Removing Intangible Assets from a Property Tax Assessment: The "Rushmore Method" Really Has Been Rejected in California
By C. Stephen Davis1
Intangible assets are exempt from property tax assessment in California.2 Some methods of removing the value of such exempt assets from assessed values have been controversial. A recent article in this publication asserts that "California law is unsettled" on the issue of whether deducting "franchise and management fees as an expense from [a hotel’s] operating income completely removes the value of intangible assets which contribute to that income."3 The "method" of removing intangible assets from an income indicator by subtracting expenses relating to such assets from projected income is known as the "Rushmore Method." The California Court of Appeal rejected use of the Rushmore Method for California property tax purposes in SHC Half Moon Bay v. County of San Mateo.4Yet, some continue to assert that SHC does not hold that the Rushmore Method was infirm for purposes of California property tax, or that case should simply be limited to its facts and establishes no ruling of general application. This article demonstrates that SHC did in fact consider and reject the Rushmore Method, and that doing so was consistent with well-founded and longstanding California authority. California law is not unsettled on this issue.5
Exempt intangible assets are frequently subsumed in property tax assessments. This occurs because assessors use appraisal methods that necessarily include such assets, but then fail to the take the secondary steps required to remove the value of such exempt assets from the assessed value. Omitting the critical second step renders the resulting assessment void.
Examples of the common appraisal methods that necessarily include the value of exempt intangible assets include enrolling the purchase price of a business that includes both tangible and intangible assets, using sales of businesses or leased fee interests as comparable sales or capitalizing the net operating revenue stream of an enterprise using the income approach (going concern value). Each of these methods includes the value of exempt intangible assets that must be removed from the resulting value indicator prior to assessment.