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August 24, 2020

California court holds assessor may not include certain capitalized costs in personal property tax assessments

California's First District Court of Appeal (court) recently held that a county property tax assessor may not include certain expenses capitalized for accounting purposes when determining fair market value for property tax assessments. In Church v. San Mateo Cnty. Asmt. App. Bd.,1 the court concluded "fair market value and net book value are separate concepts with separate purposes, and … the assessor may not rely on [the taxpayer's] capitalization of expenses for accounting purposes to establish that those expenses increase the value of the equipment and are subject to assessment."


The case involved a variety of manufacturing and storage equipment purchased by the biotechnology company Genentech, Inc. (Genentech) and incorporated into various production lines. In its general ledger, Genentech recorded the equipment purchase price plus, under the Statement of Financial Accounting Standards No. 34 (FASB 34), additional costs charged as expenses over the life of the equipment. The additional costs included capitalized interest charges as if Genentech had financed the equipment with a loan, start up and debugging costs incurred after installation to monitor the operation of the equipment, and capitalized labor for professional and engineering services incurred after installation to adjust and test the equipment.

Because Genentech assembled the individual pieces of equipment into a larger production line, the assessor argued, they should be considered "self-constructed" property and the additional capitalized costs should be included in the assessed value. Genentech, on the other hand, asserted that the equipment was purchased in a finished state so the additional costs should not be considered. The court agreed with Genentech.

Under California's property tax law, taxable personal property must be assessed at its "fair market value" or "full cash value." Property Tax Rule 6 (Rule 6)2 prescribes the methods assessors should use to determine value under the cost approach. Section 504 of the Assessor's Handbook published by the California State Board of Equalization (Assessor's Handbook)3 provides guidance on Rule 6, explaining "[c]ost for assessment purposes may be thought of as full economic cost … [which] should include all market costs, both direct and indirect, necessary to purchase or construct equipment and make it ready for its intended use."4 The handbook further explains, "[c]osts which add value … should be included in the full economic cost. Not all costs add value … ."5 Further, this section of the Assessor's Handbook differentiates between costs that should be included in the value of "purchased equipment" as opposed to "self-constructed equipment."6

Court distinguishes FASB 34 and Rule 6

Although the court noted similar language is used by both FASB 34 and Rule 6, it distinguished the two in several ways. FASB standards, the court stated, are used for financial reporting purposes to reflect a business's income each year while property tax rules are meant to determine value at a given point in time. The court also pointed out several instances in Section 504 of the Assessor's Handbook acknowledging these differences, including "the accountant's concept of value … may or may not be the same as market value."7

Because the court concluded that Genentech's equipment was purchased in a finished state, the capitalized interest, debugging costs and capitalized labor included in the accounting records were not necessary to bring the equipment to a finished state. Thus, the cost for such is excluded in determining fair market value.


As the opinion in this case makes clear, the value on a taxpayer's balance sheet for financial reporting purposes can differ from the value to be considered for property tax assessment purposes. Based on this ruling, when valuing equipment purchased by a taxpayer in a finished state, the assessor should exclude the following costs when determining fair market value:

  • Capitalized interest that has been recorded in the financial accounting records under FASB 34
  • Start-up and debugging costs associated with testing entire product lines, rather than individual pieces of equipment
  • Capitalized labor, particularly professional and engineering costs, to the degree they are related to the modification, retesting and revalidation of installed equipment (particularly when they relate to product-oriented changes)

To the extent that a taxpayer's balance sheet asset values reflect excludable costs like those previously described, taxpayers should carefully consider the costs reported to California assessors on annual business personal property returns and under cyclical audits.


Contact Information
For additional information concerning this Alert, please contact:
State and Local Taxation Group
   • Tom Bernard (
   • John Corum (
   • Matt Rakela (
   • Elvin Valverde (
   • Kristen Sharp (
   • Matt Keivens (
   • Trevor Mason (
   • Neil Fry (
   • Jessica Ko (
   • Nasmin Ahmad (


1 Church v. San Mateo Cnty. Asmt. App. Bd. and Genentech, Inc., 52 Cal.App.5th 310, A155034 (Cal. Ct. App., 1st App. Dist., Div. 4, June 26, 2020) (certified for publication July 16, 2020).

2 Cal. Code Regs., tit. 18, Section 6.

3 Cal. State Bd. of Equal., Assessor's Handbook, Sec. 504 Assessment of Personal Property and Fixtures (October 2002) (Reprinted January 2015) (available on the internet here

4 Id. at 53.

5 Id.

6 Id. at 54.

7 Id. at 70.