In Dreyer’s Grand Ice Cream, Inc. v. County of Kern, Cause No. F064154 (July 22, 2013), the California Court of Appeals observed that an external obsolescence adjustment to the assessed value of personal property may be justified when there is excess capacity (or underutilization) that is recognized in the market and which is “beyond the control of a prudent operator.” Slip op. at 11 (citation omitted). Here, an ice cream producer presented evidence to the California Assessment Appeals Board purporting to show that its facilities met these requirements. The producer argued that its production facilities, in particular production lines for novelty ice cream products, were consistently underutilized because of an external lack of demand in the market for its products. The Board concluded and the trial and appellate courts affirmed that the ice cream producer offered insufficient evidence. Slip op. at 18. Although the Assessor agreed that there might be some underutilization of the production equipment due to overcapacity, the Assessor did not agree with the producer that an external factor (i.e. lack of demand in the market) accounted for this underutilization. (Slip op. at 3.) The critical question was not whether excess capacity existed but, rather, whether sufficient evidence indicated that an external factor was causing the excess capacity.
The Court found that the producer “presented no evidence of market demand.” Slip op. at 12. Instead, the producer offered only conclusions based on its internal sales forecasts and other internal business judgments that were based on personal experience. Id. It failed to show how these internal forecasts and business judgments were tied to the market. Id. In other words, the Court held that the producer failed to explain how the internal sales forecasts and other related business judgments adequately and accurately reflected the actual conditions for demand in the market. Id. The producer cited no authority demonstrating that such evidence “was sufficient to establish external obsolescence due to lack of demand for its products.” Id.
Additionally, the Assessor’s expert witness found no evidence that external market forces caused any of the excess capacity in the producer’s facilities. Slip op. at 14. The producer may have had legitimate business reasons for maintaining excess capacity. For example, the excess capacity may have been needed to allow for adjustments in seasonal fluctuations. Id. Or a “dominant company in an industry would want to maintain its competitive advantage by holding some excess capacity to permit it to respond to competitors’ actions.” Id. Such reasons for holding excess capacity, the expert claimed, are in the best interests of the company or its shareholders and don’t result in “obsolescence for the purpose of valuation.” Id. The evidence before the Court “did not compel a finding . . . that there was excess capacity at [the producer’s] facility, which was caused by external forces beyond [the producer’s] control and recognized in the market.” Id.