Haines v. Anaconda Aluminum Co., 43676

• Decision Date: 22 April 1976
• Docket Number: No. 43676,43676
• Citation: 87 Wn.2d 28,549 P.2d 13
• Parties: James B. HAINES, Snohomish County Assessor, Respondent, v. ANACONDA ALUMINUM COMPANY, Appellant.
• Court: Washington Supreme Court

Page 28

87 Wn.2d 28

549 P.2d 13

James B. HAINES, Snohomish County Assessor, Respondent, v. ANACONDA ALUMINUM COMPANY, Appellant.

No. 43676.

Supreme Court of Washington, En Banc.

April 22, 1976.

Perkins, Coie, Stone, Olsen & Williams, Graham H. Fernald, Seattle, for appellant.

Robert E. Schillberg, Pros. Atty., Elmer E. Johnston, Jr., Everett, for respondent.

HAMILTON, Associate Justice.

Appellant, Anaconda Aluminum Company, appeals a superior court judgment which declared Laws of 1971, 1st Ex.Sess., ch. 43 ¹ (hereinafter referred to as chapter 43), unconstitutional and denied appellant an ad valorem property tax deduction.

In 1967, appellant and the Port of Everett executed a lease which gave appellant the right to use the public dock facilities at the port. A port revenue bond issue provided the funds to build the Everett port facilities. The lease required the appellant to pay the port sufficient rent to enable it to repay the principal and interest on the bonds. Appellant pays additional rent to reimburse the port for its general operating costs and insurance expenses.

In 1970, we decided Pier 67, Inc. v. King County, 78 Wash.2d 48, 469 P.2d 902 (1970), Cert. denied, 401 U.S. 911, 91 S.Ct. 876, 27 L.Ed.2d 810 (1971), which established a new rule for valuing leaseholds of tax-exempt, publicly owned land. In response to our Pier 67 decision, the legislature enacted chapter 43, which provides a deduction for rent or other consideration from the value of a leasehold created prior to January 1, 1971. The chapter 43 deduction only applies to the leasehold years prior to 1973. Following the enactment of chapter 43, the appellant filed a timely appeal with the Snohomish County Board of Equalization, challenging the assessed value of its Port of Everett leasehold. The board denied the appeal, and appellant appealed to the State Board of Tax Appeals. The State Board of Tax Appeals entered an order granting appellant a deduction for rent pursuant to chapter 43. Respondent, the Snohomish County Assessor, appealed the decision to the Snohomish County Superior Court. The superior court reversed the Board of Tax Appeals' decision, concluding that chapter 43 violates Const. art. 4, § 1, ² and Const. art. 7, *z 1 ³ and 2. ⁴ Appellant has appealed from this judgment. ⁵

Initially, we should summarize this jurisdiction's history of ad valorem taxation of leaseholds in tax-exempt, publicly owned land. In a series of decisions known as the Metropolitan Bldg. cases, the court established certain standards for the valuation and assessment of leaseholds in tax-exempt, public land. Generally, these cases allow lessees to deduct indebtedness and rent reserved from the value of the leasehold. In re Metropolitan Bldg. Co., 144 Wash. 469, 258 P. 473 (1927); Metropolitan Bldg. Co. v. King County, 72 Wash. 47, 129 P. 883 (1913); 64 Wash. 615, 117 P. 495 (1911); 62 Wash. 409, 113 P. 1114 (1911). In Pier 67, Inc. v. King County, supra, 78 Wash.2d at 55--56, 469 P.2d 902, 907 we disapproved of this valuation method.

The court recognized that the value of the leasehold term minus the rent reserved is the means used in calculating a lessee's damages when his leasehold is Condemned. Condemnation valuation represents the lessee's Equity in the leasehold; it is a non sequitur to say that it is its true value for ad valorem taxation. Taxation of property at its value, without regard to the owner's equity, is an established principal of ad valorem taxation.

The distinction between the lessee's equity in a leasehold and the value of the leasehold estate for tax purposes is a valid one. The fact that a leasehold interest has not appreciated does not mean that it is worth nothing. The value to be taxed is the value of the right to use the property over the period of the lease.

Additionally, we overruled the Metropolitan Bldg. cases and announced a new approach to valuing leaseholds in tax-exempt, publicly owned land. Assessors now must tax these leaseholds at one-half of their true market value.

The market value of a leasehold is to be measured by considering both benefits to be garnered from the use of the property over the term of the lease and the burdens placed upon it. Burdens on the leasehold are restrictions which limit its use. These burdens may arise from zoning ordinances or other legal limits on land use or may be restrictions imposed by the terms of the lease itself.

Pier 67, Inc. v. King County, supra at 57, 469 P.2d at 908.

Rent and indebtedness are burdens on the lessee. However, they do not represent burdens on the leasehold, and are no longer deductible.

Chapter 43, in part, reinstates the valuation rules of the Metropolitan Bldg. cases for leaseholds executed prior to January 1971 for the tax years prior to 1973. ⁶

Appellant asserts that our Pier 67 decision is not a decision interpreting the Washington Constitution. Appellant contends the decision merely interprets RCW 84.04.080 ⁷ and RCW 84.40.030. ⁸ If the Pier 67 case is only a statutory construction case, then the legislature possesses the necessary power to enact amendatory legislation such as chapter 43.

Most of the references to a statute in our Pier 67 decision involve RCW 84.40.030. In State ex rel. Morgan v. Kinnear, 80 Wash.2d 400, 403, 494 P.2d 1362 (1972), we describe this provision as legislation implementing Const. art. 7, § 2, which requires the taxable assessment to equal 'fifty per centum of the true and fair value of such property in money . . .' Similarly, in our Pier 67 decision, we quoted Const. art. 7, § 2, and stated at page 51, 469 P.2d at page 905 that 'RCW 84.40.030 follows the constitution with the general standard of valuation: . . ..'

Therefore, in the Pier 67 decision we specifically adhered to the constitutional mandate of article 7, section 2, as implemented by RCW 84.40.030, and required leaseholds to be assessed at 50 percent of their true market value.

Even though chapter 43 represents legislation that modifies a constitutional decision, appellant still maintains the legislature possesses the power to ameliorate the hardship caused by our Pier 67 decision. Appellant asserts chapter 43 merely revised, for a limited time and in limited circumstances, the standards adopted in the Metropolitan Bldg. cases and followed by this court for 50 years. It provides a period of equitable transition to the new standard announced in Pier 67.

The history of leasehold taxation of public lands in California supports the appellant's position. After many years of allowing deductions for rent, the California Supreme Court adopted a new rule which denied the deductions. De Luz Homes, Inc. v. County of San Diego, 45 Cal.2d 546, 290 P.2d 544 (1955). The California Supreme Court denied these deductions on the basis of a constitutional article similar to Washington's Const. art. 7, § 2. The California legislature then enacted Cal.Rev.Tax Code § 107.1 (1957), which is substantially similar to chapter 43. ⁹ In an opinion by Justice Traynor, the California Supreme Court upheld the constitutionality of section 107.1, and held:

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.

Forster Shipbuilding Co. v. County of Los Angeles, 54 Cal.2d 450, 459, 6 Cal.Rptr. 24, 353 P.2d 736 (1960).

In the Forster opinion, at page 459, 6 Cal.Rptr. at page 29, 353 P.2d at page 741 Justice Traynor also states that an appellate court may overrule a decision 'prospectively only, even though it thereby temporarily preserves and applies a mistaken interpretation of the Constitution.' The court then concludes, at page 459, 6 Cal.Rptr. at page 29, 353 P.2d at page 741:

Such temporary application of the rule of an overruled case may be prescribed by appropriate legislation as well as by judicial decision, for the Legislature is no less competent than the court to evaluate the hardships involved and decide whether considerations of fairness and public policy warrant the granting of relief.

Our research discloses no authority except the Forster case, which permits a legislature to suspend the application of a judicial decision interpreting the constitution. Chapter 43 only provides for a temporary suspension of a constitutional decision. However, it still represents a forfeiture of the court's power to interpret the constitution and also casts the judiciary in a subservient role to the legislature. The ultimate power to interpret and enforce the constitution belongs to the judiciary. Therefore, we decline to follow the Forster decision, and hold that chapter 43 violates Const. art. 4, § 1, and Const. art. 7, § 2.

Finally, this court does possess the power to review our Pier 67 decision and determine whether it should be given only prospective application. In determining the general or unlimited retroactive effect of an overruling decision, courts customarily focus on whether particular persons have relied justifiably upon the overruled decision. If so, the court must ascertain whether a retroactive application of the overruling decision would defeat these reliance interests. See Taskett v. KING Broadcasting Co., 86 Wash.2d 439, 454, 546 P.2d 81 (1976) (Stafford, C.J., concurring in part, dissenting in part); Geise v. Lee, 10 Wash.App. 728, 733--34, 519 P.2d 1005 (1974), Rev'd on other grounds, 84 Wash.2d 866, 529 P.2d 1054 (1975); Comment Note.--Prospective or Retroactive Operations of Overruling Decision, Annot., 10 A.L.R.3d 1371, 1386 (1964).

Appellant maintains it relied upon the Metropolitan Bldg. decisions when it executed its lease with the port in 1967. Specifically, appellant contends that it agreed to a higher rental fee, because it...