Mutual Life Ins. Co. of New York v. City of Los Angeles

• Decision Date: 20 December 1988
• Docket Number: No. B031946,B031946
• Citation: 206 Cal.App.3d 943,254 Cal.Rptr. 80
• Court: California Court of Appeals Court of Appeals
• Parties: Previously published at 206 Cal.App.3d 943 206 Cal.App.3d 943 MUTUAL LIFE INSURANCE COMPANY OF NEW YORK, Plaintiff and Respondent, v. CITY OF LOS ANGELES, Defendant and Appellant. MUTUAL LIFE INSURANCE COMPANY OF NEW YORK, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION, Defendant and Respondent.

Page 80

254 Cal.Rptr. 80

Previously published at 206 Cal.App.3d 943

206 Cal.App.3d 943

MUTUAL LIFE INSURANCE COMPANY OF NEW YORK, Plaintiff and Respondent, v. CITY OF LOS ANGELES, Defendant and Appellant.

MUTUAL LIFE INSURANCE COMPANY OF NEW YORK, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION, Defendant and Respondent.

No. B031946.

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

Dec. 20, 1988.

Review Granted March 16, 1989.

James K. Hahn, City Atty., Pedro B. Echeverria, Sr. Asst. City Atty., and Ronald A. Tuller, Asst. City Atty., for defendant and appellant.

Meserve, Mumper & Hughes, Los Angeles, and Douglas P. Smith, San Marino, for plaintiff and respondent/plaintiff and appellant.

John K. Van de Kamp, Atty. Gen., Edmond B. Mamer, Supervising Deputy Atty. Gen., and Herbert A. Levin, Deputy Atty. Gen., for defendant and respondent.

McCLOSKY, Associate Justice.

In this consolidated action, defendant City of Los Angeles (City) "appeals from the judgment in case No. C587986" against it and in favor of plaintiff Mutual Life Insurance Company of New York (MONY). In turn MONY appeals from that judgment insofar as it was in favor of the State Board of Equalization. ¹

MONY initiated action number C587986 for a refund of parking lot fee taxes, tax on rental revenues and utility users taxes imposed by the City for the years 1981-1983 pursuant to various provisions of the Los Angeles Municipal Court. MONY alleged these taxes were in contravention of article XIII, section 28 of the California Constitution (section 28) and were therefore void.

The trial in this matter was conducted largely upon a stipulation of facts entered into by the parties. Their stipulation was that "MONY was subject to taxation by the State of California pursuant to Article XIII, Section 28(f) of the California Constitution...." The parties further stipulated that "prior to 1980 through 1984 MONY owned two office buildings located ... in the City of Los Angeles, at each of which it operated an automobile parking facility, ... [p ] From July, 1980 through April, 1984 MONY paid the charges made for the electricity used by its tenants in the two office buildings owned by it." During this period "MONY did not occupy or use any of the office space in either of the two office buildings owned by it."

From September 1983 through May 1984, MONY paid under protest the sum of $86,574.40 in municipal taxes to the City arising from its ownership of the two office buildings.

At trial, Walter K. Korinke, vice president of real estate investment for MONY testified that MONY's purchase of the two office buildings was pursuant to an "overall investment plan ... in the normal course of MONY's investment activities." Mr. Korinke explained that in his experience "investment in real property [is] an activity traditionally associated with the business of life and health insurance."

Following trial, the court rendered judgment against the City and in favor of MONY. In its statement of decision the court explained:

"THE CITY OF LOS ANGELES was at all times barred by Article XIII, Section 28(f), of the California Constitution, and by the case law construing that section of the California Constitution from levying the municipal taxes at issue. The Court is persuaded that it is not bound by the decision rendered in Massachusetts Mutual Life Insurance Company v. City and County of San Francisco, 129 Cal.App.3d 876 (1982), in light of the clear language of Article XIII, Section 28(f), of the California Constitution, and previous judicial decisions construing this Article and its predecessors, specifically, Hughes v. Los Angeles, 168 Cal. 764 (1914); Hartford Fire Insurance Company v. Jordan, 168 Cal. 270 (1914); and First American Title Insurance & Trust Company v. Franchise Tax Board, 15 Cal.App.3d 343 (1971)."

DISCUSSION

The City contends that "an insurance company is subject to local taxation on activities not involving its insurance business."

Section 28 provides the rate and the basis of the California state tax imposed on insurers. Subdivision (f) of that section provides in pertinent part that "[t]he 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: [taxes which the parties to this action agree are not involved here]."

The City relies exclusively on Massachusetts Mutual Life Ins. Co. v. City and County of San Francisco (1982) 129 Cal.App.3d 876, 181 Cal.Rptr. 370, in urging that the subject parking lot fee tax, the tax on rental revenues and the utility users tax are not preempted by section 28.

In Massachusetts Mutual an insurer sought a refund of ad valorem taxes imposed due to its ownership of the Hyatt Hotel on Union Square in San Francisco. The insurer contended those taxes violated the "in lieu" of provision of section 28. In rejecting this claim the court reasoned:

"[T]he 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. [Citation.] 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. [Citations.] 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. [Citations.]

"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.' [Citations.]

"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 [citations], 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." (129 Cal.App.3d at pp. 881-882, 181 Cal.Rptr. 370.)

The Massachusetts Mutual court then concluded:

"To implement the policy which underlies the constitutional provision, we conclude that an insurance company does not receive the 'in lieu' exemption for property owned and used by it in the operation of an active business which generates gross operating revenues as opposed to gross insurance premiums, unless the enterprise is reasonably related or incidental to the activities traditionally associated with the insurance industry. [Citation.]

"The operation of a hotel is not in the nature of mere passive investment traditional in and incidental to the conduct of the insurance enterprise. It is an active, unrelated business which utilizes disposable assets and equipment, not, in our view, intended by the electorate to be free from taxation under the 'in lieu' exemption ... particularly where, as here, the profits appellant realized from its operation of the hotel were not taxable as gross premiums." (129 Cal.App.3d at p. 886, 181 Cal.Rptr. 370.)

The City argues that as with the hotel in Massachusetts Mutual, the office buildings and parking structures owned by MONY in the present case are "not in the nature of mere passive investment traditional in and incidental to the conduct of the insurance enterprise." (129 Cal.App.3d at p. 886, 181 Cal.Rptr. 370.) Accordingly, the City urges the subject municipal taxes imposed on those "incidental" enterprises are not prohibited by section 28.

As described above, the trial court disagreed with the reasoning employed in Massachusetts Mutual and concluded that it was not obligated to follow that decision under stare decisis because of three contrary decisions: Hartford Fire Ins. Co. v. Jordan (1914) 168 Cal. 270, 142 P. 839; Hughes v. Los Angeles (1914) 168 Cal. 764, 145 P. 94 and First American Title Ins. & Trust Co. v. Franchise Tax Bd. (1971) 15 Cal.App.3d 343, 93 Cal.Rptr. 177.

To explain why we agree with the trial court's conclusion, we begin with our decision in First American Title Ins. & Trust Co. v. Franchise Tax Bd., supra, 15 Cal.App.3d 343, 93 Cal.Rptr. 177. There, an insurer sought a refund of a state franchise tax imposed due to its liquidation of four subsidiaries. In finding that the subject tax violated the predecessor to section 28, we explained:

"This section of the Constitution is unambiguous and clearly creates a tax exemption applicable to First American as an 'insurer' not subject to any other tax or license whatsoever." (15 Cal.App.3d at p. 346, 93 Cal.Rptr. 177.)

We disregarded the legislative history and purpose of the tax scheme which was under consideration, reasoning that: "The Constitutional exemption is clear and unequivocal and, as such, needs no outside aid to test its meaning, which is that the tax there prescribed is: 'in lieu of all other taxes.' " (Id., at p. 347, 93 Cal.Rptr. 177.)

In reaching this conclusion in First American, we relied upon the Supreme Court's opinion in Hartford Fire Ins. Co. v. Jordan, supra, 168 Cal. 270, 142 P. 839. There the court concluded that the imposition of a state license...