Massachusetts Mutual Life Ins. Co. v. City and County of San Francisco

• Citation: 181 Cal.Rptr. 370,129 Cal.App.3d 876
• Court: California Court of Appeals
• Decision Date: 19 March 1982
• Parties: MASSACHUSETTS MUTUAL LIFE INS. CO., Plaintiff and Appellant, v. CITY AND COUNTY OF SAN FRANCISCO, Defendant and Respondent. Civ. 48162.

Page 370

181 Cal.Rptr. 370

129 Cal.App.3d 876

MASSACHUSETTS MUTUAL LIFE INS. CO., Plaintiff and Appellant, v. CITY AND COUNTY OF SAN FRANCISCO, Defendant and Respondent.

Civ. 48162.

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

March 19, 1982.

As Modified on Denial of Rehearing April 15, 1982.

Hearing Denied June 9, 1982.

Prentiss Willson, Jr., Morrison & Foerster, San Francisco, for plaintiff and appellant.

George Agnost, City Atty., John J. Doherty, Deputy City Atty., San Francisco, for defendant and respondent.

NEWSOM, Associate Justice.

This is an appeal from a judgment which denied appellant's claim for a refund of ad valorem taxes in the principal amount of $100,054.25, assessed and paid under protest for the fiscal year 1973-1974 on personal property allegedly owned by it. The case was tried on stipulated facts which may be summarized as follows. Appellant (hereinafter also Mass Mutual), a mutual insurance company, holds title to the Hyatt Hotel on Union Square (hereinafter hotel) and its fixtures and personal property. Under a lease agreement with the California Hyatt Corporation (hereinafter Cal Hyatt) executed on January 4, 1973, the hotel is managed and operated by Cal Hyatt. The agreement is for a term of 21 years, and grants Cal Hyatt a leasehold estate in the fixtures and equipment used in operating the hotel. ¹ Appellant retained legal title to the property; Cal Hyatt was required by the agreement to keep all of the insurable personalty in the hotel insured against loss or damage, although the risk of property loss otherwise rested with appellant. In addition, Cal Hyatt covenanted to pay any personal property taxes imposed. ²

The lease agreement also allowed appellant to exercise certain control over the operation of the hotel and, incidentally, its fixtures and equipment; that control included approval of the budget, expenses, and some decor sales and purchases. Cal Hyatt, however, controlled the day-to-day operation of the hotel and use of the personalty.

Pursuant to the agreement, 80 percent of the net profits generated by operation of the hotel were paid to appellant and 20 percent to Cal Hyatt.

Article XIII, section 14 4/5 of the California Constitution--now article XIII, section 28--imposes a tax on the annual "gross premiums" of insurance companies, and otherwise grants insurers an "in lieu" tax exemption for all other taxes. It provides in pertinent part as follows: "(b) An annual tax is hereby imposed on each insurer doing business in this State on the base, at the rates, and subject to the deductions from the tax hereinafter specified. [p] (c) ... the 'basis of the annual tax' is, in respect to each year, the amount of gross premiums, less return premiums, received in such year by such insurer upon its business done in this state, other than premiums received for reinsurance and for ocean marine insurance.... [p] (f) The tax imposed on insurers by this section is in lieu of all other taxes and licenses, state, county, and municipal, upon such insurers and their property, except: [p] (1) Taxes upon their real estate...."

The trial court concluded, as had the tax assessor, that in light of the purpose and objective of article XIII, section 14 4/5, the "in lieu" tax exemption should not and did not apply to personal property owned by the insurer but used in an unrelated and independent business.

Appellant complains that such an interpretation violates the plain meaning of the provision, which states that the gross premiums tax is "in lieu of all other taxes" imposed "upon such insurers and their property, ..." According to appellant, the unambiguous language of article XIII, section 14 4/5, grants an exemption based upon ownership of property by the insurer, without consideration of use. Respondent in turn argues that consideration of the objective of the law leads to the conclusion that the "in lieu" exemption applies only to property used in the business of transacting insurance.

To ascertain the meaning of article XIII, section 14 4/5, we consult pertinent interpretive guidelines.

A cardinal rule is that laws should be given a reasonable construction which comports with the apparent purpose and intent of the lawmaker. ³ (Gerkin v. Santa Clara Valley Water Dist. (1979) 95 Cal.App.3d 1022, 1025, 157 Cal.Rptr. 612; Cory v. Golden State Bank (1979) 95 Cal.App.3d 360, 367, 157 Cal.Rptr. 538.) Language must be read in context, keeping in mind the nature and purpose of the enactment, and given an interpretation which will promote rather than defeat the objective of the drafters of constitutional provision and the people by whose vote it was adopted. (Mosk v. Superior Court (1979) 25 Cal.3d 474, 495, 159 Cal.Rptr. 494, 601 P.2d 1030.) In Flood v. Riggs (1978) 80 Cal.App.3d 138, 152, 145 Cal.Rptr. 573, we explained that "the words used should be accorded the ordinary and usual meaning given them among people by whose vote they were adopted."

In fact, as noted in People v. Davis (1978) 85 Cal.App.3d 916, 924, 149 Cal.Rptr. 777: "... a persuasive and basic principle of statutory construction provides that ... intent should prevail over a literal or plain-meaning construction." And, as expressed in English v. County of Alameda (1977) 70 Cal.App.3d 226, 233-234, 138 Cal.Rptr. 634: "... intent may be ascertained not only by considering the words used, but also taking into account other matters as well, such as the objects in view, the evils to be remedied, the legislative history, public policy and contemporaneous administrative construction."

No different or special interpretative principles apply to "in lieu" tax exemption laws. Our high court recently recognized in Western States Bankcard Assn. v. City & County of San Francisco (1977) 19 Cal.3d 208, 137 Cal.Rptr. 183, 561 P.2d 273, that while the usual rule of strict construction of tax exemption provisions does not apply to an "in lieu" scheme, neither is "there [a]... discernible policy basis for a 'liberal' interpretation" of such laws. (Id., at p. 216, 137 Cal.Rptr. 183, 561 P.2d 273.) ⁴

The parties agree that the quid pro quo for the "in lieu" tax exemption is the imposition upon insurers of a tax on "gross premiums." Instead of being taxed on net profits, as is the common commercial case, insurance companies pay a tax measured by gross premiums. (San Francisco v. Pacific Tel. & Tel. Co. (1913) 166 Cal. 244, 248, 135 P.2d 971.) The purpose of the "in lieu" exemption granted to insurers, and other enumerated businesses, was to impose a tax obligation measured by given percentages of gross receipts--gross premiums in the case of insurance companies--the revenues from which are allocated to state, rather than local, purposes. (Id., at pp. 247-248, 135 P.2d 971; Camden Fire Ins. Assn. v. Johnson (1941) 42 Cal.App.2d 528, 531, 109 P.2d 447.) The gross premiums tax is not a tax upon property, but a franchise or excise tax exacted for the privilege of doing insurance business in this state. (Franklin Life Ins. Co. v. State Board of Equalization (1965) 63 Cal.2d 222, 231, 45 Cal.Rptr. 869; Western & Southern Life Ins. Co. v. State Bd. of Equalization (1970) 4 Cal.App.3d 21, 33, 84 Cal.Rptr. 88; Edward Brown & Sons v. McColgan (1942) 53 Cal.App.2d 504, 507, 128 P.2d 186.)

It thus becomes apparent that the "in lieu" tax exemption granted insurers is tied to the gross premiums tax. The more burdensome gross premiums tax is imposed, but is offset by an exemption which insulates "insurers and their property" from "all other taxes." (See City & County of San Francisco v. Pacific Tel. & Tel. Co., supra, 166 Cal. 244, 248, 135 P.2d 971; ⁵ City of San Jose v. Donohue (1975) 51 Cal.App.3d 40, 46, 123 Cal.Rptr. 804, app. dism. 423 U.S. 1069, 96 S.Ct. 851, 47 L.Ed.2d 80.)

Since the "in lieu" exemption is granted in return for imposition of a tax on gross, rather than net, receipts, and is functionally related to the tax which insurers must pay on gross premiums paid to the company for insurance benefits (Allstate Ins. Co. v. State Board of Equal. (1959) 169 Cal.App.2d 165, 168, 336 P.2d 961), in our view it would be inappropriate to allow a tax exemption for property owned by an insurer but not used to produce taxable gross premiums. If it were otherwise, an insurer could entirely escape taxation of all revenue-producing property not used to generate "gross premiums." Under such circumstances, as in the present case, the quid pro quo for the "in lieu" exemption no longer exists; the insurer retains the privilege of doing business, and derives profits, but pays the state nothing for property owned and used in deriving a conceivably substantial source of its income. We do not think the electors intended such a result.

Plainly, if an insurance company were allowed to own an income-producing business and its fixtures and equipment while escaping taxation under the "in lieu" provision, it would be placed in an unwarranted competitive advantage over other taxed enterprises engaged in the same business. This also we think was not contemplated by the constitutional amendment.

The quid pro quo basis for the exemption disappears if, as here, the insurer pays no gross premiums tax for the privilege of receiving otherwise preferential tax treatment, and the purpose of article XIII, section 14 4/5 is contravened where property ownership is the sole basis for granting the "in lieu" exemption.

Still, appellant urges this court to interpret section 14 4/5 in accordance with the "plain meaning" of its language, which, appellant suggests, includes no caveat regarding use of the insurer's property. In so arguing, appellant relies upon two cases which construed the public land tax exemption. (Cal.Const., art. XIII, § 3, subds. (a) and (b), formerly § 1.) We have considered both cases closely, and comment as follows.

In San Francisco v. McGovern (1915) 28 Cal.App. 491, 152 P. 980, the County of Tuolumne claimed that property purchased...