Atlantic Richfield Co. v. County of Los Angeles

• Decision Date: 15 March 1977
• Citation: 68 Cal.App.3d 105,137 Cal.Rptr. 84
• Court: California Court of Appeals Court of Appeals
• Parties: ATLANTIC RICHFIELD COMPANY, a corporation, et al., Plaintiffs and Appellants, v. COUNTY OF LOS ANGELES et al., Defendants and Respondents. ATLANTIC RICHFIELD COMPANY, a corporation, et al., Plaintiffs and Appellants, v. CITY OF LONG BEACH, a Municipal Corporation, Defendant and Respondent. ATLANTIC RICHFIELD COMPANY, a corporation, et al., Plaintiffs and Appeallants, v. COUNTY OF LOS ANGELES et al., Defendants and Respondents. Civ. 48117.

Page 84

137 Cal.Rptr. 84

68 Cal.App.3d 105

ATLANTIC RICHFIELD COMPANY, a corporation, et al., Plaintiffs and Appellants, v. COUNTY OF LOS ANGELES et al., Defendants and Respondents.

ATLANTIC RICHFIELD COMPANY, a corporation, et al., Plaintiffs and Appellants, v. CITY OF LONG BEACH, a Municipal Corporation, Defendant and Respondent.

ATLANTIC RICHFIELD COMPANY, a corporation, et al., Plaintiffs and Appeallants, v. COUNTY OF LOS ANGELES et al., Defendants and Respondents.

Civ. 48117.

Court of Appeal, Second District, Division 1, California.

March 15, 1977.

Rehearing Denied April 13, 1977.

Hearing Denied June 2, 1977.

Hanna & Morton, Harold C. Morton, Edward S. Renwick and Michael C. Mitchell, Los Angeles, for plaintiffs and appellants.

John H. Larson, County Counsel, DeWitt W. Clinton and Dixon M. Holston, Deputy County Counsel, Los Angeles, Keil & Connolly, George A. Connolly, Guilfoyle & Dole, Richard F. Dole, San Francisco, Hill, Farrer & Burrill, Vincent C. Page, Jack R. White, Los Angeles, Leonard Putnam, City Atty., and Kenneth K. Williams, Deputy City Atty., Long Beach, for defendants and respondents.

THOMPSON, Associate Justice.

Revenue and Taxation Code sections 107.2 and 107.3 were enacted in 1967. Those sections were adopted to mitigate hardship which the Legislature anticipated might result from the decision in Atlantic Oil Co. v. County of Los Angeles (1968) 69 Cal.2d 585, 72 Cal.Rptr. 886, 446 P.2d 1006 pending in the Court of Appeal in 1967. Sections 107.2 and 107.3 declare that any result of the litigation eliminating the taxpayer's right to exclude royalties in valuing possessory interests in oil and gas leases shall be prospective in operation in the sense that the new method of valuation shall be applicable only to leases entered into after the tax year in which the litigation commenced. Finding on the basis of evidence presented to it that the legislation was not necessary to alleviate hardship, the trial court held sections 107.2 and 107.3 violative of the assessment at full value requirement of California Constitution, article XIII, section 1 (a consolidation, for purposes here relevant, of former article XIII, sections 1 and 37). This appeal tests the validity of the trial court determination.

Bound by the interaction of Texas Co. v. County of Los Angeles (1959) 52 Cal.2d 55, 338 P.2d 440 and Forster Shipbldg. Co. v. County of L.A. (1960) 54 Cal.2d 450, 6 Cal.Rptr. 24, 353 P.2 736 which, in closely parallel situations, uphold the legislative power despite an earlier judicial determination of retroactivity, we conclude that Revenue and Taxation Code sections 107.2 and 107.3 are valid. Accordingly, we reverse the judgment of the trial court.

We reach our conclusion by a distillation of California Supreme Court case law which establishes: (1) in dealing with the provisions of the California Constitution mandating assessment of property at full value, the Legislature has the power to declare that a change in interpretation of the scope of the constitutional mandate shall be prospective in operation; ¹ (2) the legislative exercise of the power is subject to judicial review only for 'reasonableness'; and (3) 'reasonableness' in this context is tested by the existence of a basis for legislative action and is not the subject of de novo judicial determination.

Assessment at 'Full Value'--Possessory Interests

Article XIII, section 1 of the California Constitution states: 'Unless otherwise provided by this Constitution or the laws of the United States: ( ) (a) All property is taxable and shall be assessed at the same percentage of fair market value. . . . ( ) (b) All property so assessed shall be taxed in proportion to its full value.'

Real property is included within the definition of that which is taxable pursuant to article XIII, section 1. (Rev. & Tas.Code, § 103.) Where the fee interest in real property is vested in a governmental or other tax exempt entity and the right to possession is held by a non-tax exempt person, there is a special problem. Then the taxable property is the possessory interest and not the tangible real estate. (5 Witkin, Summary of Cal.Law, Taxation, §§ 99, 106.)

Valuation of possessory interest in a manner compatible with the assessment at full value requirement of article XIII, section 1 of the California

Constitution has presented a set of troublesome problems. The 1955 Judicially Mandated Change in Method of Valuation of Possessory Interests--Prospective or Retrospective Application

Until 1955, possessory leasehold interests were valued by first determining the value of the term and then deducting the present value of capitalized annual future rental and amortization of improvements to ascertain the current value of the leasehold interest. (Blinn Lbr. Co. v. County of Los Angeles (1932) 216 Cal. 474, 482, 14 P.2d 512, approving Hammond L. Co. v. County of Los Angeles (1930) 104 Cal.App. 235, 244--246, 285 P. 896.) In De Luz Homes, Inc. v. County of San Diego (1955) 45 Cal.2d 546, 570, 290 P.2d 544, our Supreme Court disapproved the manner of valuation of possessory interests previously accepted by it as proper. It held that the lessor's cost for rent and amortization of improvements was in effect a cost of acquisition of property which could not be deducated as part of a formula of valuation. (Id., at pp. 567--568, 290 P.2d 544; see also Victor Valley v. County of San Bernardino (1955) 45 Cal.2d 580, 290 P.2d 565; El Toro Dev. Co. v. County of Orange (1955) 45 Cal.2d 586, 290 P.2d 569.)

In Texas Co. v. County of Los Angeles, supra, 52 Cal.2d 55, 64, 338 P.2d 440, the

high court considered a contention that De Luz should apply only to possessory interests acquired after the date of the decision. The taxpayers in Texas Co. argued that because De Luz overturned a principle previously adopted by the high court in Blinn upon which persons who had acquired property rights in possessory interest had relied, the rule of County of Los Angeles v. Faus (1957) 48 Cal.2d 672, 681, 312 P.2d 680, dictated prospective application of De Luz.

The Supreme Court rejected the taxpayers' argument. It said: 'The rule of the Faus case is not applicable here, for recognition of the correct rule of valuation of possessory interests for tax purposes neither invalidates the leases nor impairs vested rights. Thus we did not apply the Faus rule in the De Luz case, although it had been recognized in earlier cases. (Citations.) . . . Although those who Acquire property or make contracts in reliance of (sic) the existing tax laws may be disappointed in their economic expectations when those laws are changed, they acquire no vested right that such changes shall not be made. Taxes on existing interests are not immutable, for within constitutional limits the Legislature has full freedom to change them. Surely an erroneous interpretation of a tax statute cannot be more immutable than the statute itself, and if the court failed to give effect to the correction of its own error, it would defeat the legislative purpose not only as to the past but for the indefinite future.' (52 Cal.2d at p. 64, 338 P.2d at p. 445.)

In 1957, while Texas Co. was pending, the Legislature enacted Revenue and Taxation Code section 107.1. That statute ventures where the Supreme Court in Texas Co. refused to tread. Section 107.1 (amended by Stats.1970) limits the De Luz rule to prospective application by providing that 'The full cash value of a possessory interest, when arising out of a lease of exempt property, is the excess, if any, of the value of the lease on the open market, as determined by the formula contained in the case of De Luz Homes, Inc. v. County of San Diego . . . over the present worth of the rentals under said lease for the unexpired term thereof. . . . ( ) This section applies only to possessory interests created prior to the date on which the decision of the California Supreme Court in De Luz . . . became final. It does not . . . apply to any of such interests created prior to that date that thereafter have been, or may hereafter be, extended or renewed . . ..' (Emphasis added.)

The County of Los Angeles challenged the constitutionality of section 170.1. Faced with the challenge, the Supreme Court, in Forster Shipbldg. Co. v. County of L.A., supra, 54 Cal.2d 450, 6 Cal.Rptr. 24, 353 P.2d 736, stated, in contrast to its language in Texas Co.: 'Section 107.1 partially reinstates the rule of the Blinn case as the method for assessing and taxing interest created in reliance on that rule, while preserving the rule of the De Luz case for all other interests. The sole purpose of the section is to mitigate the economic burdens imposed on lessees of tax-exempt property when this court overruled the Blinn case. . . . ( ) In recent years much attention has been given to the problem of mitigating the hardships caused by an overruling of established law. (Citations.) . . . In most jurisdictions . . . courts have established exceptions to the general rule of retroactivity (of decisional law) to protect those who acted in reliance on the overruled decision. (Citation.) . . . ( ) We have hitherto recognized that the California Constitution permits an appellate court to apply an overruling decision prospectively only, even though it thereby temporarily preserves and applies a mistaken interpretation of the Constitution. (County of Los Angeles v. Faus, 48 Cal.2d 672, 312 P.2d 680 . . ..) The constitutional requirements of assessment and taxation at full cash value and in proportion to value are no less flexible in this respect than other constitutional provisions. Neither provision precludes the temporary and limited application of a rule once approved by this court, if reasonably designed to mitigate hardships caused by our subsequent rejection of the rule. Such temporary application of the rule of an overruled case may be prescribed by appropriate legislation as well as by judicial decision, for the...