looking at the cost of the newsprint
medical and surgical supply items and pharmaceu-
and ink, concluded that the commissioner was
ticals. The commissioner argued that the taxpayer
within his discretion to require that the taxpayer was required to use the accrual method of account-
maintain inventories for the newspapers and ac- ing for the medical supplies. The Tax Court ruled
count for them using the accrual method of account-
that the hospitals engaged in service activities. The
ing. As in Surtronics and Wilkinson-Beane, the court
court concluded that the medical supplies played a
based its decision on the relative percentage the cost
necessary and vital role in the diagnosis, prognosis,
represented of total revenues, the facts and circum-
and treatment of the hospitals’ patients. Moreover,
the court stated that furnishing medical supplies by
the hospitals is merely incidental to the main pur-
42
pose of rendering healthcare services. Thus, the
Under IRC section 471 and reg. section 1.446-1(c)(2)(i),
supplies and the services could not be separately
the accrual rather than the cash basis method of accounting
must be used for inventory sales. accounted for using different accounting methods.
43
Moreover, the court noted that in 1963 and 1965, the cost
of the caskets represented 15.4 percent and 14.7 percent of
the taxpayer’s cash basis receipts. That factor demonstrated
46
that the caskets were a substantial income-producing factor Honeywell, Inc. v. Commissioner, T.C. Memo, 1992-453.
for the taxpayer. 47
An expendable part was a part not repaired when it
44
Surtronics, Inc. v. Commissioner, T.C. Memo. 1985-277. malfunctioned, while a rotable part was a part that was
Electroplating involves the plating of metal to switches and repaired when it malfunctioned. The rotable parts were used
other component parts of electronic equipment. to service computers under the maintenance agreements.
45 48
Knight-Ridder Newspapers, Inc. v. U.S., 743 F.2d 781, Hospital Corporation of America v. Commissioner, 107
790 (11th Cir. 1984). T.C. 116, 118 (1996).

Doc 2006-1081 (16 pgs)
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software.6 In the proposed regulations, Treasury sales income may be deductible, while income from
interpreted the phrase ‘‘any lease, rental, license, services when the service provider uses property to
sale, exchange, or other disposition’’ of computer perform the services may not be.
software as requiring a physical transfer of a copy of As U.S. tax law grows, more complex, discrete
a computer program from the software vendor to the silos — self-contained areas of tax law — arise. For
customer. The statement that has created concern in many tax practices, transfer pricing is its own sepa-
the regulations is that qualifying income does not rate silo — separate even from a more general
include ‘‘gross receipts derived from . . . provider- international tax practice. The section 199 domestic
controlled software online access services.’’7 production activities deduction is fast becoming its
The proposed regulations also put taxpayers on own separate silo. For example, in the preamble to
notice that some transactions that clearly involve the recently proposed section 199 regulations, the
the transfer of property (for example, software) also IRS made clear that different standards would gov-
might contain an embedded service.8 Income attrib- ern the treatment of similar transactions under
utable to that embedded service would not qualify section 482 and section 199.
for section 199 benefits, while income attributable to
The IRS and Treasury Department do not
the property transfer could qualify for section 199
intend that services defined as embedded ser-
benefits.
vices under section 199 will be treated in the
same manner provided in [section] 1.482-
Treasury may take income that a 2(b)(8) because such treatment would be gen-
taxpayer may think is services erally inconsistent with the intent and purpose
of section 199.9
income and treat it as income from
an intangible. Yet what goes on within those silos always has the
potential to spread beyond the silo.
To review the bidding, in the proposed section 482 The embedded intangible (or embedded service)
regulations Treasury may take income that a tax- issue can have profound implications for more gen-
payer may think is services income and treat it as eralized international tax issues. Consider three
income from an intangible (embedded intangible). In fairly generic examples that frame some of the
the proposed regulations for IRC section 199, the issues. In the first example, suppose that USP owns
U.S. Internal Revenue Service may recharacterize all of the shares of CFC1, a controlled foreign
income that a taxpayer treats as royalty or rental corporation in a low-tax jurisdiction. CFC1 main-
income as income from services. For online (that is, tains a computer server with back-office software
hosted) software, the recharacterization would cover that performs a variety of financial, accounting,
all income generated. For an embedded service and/or tax functions. CFC1 makes that functionality
when there is a service component to a property available to CFC2 and other members of the USP
transfer, the recharacterization would affect fees for worldwide group in other jurisdictions. It may be
the embedded service component. Of course, it need likely that CFC1 is treating the payments it collects
not be that Treasury’s positions are inconsistent. from CFC2 as services income. Although foreign
Both could be correct or both might be incorrect. base company services income is one of the catego-
Later we will consider what factors might govern the ries of subpart F income, services income from
characterization issue. services performed inside CFC1’s country of incor-
poration is not foreign base company services in-
In both the section 199 and section 482 context, come.10
the issue is characterization, because the U.S. tax
system does different things with different catego- However, if the IRS were to find within the
ries of income. For example, in the transfer pricing contract between CFC1 and CFC2 an embedded
area, more income may be allocated to a transaction intangible, a portion or all of the fees received by
between related parties involving intangibles than a
transaction involving services. For the domestic
production activities deduction, royalty, rental, or
9
Preamble to the proposed regulations under IRC section
199.
10
IRC section 954(e)(1)(B). The character and source of
6
IRC sections 199(c)(4) and (5). income generated by software on a server has not been
7
directly addressed by the IRS. However, the source of services
Prop. reg. section 1.199-3(h)(6). See, e.g., Nebergall, ‘‘Soft- income in general is the place where services are performed.
ware Group Urges Refining Definition of Computer Software IRC section 861(a)(3). Many tax advisers would conclude that
for U.S. Manufacturing Deduction,’’ 2005 WTD 129-17 or Doc if software is generating a fee for the performance of services,
2005-14382 (July 7, 2005). performance takes place where the server is located. The
8
Prop. reg. section 1.199-3(h)(4). source rule for that income is not the focus of this article.

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In Osteopathic Medical Oncology and Hematol- against its income particular investments in prop-
ogy, P.C. v. Commissioner, the taxpayer was a pro- erty.51 Property ‘‘used by’’ a tax-exempt organization
fessional medical corporation with a specialty in or governmental unit, however, did not qualify for
oncology and hematology.49 The taxpayer provided the credit.52 Property ‘‘used by’’ those organizations
individualized chemotherapy treatment. As part of included property ‘‘leased’’ to them.53
the treatment, the taxpayer administered chemo-
In Xerox Corp. v. United States,54 the federal
therapy drugs to its patients. The taxpayer used the
government obtained machines from Xerox under a
cash method of accounting to report income and
master agreement between Xerox and the General
never maintained an inventory of the chemotherapy
Services Administration. The master contract per-
drugs. The commissioner determined that the tax-
mitted the federal government to cancel the ar-
payer had to inventory its chemotherapy drugs
rangement upon proper notice to the manufacturer.
using the accrual method, while using the cash
Xerox also entered into similar contracts with state
method for all other items. The Tax Court disagreed
and local governments, tax-exempt organizations,
with the commissioner, concluding that income gen-
and commercial customers. Xerox was responsible
erated by the chemotherapy drugs was service in-
for the maintenance and repair of the machines, as
come because the drugs were inseparably connected
well as for incorporating changes and improve-
to the performance of the medical services. Thus,
ments. Xerox generally absorbed the cost of deliver-
dividing the drugs from the service for inventory
ing the machine to the customers’ premises, but the
accounting purposes was not permissible.
customers usually paid the wiring expenses on de-
Finally, in RACMP Enterprises v. Commis- livery.
sioner,50 a concrete contractor reported business After analyzing several revenue rulings and pri-
income using the cash basis accounting method, not vate letter rulings,55 the Court of Federal Claims
accounting for inventory. The commissioner pro- stated that ‘‘the published and private letter rulings
posed income tax deficiencies based on the accrual discussed above do not articulate any single test
accounting method. The court ruled that the com- which one could utilize to determine whether a given
missioner abused his discretion. The petitioner agreement is a service arrangement or a lease for
could use the cash method that was historically used investment credit eligibility purposes’’ and that ‘‘it is
in the construction industry. The court found the apparent that any such determination must be
taxpayer to be in the business of selling services and made on an ad hoc basis.’’56
not merchandise. The inventory method was not
required because the materials were sold in conjunc- The court of claims then discussed two factors
tion with, were incidental to, were inseparable from, from the IRS’s rulings to distinguish service con-
and were consumed when performing the services, tracts from leases. The first factor was the nature of
and they were not merchandise held for sale to the possessory interest in the property retained by
customers. the taxpayer, which the IRS measured by examining
the following criteria in its rulings: (1) retention of
It is difficult to discern deep-seated principles in property ownership by the taxpayer; (2) retention of
those cases. Each case seems to be decided based on possession and control of the property by the tax-
the facts and circumstances, although the courts payer; (3) retention of risk of loss by the taxpayer;
appear to emphasize industry practice. Undoubt- and (4) reservation of the right to remove the prop-
edly, one of the reasons so many of these cases have erty and replace it with comparable property. The
been litigated is that widely shared governing prin- second factor was the degree to which the property is
ciples are not present, allowing both parties (that is, part of an integrated operation.
the taxpayer and the commissioner) to reach differ-
ent conclusions on what the litigated outcome would The court of claims held that Xerox was providing
be. When rules and outcomes are clear, parties tend a service, because Xerox retained ownership as well
to reach an agreement without litigation. as a possessory interest in the machines that it
D. Investment Tax Credit
A second important area in which courts have
51
wrestled with whether a payment is for services or is IRC section 38.
52
for tangible property concerns the investment tax IRC sections 48(a)(4) and (5).
credit. Under that regime, a taxpayer could credit 53
Treas. reg. section 1.48-1(j), (k).
54
656 F.2d 659 (Ct. Cl. 1981).
55
The Court of Federal Claims examined Rev. Rul. 68-109,
1968-1 C.B. 10; Rev. Rul. 70-313, 1970-1 C.B. 9; Rev. Rul.
49
Osteopathic Medical Oncology and Hematology, P.C. v. 71-397, 1971-2 C.B. 63; and Rev. Rul. 72-407, 1972-2 C.B. 10;
Commissioner, 113 T.C. 376, 377 (1999). as well as LTR 7829066 and LTR 7847075.
50 56
114 T.C. 211 (2000). Xerox Corp. v. United States, 656 F.2d at 674.

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placed with its customers. Xerox was responsible for taxpayer’s control of the scanner was further illus-
risk of machine loss or damage and was economi- trated by its retention of a technician and a physi-
cally at risk because customers could exercise a cian who were responsible for the scanner’s use,
15-day cancellation provision. Further, the agree- operation, and maintenance. The hospital paid for a
ments provided that the customers were prohibited minimum number of procedures, but it was allowed
from altering the machines and needed Xerox’s to accumulate credits for unused procedures and
permission to move them. Xerox trained customer sometimes exceeded the minimum number. The
personnel to operate the machines. Xerox installed court concluded that although the scanner was not
new parts, known as retrofits, to improve perfor- part of a broad and integrated system of services,
mance of the machines. Xerox also retained the right the agreement with the hospital was a service agree-
to exchange machines at the customers’ offices, ment, not a lease.
which illustrates the possession and control it re- The court reached the opposite conclusion on the
tained over its machines. camera. It noted that the hospital was in possession
and control of the camera because the camera was
One of the reasons so many of on the hospital premises and was operated by the
hospital. Also, the hospital paid for the camera
these cases have been litigated is monthly, rather than on a per-procedure basis. Fi-
that widely shared governing nally, the camera stood by itself in the hospital and
principles are not present. was not connected with a broad, integrated system
designed to provide services.58
The court of claims concluded that Xerox used the The judicially developed factors were used by
machines to provide a copying service, which was an Congress in the passage of section 31(e) of the Tax
integrated package of equipment and services de- Reform Act of 1984,59 which added section 7701(e)
signed to produce copies as its end result. The IRS addressing the distinction between services and a
contended that Xerox’s customers contracted only lease.
for machines, which they could operate themselves (e) Treatment of Certain Contracts for Pro-
to make copies used in their work. The court held viding Services, Etc. — For Purposes of
that Xerox’s activities of repair, maintenance, re- Chapter 1 —
placement, and retrofitting indicated that it was
providing an integrated operation, designed to pro- (1) In General.— A contract which purports to
duce copies. be a service contract shall be treated as a lease
of property if such contract is properly treated
Xerox was followed by a series of similar cases. as a lease of property, taking into account all
Smith v. Commissioner57 involved high-tech medical relevant factors including whether or not —
equipment, a CT scanner, and a special diagnostic
camera, each of which had been either leased or (A) the service recipient is in physical pos-
provided to a hospital under a service contract. The session of the property,
court outlined the following factors to be considered (B) the service recipient controls the prop-
in distinguishing a lease from a service contract: erty,
(1) which party has the use and possession or (C) the service recipient has a significant
control of the equipment; (2) which party oper- economic or possessory interest in the prop-
ates the machine; (3) whether the tax-exempt erty,
organization pays for the use of the machine for
some duration or, instead, pays based upon the
number of procedures executed; and (4)
whether the equipment is part of a broader, 58
See also Musco Sports Lighting, Inc. v. Commissioner,
integrated system of equipment and services. 943 F.2d 906, 908 (8th Cir. 1991), aff’g T.C. Memo. 1990-331.
The Court of Appeals for the Eighth Circuit approved the
The court then applied those four factors to a four-factor test used in Smith. The taxpayer in Musco Sports
medical scanner and a camera. The court found that custom-designed and built lighting systems. The lighting
the taxpayer retained possession and control of the systems were installed on poles at customers’ athletic fields
scanner by keeping it in an office adjacent to the and were leased with an option to purchase. All but one of the
hospital paying for its use. Thus, the taxpayer could customers were either governmental units or tax-exempt
organizations. The lighting systems were in possession of the
effectively render services both to the hospital as
customers and used by the customers. Although frequency of
well as to patients of other hospitals and clinics. The use was figured into the calculation, an annual fee was
charged. Based on those factors, the court determined that
the agreements with the customers were really equipment
leases rather than service contracts.
57 59
T.C. Memo. 1989-318. P.L. 98-369, 98 Stat. 518.

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(D) the service provider does not bear any here that IRC section 7701(e) may be useful — at
risk of substantially diminished receipts or least with existing property.
substantially increased expenditures if For property newly created under the contract,
there is nonperformance under the contract, section 7701(e) may not offer much help. If newly
(E) the service provider does not use the created property belongs to the customer from its
property concurrently to provide significant inception (that is, the vendor provides services re-
services to entities unrelated to the service sulting in customer-owned property), then no prop-
recipient, and erty has been transferred. If newly created property
belongs to the vendor at all times (that is, the vendor
(F) the total contract price does not substan- performs services and develops know-how or some
tially exceed the rental value of the property other type of intangible that it keeps), no property
for the contract period. has been transferred. It is only when newly created
property is deemed to be owned by the vendor under
IRC section 7701(e) has broad application — for the contract and then transferred to the customer
all income tax provisions under the Internal Rev- that tax characterization as a property transfer
enue Code. For example, in determining whether a should result. For example, if the contract provides
taxpayer was entitled to foreign sales corporation that the customer pays the vendor only if the vendor
benefits, it was necessary for the IRS to classify produces a specified intangible and transfers it to
whether a time charter of a vessel to an unrelated the customer, a property transfer for tax purposes
person was a contract for the provision of services has taken place.64
(no FSC benefits available) or a lease (FSC benefits
available).60 The IRS reviewed the contract, walked Second, if property has been transferred and if
through the section 7701(e) factors one by one, and services are also involved, it should be determined if
concluded that the arrangement was that of a ser- the services are rendered to produce the property
vices provider-customer rather than lessor-lessee. that is transferred, thereby providing an indirect
Of the seven factors, one required further factual benefit to the customer, or if they instead are ren-
development (rental value of property relative to dered directly to the customer. It is the latter possi-
total contract price).61 One supported lease charac- bility that might lead to disaggregating what may
terization (the time charter did not permit concur- seem to be a single transaction.
rent use of the vessel by other parties).62 The re- Third, if disaggregation is contemplated, it must
maining factors supported characterization as a be determined what level of service component in
services contract. Of those remaining factors, the the contract renders disaggregation appropriate. If
most important seemed to be the physical possession the services are ancillary or subsidiary to a product
and the control of the property.63 In the time charter transfer, should disaggregation be mandated? If the
agreement, the owner’s employees, rather than the services are de minimis, is disaggregation required?
customer’s employees, were to operate the vessel,
and the owner was responsible for a long list of A. Cleaning the Carpet
duties and responsibilities for the vessel. Before turning to the examples introduced in the
beginning of this article dealing with intangibles,
II. An Embedded Approach to the consider the following more tangible example. Sup-
Embedded Intangible (Service) Issue? pose a homeowner decides it is finally time to
deep-clean the carpeting throughout the house, but
Perhaps section 7701(e) provides an embedded the homeowner doesn’t own the necessary steam
solution, or at least an aid, to resolving an embedded cleaner vacuum. The homeowner might make any
intangible (service) problem. One approach might be one of several arrangements to get the job done.
to first determine whether any part of the transac- Of course, the homeowner could purchase the
tion involves the transfer of an intangible or a necessary equipment, but the homeowner doesn’t
product directly resulting from an intangible (for plan to vacuum again for years. Instead, the home-
example, a copyrighted article) to the customer. It is owner could pay a fee to a vendor to acquire the use
of the steam cleaner for a limited time — perhaps a
day.65 How that limited use should be treated by the
60
FSA 200228002. Under a ‘‘time charter,’’ the owner’s
master, officers, and crew continue in possession of the vessel,
its management, and operation. See, e.g., Randolph v. Water- 64
man Steamship Corp., 166 F. Supp. 732, 733 (E.D.P.A. 1958). In that case, there would be no payment for services that
61
did not result in a product.
IRC section 7701(e)(1)(F). 65
62
The IRS has sometimes treated short-term rental ar-
IRC section 7701(e)(1)(E). rangements as the provision of services when the provision of
63
IRC sections 7701(e)(1)(A) and (B). services was integral to the rental — for example, the
(Footnote continued on next page.)

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vendor depends on how that temporary use is ac- lease; when the vendor operates the vacuum, the
complished. Suppose the homeowner acquires the control factor would tend to favor a services con-
steam cleaner and the homeowner cleans the car- tract.
pets. Under those circumstances, it would seem that The third factor is whether the contract conveys a
the fee received by the vendor should be character- significant possessory or economic interest to the
ized as a rental payment. The homeowner rents the customer.71 A contract that conveys a significant
property and controls its usage.66 possessory or economic interest to a customer re-
On the other hand, suppose the vendor is hired to sembles a lease. The existence of a possessory or
clean the carpets using the steam cleaner. In that economic interest in property is established by facts
scenario, the fee received by the vendor would ap- that show: (1) the property’s use is likely to be
pear to be a fee for services rendered. The vendor dedicated to the customer for a substantial portion
uses and controls the property to provide services. of the useful life of the property; (2) the customer
Resolution of this characterization issue depends on shares the risk that the property will decline in
control. It is who has control that IRC section value; (3) the customer shares in any appreciation in
7701(e) seeks to resolve. the value of the property; (4) the customer shares in
savings in the property’s operating costs; or (5) the
customer bears the risk of damage to or loss of the
The embedded intangible (or property.
service) issue may affect subpart F
The focus of that factor is that a lease is a form of
inclusion, withholding tax liability, ownership — temporal ownership in which the les-
and foreign tax credit use. see ‘‘owns’’ the property for a period of time. Accord-
ingly, the benefits and burdens of ownership for that
Consider how section 7701(e) might solve the period belong to the ‘‘owner’’ (that is, the lessee).
problem. The first factor is physical possession.67 Because of the short-term nature of the steam
Physical possession of property is indicative of a cleaner contract, that factor may not provide much
lease. Property that is located on the premises of a help. Certainly, the property’s use is not dedicated to
customer, or located off the premises but operated by the homeowner for a substantial portion of the
the customer, is viewed as in the physical possession useful life of the property. But at least conceptually,
of the customer.68 In both scenarios, the property is if there is a sudden demand for steam cleaners
located on the premises of the homeowner, but when during the term of the contract, it is the homeowner
the property is used by the vendor it is not in the who would benefit through the ability to sublease
physical possession of the homeowner. the steam cleaner. One would also look to see if the
homeowner bore the risk of damage to the property
The second factor is control of the property.69 That under the contract. When the vendor is hired to
the customer controls the property is indicative of a vacuum, it would appear that damage to the cleaner
lease. A customer may be viewed as controlling the would be a risk assumed by the vendor.
property to the extent the customer dictates or has a
right to dictate how the property is operated, main- The fourth factor is substantial risk of nonperfor-
tained, or improved. Control is not established mance.72 Under a service contract, the vendor bears
merely through contractual provisions designed to the risk of substantially diminished receipts or sub-
enable the customer to monitor or ensure the ven- stantially increased expenditures if there is nonper-
dor’s compliance with performance, safety, or other formance by the vendor or the property. If the vendor
general standards.70 When the homeowner operates does not bear any significant risk of nonperfor-
the steam cleaner, the control factor would favor a mance, that is indicative of a lease.73
Although it is not clear from the legislative his-
tory of section 7701(e) what that factor targets, it
appears to focus on what happens if the vendor is
short-term rental of an automobile. Rev. Rul. 88-65, 1988 C.B.
32. As recognized in the preamble to the proposed section 199 unable to perform after the contract is entered into.
regulations, the short-term nature of a transaction does not For example, assume that after the contract is
alone render the transaction a service. entered into, the steam cleaner didn’t work because
66
There may also be an embedded service aspect. For of a power blackout. If burden of nonperformance is
example, if the contract called for the steam cleaner to be borne by the homeowner, that suggests a lease. If,
delivered and set up at the customer’s house, disaggregation
of a rental contract might be appropriate.
67
IRC section 7701(e)(1)(A).
68 71
S. Rep. No. 98-169, 136-140 (1984). IRC section 7701(e)(1)(C).
69 72
IRC section 7701(e)(1)(B). IRC section 7701(e)(1)(D).
70 73
Supra note 68. Supra note 68.

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under the terms of the contract, the vendor promised could still be treated as a lease after taking all
clean carpets, that would suggest a service agree- other relevant factors into account.77
ment. IRC section 7701(e) by its terms is intended to
The fifth factor looks at concurrent use of the distinguish a lease of existing property from the
provision of services. It does not address whether
property.74 The concurrent use of the property to
newly created property has been sold from a vendor
provide significant services to other customers un-
to a customer or whether the customer has paid for
related to the customer is indicative of a service
services that result in the creation of property that
contract. For example, when the homeowner makes the customer owns from its inception. Nor does IRC
arrangements to use the steam cleaner, the steam section 7701(e) directly apply to distinguish a li-
cleaner is not available for use by others. But if the cense from the performance of services. Yet the
homeowner hires a vendor to clean the carpets, it standards for determining whether tangible prop-
may be that the vendor would use the steam cleaner erty is leased or intangible property is licensed
at other houses on the street while carpets are conceptually should be the same.
drying or while there is no access to some of the
homeowner’s carpets. After determining that property has been trans-
ferred in some manner (sale, lease, or license), it
The sixth factor considers the rental value of the may still be questionable whether, within the trans-
property relative to the total contract price.75 That action, there is an embedded service that should be
the total contract price (including expenses to be disaggregated. That determination is essentially
reimbursed by the customer) substantially exceeds whether any services rendered were rendered by the
the rental value of the property for the contract vendor for the vendor to make the property transfer
period is indicative of a service contract. If the total possible or whether the services were rendered to
contract price reflects substantial costs that are the customer. Even if the services were rendered for
attributable to items other than the use of the the customer, if the services are de minimis or
property subject to the contract, the contract more ancillary to the property transfer, disaggregation
closely resembles a service contract. Conversely, may be inappropriate.
that the total contract price is based principally on B. Examples Redux
recovery of the cost of the property indicates a lease.
The legislative history also observes that a contract Revisiting the three examples described in sec-
that states charges for services separately from tion I above to frame the embedded intangible
charges for use of property is indicative of a lease.76 (services) issue, could existing IRC section 7701(e)
Presumably, in most cases a vendor would charge provide some guidance? In the first example, USP
more to use the steam cleaner to clean the home- owns all of the shares of CFC1, a controlled foreign
owner’s carpets than the vendor would charge for corporation in a low-tax jurisdiction. CFC1 main-
use of the same equipment by the homeowner. tains a computer server with back-office software
that performs a variety of financial, accounting,
The legislative history of section 7701(e) provides and/or tax functions. CFC1 makes that functionality
additional guidance: available to CFC2 and other members of the USP
worldwide group in other jurisdictions. It may be
A contract will be treated as a lease rather than likely that CFC1 is treating the payments it collects
a service contract if the contract more nearly from CFC2 as services income. Although foreign
resembles a lease. Although each of the factors base company services income is one of the catego-
in the bill must be considered, a particular ries of subpart F income, services income from
factor or factors may be insignificant in the services performed inside CFC1’s country of incor-
context of any given case. Similarly, because poration would not be foreign base company services
the test for determining whether a service income.78
contract should be treated as a lease is inher-
ently factual, the presence or absence of any
single factor may not be dispositive in every
case. For example, even if a tax-exempt entity 77
Supra note 68. As discussed below, the last sentence may
or other service recipient does not have physi- have particular relevance to intangibles.
cal possession of property, the arrangement 78
IRC section 954(e)(1)(B). The place where services are
performed by software on a server has not been directly
addressed by the IRS. However, the source of services income
in general is the place where services are performed. IRC
74
IRC section 7701(e)(1)(E). section 861(a)(3). Many tax advisers would conclude that if
75
software is generating a fee for the performance of services,
IRC section 7701(e)(1)(F). performance takes place where the server is located. The
76
Supra note 68. source rule for that income is not the focus of this article.

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Is there a risk in that situation that the IRS The rules of this section shall be applied irre-
would adopt the position advocated by some regard- spective of the physical or electronic or other
ing section 199 that income resulting from software medium used to effectuate a transfer of a
that is hosted on a vendor’s server rather than computer program.83
downloaded could nevertheless be treated as rent or However, examples 8 and 9 of those same regula-
royalty income rather than services income?79 In the tions reach different characterization results in
proposed regulations, the IRS concludes that online identical transactions when the only difference is
software access does not qualify for section 199 the method of software delivery.84 Perhaps taking
benefits (that is, lease or license of computer soft- the position that hosting software access is treated
ware).80 If the same software functionality were as a service may provide some certainty for taxpay-
made available to customers through a compact disc ers. For the CFC providing software functionality to
or download, section 199 benefits would be avail- related entities, knowing that access is treated as a
able. service would be helpful. Of course, it may be pos-
sible that hosting can be treated one way under
section 199 and another way under subpart F, but in
Generally, the international tax general that kind of silo treatment makes for poor
community recognizes that tax policy.85
payment for contract R&D is Now reconsider the variation when CFC1 pro-
payment for services. vides contract R&D services for CFC2. If, under the
reasoning of the proposed transfer pricing regula-
It appears that a line has been drawn that is tions, the IRS were to find that part of the payment
perhaps consistent with IRC section 7701(e). To the to CFC1 was for the acquisition of an embedded
extent that software functionality is made available know-how intangible, then subpart F income may
to customers on a server that is hosted by or con- result.86 The principles of IRC section 7701(e) are
trolled by a vendor,81 apparently the IRS regards the not terribly helpful here when the issue is whether a
software to be used by the vendor in providing newly created intangible was transferred to the
services (that is, software functionality to the cus- customer. Conceptually, the payment should be
tomer). In that situation, arguably the service recipi- treated as a payment for services under either of two
ent is not in physical possession of the property and circumstances. If the contract envisions that the
does not control the property.82 It is true that in customer will own any created intangible from its
some sense, the customer does control the property inception, then no property has been transferred
in that access through log-on is available, but it is from vendor to customer and no subpart F should
the vendor that likely: (1) has put the software on result. The second circumstance would be when an
the server; (2) makes changes to the software (that intangible is created by the services performed by
is, updates the database); (3) provides and autho- the vendor, but that intangible is controlled by the
rizes software access; and (4) is responsible for vendor and used by the vendor to render the ser-
server maintenance. Those indicia of control may vices, or perhaps is not used by the vendor at all, but
suggest that the vendor uses the property to provide
a service.
Advocates for the section 199 position have said
that method of delivery should be irrelevant in
determining income characterization. That is true in 83
Reg. section 1.861-18(f)(2).
an ideal world, but tax professionals are in the 84
In Example 8, the right to make copies from a master
business of arbitrary line-drawing. The software disk (customer does the copying) is treated as a license, while
regulations concerning characterization and source in Example 9, when the vendor provides one disk for each
clearly state: computer (that is, vendor does the copying), the transaction is
treated as a sale of the copyrighted article.
85
As noted above, the preamble to the proposed section 199
regulations clarify that an embedded service treated one way
79 for purposes of reg. section 1.482-2(b)(8) (‘‘ancillary and
See, e.g., ‘‘Attorneys Address Treatment of Software subsidiary’’ services do not require a separate allocation) will
Under Domestic Production Activities Provision,’’ 2005 WTD be treated in a different manner under IRC section 199
73-14 or Doc 2005-7517 (Apr. 15, 2005); ‘‘U.S. Software Group (ancillary and subsidiary services may constitute an embed-
Submits Draft Reg on IRC Section 199 Treatment of Software ded service that does not qualify under section 199).
Access,’’ 2005 WTD 155-14 or Doc 2005-16970 (Aug. 11, 2005). 86
80 Prop. reg. section 1.482-9(m)(2). If the know-how were
Prop. reg. section 1.199-3(h)(6). deemed to be licensed, IRC section 954(c)(1)(A) would result
81
For example, the vendor makes arrangements with a in subpart F income. There would be no active trade or
third party to host the software. business income exception for royalty income from a related
82
IRC sections 7701(e)(1)(A) and (B). party.

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is a residual benefit of performing services that may issue discussed in the first example — whether
be useful to the vendor in the future. payments in connection with hosted software are
The only time the services contract potentially payments for services or payments for property
should be disaggregated would be when the know- transfers or both. Under the principles of IRC sec-
how was created by the vendor, owned by the vendor, tion 7701(e), it might not be unreasonable to take
and transferred to the customer. It would seem that the position that the IRS has taken in the proposed
in most contract R&D arrangements, the customer regulations and treat the payment as essentially a
is contracting for the R&D itself rather than the payment for services.91
know-how that arises from performance. Typically,
contracts call for payment to the vendor regardless The third example focuses on source implications.
of whether know-how is produced.87 Generally, the Suppose USCO licenses, leases, or sells software to
international tax community recognizes that pay- non-U.S. customers. USCo takes the position that
ment for contract R&D is payment for services.88 the income generated is foreign-source income.92
That position may allow USCO to maximize the use
of its foreign tax credits. As part of the license, lease,
Perhaps section 7701(e) provides or sales agreement, USCO and its customers enter
an embedded solution, or at least into a separate software maintenance contract un-
an aid, to resolving an embedded der which USCO promises to provide users with
upgrades or updates to the software and to provide
intangible (service) problem. technical support.93 Typically, industry practice is to
provide updates and technical support under a
Consider the second example. USCO pays a fee to single agreement with a single price.94
Forco, an unrelated foreign corporation, for the same
back-office functionality described in the previous For purposes of IRC section 199, the IRS has
example. If the fee paid is treated as a payment for indicated that there may be an embedded service
the provision of services, and the services are con-
sidered performed where the server is located, then
USCO has no withholding obligation and Forco has
91
not generated income that would be taxable in the The position is based in part on administrative conve-
United States.89 However, if the income is considered nience. The preamble explains:
in whole or in part to be either rental or royalty If gross receipts attributable to the use of online soft-
income, then USCO might have a withholding obli- ware were permitted to qualify as DPGR [domestic
production gross receipts] because the same or similar
gation and Forco would have U.S. tax liability.90 software also is available to customers on disk or by
While this fact pattern involves whether there is download, different items of software available online
a U.S. withholding tax rather than whether subpart would be subject to disparate treatment under section
F income is created, analytically it involves the same 199. In addition, if online software were permitted to
qualify as DPGR, it would be difficult to distinguish
this online software from software that is used to
facilitate a service.
92
87
For this article, it is not necessary to decide among the
Compare reg. section 1.861-18(h), Ex. 15 (customer con- license, lease, or sales characterizations. Assume that under
tracted for services, not for the know-how of the service all three, foreign-source income would result. IRC section
providers) with Ex. 16 (customer contracted specifically for 861(a)(4) (for license or lease payments, the place where the
know-how). property is used determines source); section 861(a)(6) (for
88
Westreco v. Commissioner, 64 TCM 849 (1992). The purchased inventory, where title passes); IRC section 863(b)
example in the proposed section 482 regulations may not (for manufacture inventory, 50 percent of income sourced
represent a departure from existing interpretation if it is where title passes). In this example, it is likely that any
narrowly read. In the example, both the customer and the income generated would be general limitation income. IRC
vendor were engaged in manufacturing. If the customer did section 904(d)(1)(I).
contract for know-how to be delivered to improve the cus- 93
The upgrades consist of new software that supplements
tomer’s manufacturing processes, disaggregation may be ap- the original program, often providing new features that
propriate. improve the functionality of the program. The upgrades are
89
Presumably, Forco would not be engaged in a U.S. trade provided under the contract that governs the original soft-
or business from that particular activity. Even if Forco were ware transaction. The technical support aspect provides cus-
engaged in a U.S. trade or business, the services income tomers with assistance required to enable full functionality of
would be foreign-source income, which would not be effec- the software. The support may be offered by e-mail or phone
tively connected. See IRC section 864(c)(4). or through online databases. Typically, technical support does
90
Both rental and royalty income would be subject to a 30 not include user training, which might be provided by a
percent U.S. withholding tax under IRC sections 881 and separate contract.
94
1442. Here, it might be important to determine whether the Users do not distinguish between the software acquired
payment is rent or royalty, because treaties typically reduce and maintaining its functionality. Sellers find value in having
the withholding rate for royalties but not for rental payments. users enjoy the full functionality of the product.

Deluxe RentAcar's Fraud King and Special Interest's Poster Child For Abuse

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Deluxe RentAcar's Fraud King and Special Interest's Poster Child For Abuse

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Special Interest at Work - $21 Billion Debt

$2-8,000,000 taxpayer’s money in John Hennessay’s pocket

[ 13800 Coppermine Rd, Herndon, VA 20171

By Dennis M. Lormel 3/13/2009

[ 13800 Coppermine Rd, Herndon, VA 20171

INDEPENDENT AUDITOR’S REPORT ON COMPLIANCE WITH REQUIREMENTS

Internal Control over Financial Reporting

A material weakness is a significant deficiency, or combination of significant deficiencies, that results in

Certified Public Accountants

Los Angeles, California

Website Maintenance Notice

Home > LAX

Real-Time Flight for

Search the site: Rental Cars

Click the image above for Waiting Area Map

City of L.A. | Disclaimer | Accessibility | Privacy | Notices | Contact Us | Comments |Sitemap

Armenian | (Chinese) | (Korean) | Español | (Japanese) | Tagalog | Vietnamese

© 2009 Los Angeles World Airports. All rights reserved.

In Reply Refer To: D191-1

VIA E-MAIL AND U.S. MAIL

Re: Deluxe Rent a Car

Dear Mr. Powell:

GLASSMAN, BROWNING, SALTSMAN & JACOBS, INC.

Economy Yes $521.89 $656.54 $134.65 $48.27 $13.05

$10.00 55.32 $8.01 $26.61 $54,213.60 $26,082.53

Car Cost LF Total/ VLF U/B / Day

From: TIM GIPSON <22827@lapd.lacity.org>

As previously mentioned, this information is available for court but

>>> <theplatinumlife@aol.com> 6/12/2009 11:06 AM >>>

I talked to Deluxe's attorney and she was supposed to be working on

I am actively investigating the option of refiling this case under

“The "rentals" subject to the tax include any payments required by

Local Policy Information

Email not displaying correctly? View it in your browser.

We are still located at our LAX location and

Our new 2,500 sq ft state of the art customer

NEWS FLASH !!!!

Unsubscribe BMICHELSON@BORROWERHOTLINE.COM from this list.

Our mailing address is:

Copyright (C) 2009 Deluxe Rent a Car All rights reserved.

Forward this email to a friend

An Excellent Credit Score is 750. See Yours in Just 2 Easy Steps!

Here is was my “guaranteed clean, comfortable and affordable vehicle”

From: MIODOVSKI, MARK R. <MMiodovski@lawa.org>

Dear Mr. Powell,

From: theplatinumlife@aol.com [mailto:theplatinumlife@aol.com]

Fr: Kevin Powell

Email not displaying correctly? View it in your browser.

Re: Deluxe Rent A Car – ACRF Fee.

Fr: Kevin Powell

July 28th 2008 My site went up. http://www.deluxerentacar.info

July 31th 2008 Deluxe became aware of my activities

August 1st 2008 Deluxe threatens to sue me on http://www.youtube.com/deluxerentacar and

I can't believe they forged your name - that is ruthless.

----------------- Original Message -----------------

http://messaging.myspace.com/index.cfm?fuseaction=mai...fed=True&MyToken=9a5ffa14-eee6-46d7-ab79-6407ed18d402 (3 of 5)8/6/2008 5:38:56 PM

1) The date in which the unbundling began

Car Rentals Home Customer Care Car Rentals FAQ

Automatic Special 10% Discount

Automatic Special 10% Discount

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