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Terraced buildings

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I am trying to find an interpetation of the number of stories for a terraced
house.  The house is on a sloped site and is terraced up the hill such that
no portion of the building is more than 2 stories at any one point.  The
planning department, after spending $15,000 on plans, and telling me it was
ok, has arbitrarily changed their mind and decided each level is considered
a story. A level is not a story.  Otherwise every stair tread, sunken living
rooms etc.would be considered a story.  This decision is arbitrary, with no
justification in their code, made by planning dept. officials who have no
liscense or professional credential other than being appointed by the board
of supervisors who won a popularity contest.

The cross section is represented below.

                                 1 story-br's
                1 story-office br's
1 story-living room/kit          
1 story-below grade garage

Is this a 2 story or 4 story building?  Is there a commentary or description
of terraced houses in the building code?

I'd like to know your thoughts.