ITT World Communications, Inc. v. City and County of San Francisco

• Decision Date: 31 January 1985
• Docket Number: S.F. 24721
• Citation: 210 Cal.Rptr. 226,37 Cal.3d 859
• Court: California Supreme Court
• Parties: , 693 P.2d 811 ITT WORLD COMMUNICATIONS, INC., Plaintiff and Appellant, v. CITY AND COUNTY OF SAN FRANCISCO et al., Defendants and Respondents.

Page 226

210 Cal.Rptr. 226

37 Cal.3d 859, 693 P.2d 811

ITT WORLD COMMUNICATIONS, INC., Plaintiff and Appellant, v. CITY AND COUNTY OF SAN FRANCISCO et al., Defendants and Respondents.

S.F. 24721.

Supreme Court of California.

Jan. 31, 1985.

John J. Doherty, Deputy City Atty., San Francisco, for defendant and respondent (City and County of San Francisco).

Edward P. Hollingshead, Deputy Atty. Gen., Sacramento, for defendant and respondent (Board of Equalization).

MOSK, Justice.

The question in this case is whether the "valuation rollback" provision of article XIII A, section 2, subdivision (a), of the California Constitution, part of the 1978 initiative known as Proposition 13, applies to unit taxation of public utility property. ¹ Plaintiff ITT World Communications, Inc. (hereinafter Worldcom) brought this action for a property tax refund for the fiscal years 1978-1979 and 1979-1980 against defendants, the City and County of San Francisco and the State Board of Equalization (hereinafter the Board), alleging that the Board acted illegally in refusing to adjust the assessment of Worldcom's property to its 1975-1976 value in accordance with the valuation rollback provision. The court entered summary judgment in favor of defendants, and plaintiff appealed. We conclude that the judgment should be affirmed.

I

In 1935 the current system of ad valorem unit taxation of public utility property, now defined by article XIII, section 19, of the California Constitution and Revenue and Taxation Code section 721 et seq., came into effect. ² Under this system all property, other than franchises, owned or used by public utilities is annually assessed and subjected to taxation. (Cal. Const., art. XIII, § 19; §§ 721-722, 755-756.) Under the system that had prevailed from 1910 into the 1930's, there was a separation of sources of tax revenue: public utility property was subject to a special gross receipts "in lieu" tax levied and collected by the state to support state government, and other property was subject to the regular ad valorem property tax levied and collected by local government to support itself. (Bertane, The Assessment of Public Utility Property in California (1973) 20 UCLA L.Rev. 419, 423-424 (hereinafter Bertane, Public Utility Property ).)

By the early 1930's, however, the Great Depression had brought about a crisis in taxation as in other aspects of public and private life, and there arose general dissatisfaction with this system of taxation. Local tax rates were believed to be too high, in part because public utility property was not on the local tax rolls; state revenues were believed to be too low, in part because public utility tax rolls could be raised only by a two-thirds vote of the Legislature (Cal. Const., former art. XIII, § 14, subd. (f)) and the public utilities possessed sufficient political power to block such tax increases (see Rep. of State Bd. of Equalization for 1931-1932 (1932) p. 12). In the face of this crisis, the Legislature drafted and the voters adopted an amendment to the Constitution known as the Riley-Stewart Plan, which completely revised this system of taxation. The special gross receipts "in lieu" tax was repealed and public utility property was subjected to the regular ad valorem property tax, thus restoring public utility values to the local tax rolls and alleviating the local tax burden; the political problems inherent in taxing public utilities at the state level pursuant to legislatively set rates were eliminated by having public utility property centrally assessed by the Board.

One of the primary objectives of the system of unit taxation of public utility property is to ascertain and reach with the taxing power the entire real value of such property. (See Plan for Tax Relief presented in Sen. Const.Amend. No. 30 and Assem. Const.Amend. No. 68 to be Submitted as Prop. 1 on Ballot of June 27, 1933, p. 8 (hereinafter Plan for Tax Relief); Bertane, Public Utility Property, supra, 20 UCLA L.Rev. at pp. 426-427, 433.) It has long been recognized that "public utility property cannot be regarded as merely land, buildings, and other assets. Rather, its value depends on the interrelation and operation of the entire utility as a unit. Many of the separate assets would be practically valueless without the rest of the system. Ten miles of telephone wire or one specially designed turbine would have a questionable value, other than as scrap, without the benefit of the rest of the system as a whole." (Bertane, Public Utility Property, supra, at p. 433.) Unit taxation prevents real but intangible value from escaping assessment and taxation by treating public utility property as a whole, undifferentiated into separate assets (land, buildings, vehicles, etc.) or even separate kinds of assets (realty or personalty).

The unit taxation of public utility property is effected in four general stages. First, the Board annually assesses all unitary property of each public utility, that is, all property that it uses in performing its function. ( § 723.) In making this assessment, the Board uses the principle of unit valuation: it determines the value of the property as a whole, rather than the value of any of the assets as parts of the whole; it does not assess each asset and then total up the valuation, but values the property as a unit, primarily through a capitalized earnings approach. ³ Second, the owner of the public utility property is offered an opportunity to apply for corrections. ( §§ 731, 741-749.) Third, the Board transmits to the local taxing authority a roll showing the assessments against public utility property situated within its jurisdiction. ( §§ 755-756, 758.) In accordance with the principle of unit valuation, such assessments do not represent the value of the assets situated within that jurisdiction; rather, they represent the share of the value of the property as a whole that the Board has determined should equitably be allocated to the jurisdiction. Thus, after it has assessed the value of the property as a whole, the Board makes a formulary allocation that has little or no relationship to the actual fair market value of the particular assets situated within the jurisdiction. Fourth, the local taxing authority subjects the property so assessed to taxation at the rate fixed in its jurisdiction. (See §§ 755-756.)

II

Article XIII A provides in part that "[t]he maximum amount of any ad valorem tax on real property shall not exceed One percent (1%) of the full cash value of such property." (Cal. Const., art. XIII A, § 1, subd. (a).) The valuation rollback provision here challenged provides in relevant part that "[t]he full cash value means the county assessor's valuation of real property as shown on the 1975-76 tax bill under 'full cash value' ...." (Id., § 2, subd. (a).)

In contending that the maximum assessed value of its unitary property in California should not exceed that property's 1975-1976 value, plaintiff first argues that article XIII A applies directly to the unit taxation of public utility property. The argument is without merit.

A

From our review of the relevant constitutional and statutory provisions, we conclude that unit taxation is properly characterized not as the taxation of real property or personal property or even a combination of both, but rather as the taxation of property as a going concern. First, what the Board assesses is the value of the public utility property as a going concern; it considers the earnings of the property as a whole, and does not consider, less still assess, the value of any single real or personal asset. Second, what the Board allocates to the local taxing authority is, again, a share of the value of the public utility property as a going concern; it makes a formulary allocation based on considerations of equity, and does not even attempt to match the allocation to the fair market value of the particular assets of the utility situated within the jurisdiction.

As we have explained, "[b]y its terms, article XIII A applies only to real property taxes. In Amador [Valley Joint Union High Sch. Dist. v. State Bd. of Equalization (1978) 22 Cal.3d 208, 149 Cal.Rptr. 239, 583 P.2d 1281] we upheld the constitutionality of the enactment and accorded it the liberal construction to which initiative measures are entitled. [Citation.] In so doing, throughout our opinion and in varying contexts we observed that the measure pertained to the subject of real property taxation and declared its underlying purpose and chief aim to be real property tax relief." (Board of Supervisors v. Lonergan (1980) 27 Cal.3d 855, 863, 167 Cal.Rptr. 820, 616 P.2d 802; italics in original.) In the same case we also emphasized that "Proposition 13 was widely publicized as a taxpayers' revolt providing tax relief for homeowners," and was widely accepted as such by the voters. (Id. at p. 864 & fn. 9, 167 Cal.Rptr. 820, 616 P.2d 802; italics added.)

In determining whether article XIII A directly applies to the unit taxation of public utility property, we use well settled rules of construction. First, "[a] constitutional amendment should be construed in accordance with the natural and ordinary meaning of its words." (Amador Valley Joint Union High Sch. Dist. v. State Bd. of Equalization, supra, 22 Cal.3d 208, 245, 149 Cal.Rptr. 239, 583 P.2d 1281; accord, In re Quinn (1973) 35 Cal.App.3d 473, 482, 110 Cal.Rptr. 881.) Second, it should not be construed in such a way as to undermine its validity. (See Amador Valley Joint Union High Sch. Dist. v. State Bd. of Equalization, supra, 22 Cal.3d at p. 245, 149 Cal.Rptr. 239, 583 P.2d 1281; Associated Home Builders etc., Inc. v. City of Livermore (1976) 18 Cal.3d 582, 598, 135 Cal.Rptr. 41, 557 P.2d 473.) Third, it should not be construed to effect the implied repeal of another constitutional provision. (Board of Supervisors v. Lonergan, supra, 27 Cal.3d 855, 868-869, 167 Cal.Rptr. 820, 616 P.2d 802.)

Using these...