Industrial Indemnity Co. v. City and County of San Francisco

• Decision Date: 14 March 1990
• Docket Number: No. A044619,A044619
• Citation: 218 Cal.App.3d 999,267 Cal.Rptr. 445
• Court: California Court of Appeals
• Parties: INDUSTRIAL INDEMNITY COMPANY, Plaintiff and Appellant, v. CITY AND COUNTY OF SAN FRANCISCO, Defendant and Respondent.

Page 445

267 Cal.Rptr. 445

218 Cal.App.3d 999

INDUSTRIAL INDEMNITY COMPANY, Plaintiff and Appellant, v. CITY AND COUNTY OF SAN FRANCISCO, Defendant and Respondent.

No. A044619.

Court of Appeal, First District, Division 4, California.

March 14, 1990.

As Modified on Denial of Rehearing April 4, 1990.

Review Denied June 7, 1990.

Theodore F. Bayer, Nancy B. Ranney, Patricia Pollastrini, Rubin, Eagan & Feder, San Francisco, for plaintiff and appellant.

Fred Main, California Chamber of Commerce, Sacramento, for amici curiae on behalf of appellant.

Louise H. Renne, City Atty., Robin M. Reitzes, Deputy City Atty., San Francisco, for defendant and respondent.

John K. Van de Kamp, Atty. Gen., Robert F. Tyler, Supervising Deputy Atty. Gen., Robert D. Milam, Deputy Atty. Gen., Sacramento, for amicus curiae on behalf of respondent.

CHANNELL, Associate Justice.

In this case of first impression, we hold that a true sale and leaseback of real property--one that is not a financing transaction--constitutes a change in ownership within the meaning of Proposition 13, triggering reassessment of the property. (See Cal.Const., art. XIIIA, § 2, subd. (a).)

I. FACTS

In 1984, appellant Industrial Indemnity Company owned real property and improvements at 255 California Street in San Francisco. For the 1984/1985 tax year, respondent City and County of San Francisco had assessed property taxes against this property based on a full-value assessment of $9,111,719. In November 1984, Industrial Indemnity agreed to convey fee title to the property to Resources Property Improvement Corporation, conditioned on receipt of a leaseback of the property. This lease was to be effected on the closing of title. Resources assigned its rights to purchase to Camfex Associates and assigned the remainder interest to Emily Associates. In December 1984, Industrial Indemnity sold the property to Camfex and leased it back for a period of 25 years, with five 5-year options to extend the lease. ¹ Underthe terms of the lease, Industrial Indemnity must pay all property taxes.

For federal and state income tax purposes, Industrial Indemnity and Camfex treated the transaction as a sale. Industrial Indemnity claimed deductions for rent and other expenses; Camfex took depreciation on the building and claimed the rent paid by Industrial Indemnity as ordinary income.

In 1985, the city determined that a change in ownership of the property had occurred and reset the property's full-value assessment at $40,600,000. The city sent Camfex a supplemental tax bill for the 1984-1985 tax year, based on the new valuation. The tax bill for the 1985-1986 tax year was also based on the reassessed valuation. Acting on its own behalf and for Camfex, Industrial Indemnity applied to the city's Assessment Appeals Board for a changed assessment, to affect both the 1984-1985 supplemental tax bill and the 1985-1986 tax bill. The board reduced the full-value assessment of the property to $37,650,000, but declined to decide whether the sale and leaseback constituted a change in ownership. In 1986, the city issued corrected tax bills to reflect the board's revision.

Industrial Indemnity paid the corrected tax bills under protest. Its claim for refund filed with the city Board of Supervisors was denied in 1986. Industrial Indemnity, again acting on its own behalf and for Camfex, filed a complaint for refund of property taxes, without success. ² The trial court found that the Industrial Indemnity-Camfex sale and leaseback constituted two changes in ownership, prompting reassessment. Judgment was issued, corrected, and amended nunc pro tunc. Industrial Indemnity appeals from the amended judgment. ³

II. DISCUSSION

A. Change in Ownership--Sale

Industrial Indemnity contends that the city's reassessment was premature because the sale and leaseback of the California Street property did not constitute a "change in ownership" within the meaning of Proposition 13. (See Cal.Const., art. XIIIA.) The city contends that the trial court correctly determined that Proposition 13's implementing statutes and regulations do not support Industrial Indemnity's claim. In addition to the briefs of the parties, we have considered amicus briefs from the California Taxpayers Association and the California Chamber of Commerce supporting Industrial Indemnity's argument and from the State Board of Equalization urging us to adopt the city's position.

Proposition 13, adopted by California voters in 1978, set a maximum amount of an ad valorem tax on real property based on the full cash value of the property. (Cal.Const., art. XIIIA, § 1; Title Ins. & Trust Co. v. County of Riverside (1989) 48 Cal.3d 84, 88, 255 Cal.Rptr. 670, 767 P.2d 1148.) The measure defines the term "full cash value," as (1) the county's assessed valuation of the property in the 1975-1976 tax year or (2) the appraised value of the property when purchased, when newly constructed, or when a change in ownership occurs. (Cal.Const., art. XIIIA, § 2, subd. (a); see Cal.Code Regs., tit. 18, § 462, subd. (a)(1).) Although this article provides that certain transactions--none of which are relevant to our case--do not constitute a "change in ownership," this term is not affirmatively defined in the Constitution itself. (See Cal.Const., art. XIIIA, § 2, subds. (d), (g), (h); Title Ins. & Trust Co. v. County of Riverside, supra, at p. 95, 255 Cal.Rptr. 670, 767 P.2d 1148; E. Gottschalk & Co. v. County of Merced (1987) 196 Cal.App.3d 1378, 1384, 242 Cal.Rptr. 526.)

Revenue and Taxation Code section 60 ⁴ establishes a three-pronged definition for the term "change in ownership"--a transfer of a present interest in real property; a transfer of the beneficial use of the property; and a transfer of value substantially equal to the value of the fee. (See Cal-American Income Property Fund II v. County of Los Angeles (1989) 208 Cal.App.3d 109, 114, 256 Cal.Rptr. 21.) Despite Industrial Indemnity's arguments to the contrary, the subject transaction satisfies all three of these criteria. The sale of the California Street property constituted a sale of a present interest, as evidenced by Camfex's immediate right to possess the property. (See Civ.Code, § 689.) The lease's provision that the right to physical possession should remain with Industrial Indemnity did not transform the sale into one of a future interest, postponing possession to a future time. (See id., § 690.) The sale transferred to Camfex the right to possess the California Street property. The new owner then leased the right of physical possession to Industrial Indemnity in exchange for its rental value. As a general rule, the use of a thing does not mean the thing itself, but that the user may enjoy, hold, occupy, or have some benefit from it. In the real estate context, the use of the property can be the rent which can be obtained for its use. (Union Oil Co. v. State Bd. of Equal. (1963) 60 Cal.2d 441, 448, 34 Cal.Rptr. 872, 386 P.2d 496, app. dism. 377 U.S. 404, 84 S.Ct. 1629, 12 L.Ed.2d 495.) That Camfex contracted by lease to accept the financial value of its right of possession rather than the actual, physical possession of the property does not transform a present interest in real property into a future interest.

The same logic applies to Industrial Indemnity's claim that the second prong of section 60--a transfer of beneficial use of the property--was not met because, under the lease, it continues to enjoy physical possession of the property. Camfex acquired the right to possession as a result of the sale. The lease transfers this right to Industrial Indemnity, in exchange for the value of that right. The fact that Camfex may not occupy the property during the lease period does not deprive it of its right to enjoy the value of its property represented by the rent. (See City of Desert Hot Springs v. County of Riverside (1979) 91 Cal.App.3d 441, 452-453, 154 Cal.Rptr. 297 [pre-Proposition 13 case]; Ohrbach's Inc. v. County of Los Angeles (1961) 190 Cal.App.2d 575, 581, 12 Cal.Rptr. 132.) The sale and leaseback constituted a transfer of the beneficial use of the property within the meaning of section 60.

The sale of the fee also transferred a value substantially equivalent to the value of the fee, thus meeting the third requirement of the statute. (See § 60.) In fact the sale was not simply equivalent to the value of the fee--it was a transfer of the fee itself. The purchase agreement provided for a transfer of "fee title"; the conveyance divests Industrial Indemnity of its fee interest in the California Street property. Camfex is now the primary owner of the subject property. All three prongs of the statutory test being met, the sale constituted a change in ownership under section 60.

B. Change in Ownership--Leaseback

The leaseback for a term of 50 years (including renewal options) also constituted a change in ownership. Section 61 lists nine specific examples of a "change in ownership." Subdivision (c)(1) of section 61 provides that the creation of a leasehold interest in taxable real property for a term of 35 years or more (including renewal options) constitutes a change in ownership. This finding is also consistent with the three-pronged test of section 60. The Legislature has determined that a lease of this length, with its rights of physical possession and use of the property during the term of the lease, is the equivalent of a transfer of the fee for purposes of Proposition 13. (See E. Gottschalk & Co. v. County of Merced, supra, 196 Cal.App.3d at pp. 1384-1386, 242 Cal.Rptr. 526.) The Legislature's interpretation of a "change in ownership" in section 60 and subdivision (c)(1) of section 61 have been held to be constitutional. (Id., at p. 1386, 242 Cal.Rptr. 526.)

C. Estate for Years

Section 62 defines many specific exclusions from the term "change in ownership," including any "transfer by an instrument whose terms reserve to the transferor an estate for years...." (§ 62,...