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exas property tax laws that dealt with the appraisal of intangibles had conformed to a similar process. For example, before Texas law exempted intangibles of transportation companies, the comptroller appraised those properties by estimating an intangibles residual value. The appraisal formula began with an estimate of the market value of the operating property that could be reasonably assigned to Texas. Next, the comptroller obtained an appraisal of the tangible operating properties. The tangible value was then deducted from the business value to leave the residual intangible value.

Although the issues surrounding claims of intangible exemptions have not proceeded through Texas courts, California taxpayers and assessors have fought a series of legal battles over similar provisions in California's tax laws. The experience of California taxpayers indicates that exemption of intangibles may not excuse as much value from taxation as suggested by the statutes. California taxpayers expected to escape taxation of intangible values when the exemption was adopted. However, in 1948 the courts ruled that although the value of a license was exempt from taxation, the assessor could take the effect that the presence of that license had on the value of the real property into account when appraising the real estate.

Through the years, California assessors have sought to access such values for their tax base. These efforts resulted in a number of notable courtroom confrontations including the case of Service America Corp v. County of San Diego. The courts ruled that the assessor erred when he included the entire income stream from a firm holding concession rights at a publicly owned stadium. Obviously, the court ruled, the part of the income resulting from exempt intangibles should be excluded from Service America's taxable value. But the court further declared that the exclusive nature of the concession agreement obviously contributed to profitability and that the county could not overlook that fact in estimating a value. The decision gives precious little guidance about how to take the influence of intangibles into account but states that the

Prominent

among intangibles are franchise names that create an identity for a business and provide instant credibility.

taxable value should be less than the value derived by capitalizing the entire income stream for Service America. The court admitted that the final valuation would" bear some characteristics of arbitrary selection."

In the case of Shubat v. Sutter County Assessment Appeals Board, the court had more valuation information to consider. The case involved the allocation of value between intangibles and taxable tangible values of the Nor Cal Cablevision Company. The assessor used a sales comparison approach, having a sale involving the firm in question. After making some adjustments, the assessor allocated amounts to the taxable tangible items and the remaining $16.2 million to a single intangible possessory interest in publicly owned rights of way, which were taxable under California laws.

Nor Cal objected, contending that its subscriber list, franchise operating rights, a lease, assembled workforce, noncompete agreement and going concern value were all nontaxable intangibles that had been ignored by the assessor. Nor Cal's appraiser employed an excess earnings approach to value the intangibles of the company. The net income was allocated among the intangibles using income ap proach techniques to substantiate the allocation. Nor Cal's resulting estimate of the value of the taxable possessory interest was $4 million.

The board substantially agreed with Nor Cal's analysis but adjusted to arrive at a value for the possessory interest of $6.01 million. The assessor objected and initiated the court action to restore the original value. However, the court found Nor Cal's appraiser and his thorough analysis to be overwhelming valuation evidence and accepted the appeal board's decision.

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In the first two California cases, the courts refused to consider all business value irrelevant when setting taxable values. The third case indicates that taxpayers must present a well reasoned case, founded in accepted appraisal methodology, to prevail in a claim of exempted intangible value. The crucial element is the reasonableness of the individual's position and thorough documentation. xemption of intangibles raises numerous thorny questions for properties that combine a variety of legal and social functions to provide a product or service. Separating the value of the tangible properties from the value residing in the intangibles requires expert knowledge of both the markets and processes involved. Many issues of the problem remain to be resolved in terms of identifying acceptable and unacceptable methods of deriving a market value for intangibles in a going concern enterprise. Taxpayers should concentrate on sustainable estimates of market value for their real estate and tangible assets if possible. When an appraisal of intangibles becomes necessary, the resolution will depend on the knowledge, experience and abilities of the valuation experts analyzing the problems.

Dr. Gilliland is an associate research economist with the Real Estate Center at Texas A&M University.

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