Crocker National Bank v. City and County of San Francisco

• Decision Date: 30 November 1989
• Docket Number: No. S007833,S007833
• Citation: 782 P.2d 278,264 Cal.Rptr. 139,49 Cal.3d 881
• Parties: , 782 P.2d 278, 58 USLW 2355 CROCKER NATIONAL BANK, Plaintiff and Appellant, v. CITY AND COUNTY OF SAN FRANCISCO, Defendant and Appellant.
• Court: California Supreme Court

Page 139

264 Cal.Rptr. 139

49 Cal.3d 881, 782 P.2d 278, 58 USLW 2355

CROCKER NATIONAL BANK, Plaintiff and Appellant, v. CITY AND COUNTY OF SAN FRANCISCO, Defendant and Appellant.

No. S007833.

Supreme Court of California,

In Bank.

Nov. 30, 1989.

Rehearing Denied Feb. 1, 1990.

Morrison & Foerster, William Alsup and Charles J. Moll III, San Francisco, for plaintiff and appellant.

Philip M. Plant, Barbara L. Rosenfeld, San Francisco, Ehrman, Flavin, Devine & Baker, Sean Flavin, Kenneth A. Ehrman, Monterey, R. Blair Reynolds, Stephens, Berg, Lasater, Schulman & Rogers and Mark G. Ancel, Los Angeles, as amici curiae on behalf of plaintiff and appellant.

Louise H. Renne, City Atty., San Francisco, and John J. Doherty, Deputy City Atty., for defendant and appellant.

Donald L. Clark, County Counsel, and Thomas Wm. Cain, Deputy County Counsel, San Jose, as amici curiae on behalf of defendant and appellant.

MOSK, Justice.

We granted review to address "[o]ne of the most controversial questions of classification" for purposes of taxation in the law of fixtures, that of electronic data processing equipment. (1 Ehrman & Flavin, Taxing Cal. Property (3d ed. 1988) § 3:04, p. 10; see Allstate Ins. Co. v. County of Los Angeles (1984) 161 Cal.App.3d 877, 207 Cal.Rptr. 888; Security Data, Inc. v. County of Contra Costa (1983) 145 Cal.App.3d 108, 193 Cal.Rptr. 121; Exchange Bank v. County of Sonoma (1976) 59 Cal.App.3d 608, 131 Cal.Rptr. 216; Bank of America v. County of Los Angeles (1964) 224 Cal.App.2d 108, 36 Cal.Rptr. 413; see also Cal.Code Regs., tit. 18, §§ 122.5, 124 [purporting to codify the case law].)

In this case we address that question by considering two issues. The first is: the test for classifying an item of personal property as a fixture of the host real property for purposes of taxation. The second is: the standard of review on appeal after such a determination by the trial court.

As will appear, we conclude the classification should turn on whether a reasonable person would consider the item in question to be a permanent part of the host real property, taking into account annexation, adaptation, and other objective manifestations of permanence. And we conclude the trial court's determination should be reviewed independently.

I. THE FACTS

In six actions later consolidated for discovery and trial, Crocker National Bank (hereafter Crocker) sought refund of certain real property taxes paid to the City and County of San Francisco (hereafter San Francisco) in six tax years. San Francisco had levied the taxes on certain electronic data processing equipment owned by Crocker and located in a leased building at 155 Fifth Street. For tax purposes, "real property" includes "[i]mprovements" (Rev. & Tax.Code, § 104, subd. (c)), and "[i]mprovements" includes "fixtures" (id., § 105, subd. (a)). San Francisco had classified the equipment as fixtures. As a bank, Crocker was subject to taxation on its real property, but was exempt as to its personal property. (See Cal. Const., art. XIII, § 27; Rev. & Tax.Code, §§ 23181-23182.)

In this litigation, Crocker claimed the equipment could not properly be classified as fixtures. San Francisco insisted it could. It also maintained, inter alia, that (1) a refund for taxes paid in two of the years was barred for failure to exhaust administrative remedies, and (2) a refund for the first installment of the taxes paid in each of the years was barred for failure to file a claim for refund within the time prescribed by Revenue and Taxation Code section 5097.

The six consolidated actions were tried to the superior court sitting without a jury. After trial, the court issued a statement of decision. It resolved the procedural questions identified above in favor of Crocker, but determined the substantive question of classification in favor of San Francisco. In accordance with its decision, it entered judgment for San Francisco. Crocker appealed and San Francisco cross-appealed.

The Court of Appeal affirmed. It reviewed the superior court's classification as the resolution of a question of fact under the substantial-evidence test, and under that test upheld the determination. Because of that result, it did not address the procedural questions.

Crocker then petitioned for review on the substantive question of classification. In an answer, San Francisco opposed Crocker's request but presented the procedural questions as additional issues in the event review was granted. Because of the importance of the substantive question, we granted review.

II. DISCUSSION

Crocker contends the Court of Appeal erred by upholding the superior court's classification of its electronic data processing equipment as fixtures for purposes of taxation. Before we can properly consider the claim, however, we must address and resolve the issues of the applicable fixtures test and the proper standard of review.

A. The Fixtures Test

We first consider the test for classifying an item of personal property as a fixture of the host real property for purposes of taxation.

As noted above, Revenue and Taxation Code section 104, subdivision (c), defines "real property" to include "[i]mprovements." And Revenue and Taxation Code section 105, subdivision (a), defines "[i]mprovements" to include "fixtures." The latter provision apparently refers back to Civil Code section 660. (Horowitz, The Law of Fixtures in California--A Critical Analysis (1952) 26 So.Cal.L.Rev. 21, 57 [hereafter Horowitz].) ¹ That provision refers back, in turn, to the seminal decision in Teaff v. Hewitt (1853) 1 Ohio St. 511. (See code comrs. notes foll. 1 Ann.Civ.Code, §§ 660, 1013 (1st ed. 1872, Haymond & Burch, comrs.-annotators) pp. 202-203, 285-286.)

Properly read, Teaff v. Hewitt stands for the broad proposition that the classification of fixtures does not depend ultimately on how or indeed whether an item of personal property is physically attached to the host real property, but rather on the nature of the underlying legal problem and the policy considerations implicated in the solution of that problem.

In that case, the legal problem was the construction of a conveyance that did not mention certain items--did the conveyance transfer interest in the items or not? The policy considerations were those common to all such problems--how to determine what the parties would have decided had they thought about the matter. The court there held that "the united application of the following requisites will be found the safest criterion of a fixture: [p] 1. Actual annexation to the realty, or something appurtenant thereto. [p] 2. Appropriation to the use or purpose of that part of the realty with which it is connected. [p] 3. The intention of the party making the annexation, to make the article a permanent accession to the freehold--this intention being inferred from the nature of the article affixed, the relation and situation of the party making the annexation, the structure and mode of annexation, and the purpose or use for which the annexation has been made." (1 Ohio St. at pp. 529-530, italics in original.) The court made plain that the third "requisite" was the crucial and indeed ultimate factor: "In no case is a fixture created without the apparent intention of the party making the annexation to make a permanent accession to the freehold." (Id. at p. 533.) The court impliedly defined "intention" not as the subjective intent of the annexor but the objective "intent" that would be inferred by a reasonable grantee or mortgagee. As stated, it is the apparent intention that is crucial.

Thus, when the legal problem to be solved involves the construction of a conveyance, the rule of Teaff v. Hewitt is reducible to the test, "what does the grantee or mortgagee, as a reasonable man, think he is receiving under the conveyance. Those chattels on the land will be included in a conveyance of the land which look like they would come along in a conveyance of the land, based upon objective factors of annexation to the land, adaptability for use with the land as an economic entity, and other objective manifestations of the intent of the land owner to include them...." (Horowitz, supra, 26 So.Cal.L.Rev. at p. 28.)

When, however, the legal problem to be solved involves the classification of an item of personal property for purposes of taxation, "The policy considerations ... do not seem to be compelling either way. The most important factor would seem to be to have a certain and workable rule under which both the tax assessor and the person subject to the tax can most efficiently operate." (Horowitz, supra, 26 So.Cal.L.Rev. at p. 57.) The rule of Teaff v. Hewitt is such. (See Horowitz, supra, at p. 25.) And indeed, it has been followed by the case law in its broad lines. (See, e.g., Simms v. County of Los Angeles (1950) 35 Cal.2d 303, 309, 217 P.2d 936; see also Trabue Pittman Corp. v. County of L.A. (1946) 29 Cal.2d 385, 397-398, 175 P.2d 512 [holding that "in matters relating to taxation in this state, rules ... conforming to those used in determining what constitutes fixtures as between grantor and grantee, vendor and vendee, or mortgagor and mortgagee, should apply ..."].)

Accordingly, in California "It is well settled that in determining whether an article constitutes a fixture, three criteria must be taken into consideration: (1) the manner of its annexation to the realty; (2) its adaptability to the use and purpose for which the realty is used; and (3) the intention with which the annexation is made [citations].... 'It is also settled that for tax purposes the "intention" must be determined by the physical facts or reasonably manifested outward appearances....' [Citation.] [p] In resolving whether an article placed on the premises constitutes a fixture or personal property, the aforelisted three elements do not play equal parts. In making the determination in a particular case the element of intent is regarded as a crucial and overriding factor,...