Sutter Hospital of Sacramento v. City of Sacramento

• Decision Date: 14 May 1952
• Citation: 39 Cal.2d 33,244 P.2d 390
• Court: California Supreme Court
• Parties: SUTTER HOSPITAL OF SACRAMENTO v. CITY OF SACRAMENTO. Sac. 6110.

Page 390

244 P.2d 390

39 Cal.2d 33

SUTTER HOSPITAL OF SACRAMENTO v. CITY OF SACRAMENTO.

Sac. 6110.

Supreme Court of California, in Bank.

May 14, 1952.

Rehearing Denied June 11, 1952.

Butler & Reckers and Stanley W. Reckers, all of Sacramento, for appellant.

Musick & Burrell, Howard Burrell and James E. Ludlam, Los Angeles, amici curiae on behalf of appellant.

Everett M. Glenn, Ralph H. Lewis and Fred R. Pierce, all of Sacramento, for respondent.

Harold W. Kennedy, County Counsel (Los Angeles), and Arvo Van Alstyne, Deputy County Counsel, Ray L. Chesebro, City Atty. (Los Angeles), and Louis A. Babior, Deputy County Counsel, all of Los Angeles, amici curiae on behalf of respondent.

SPENCE, Justice.

Plaintiff brought this action to recover real property taxes paid under protest for the fiscal year 1946-1947. The underlying question is whether the tax assessments were properly made in view of the welfare exemption law. Cal.Const art. XIII, § 1c; Rev. & Tax. Code, § 214. The trial court found that plaintiff did not meet certain conditions for exemption; and from the judgment accordingly entered in favor of defendant, plaintiff appeals.

One of the conditions which the trial court found that plaintiff had failed to meet is that embodied in subdivision (3) of section 214 of the Revenue and Taxation Code, which reads: 'The property is not used or operated * * * for profit regardless of the purposes to which the profit is devoted'. Plaintiff contends that the evidence is insufficient to sustain the trial court's findings relative to plaintiff's failure to meet this condition. As there is no dispute concerning the facts, the question becomes essentially one of statutory construction. We have concluded that plaintiff's position with respect to this phase of the controversy cannot be sustained, and that the judgment must be affirmed. It is therefore unnecessary to discuss certain other questions raised concerning plaintiff's qualification for exemption.

In 1944 a constitutional amendment was adopted relating to the exemption of certain property used for hospital purposes. Art. XIII, § 1c. The relevant portions provide that the 'Legislature may exempt from taxation all or any portion of property used exclusively for * * * hospital * * * purposes and owned by * * * corporations organized and operated for * * * hospital * * * purposes, not conducted for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.' Unlike certain other provisions relating to tax exemptions, see art. XIII, §§ 1a, 1b, 1 1/2 and 1 1/2a, this amendment is not self-executing, and legislation is required in order to effect the exemption of any property. The amendment is purely permissive rather than mandatory in character, and it qualifies section 1 of article XIII, which requires that all property be taxed according to its value 'except as otherwise in this Constitution provided'. In other words, the Legislature could refrain from exempting any of the property referred to in the amendment or it could exempt only such property as might meet the conditions specified in the amendment and such further conditions as the Legislature might see fit to impose. The Legislature followed the latter course and enacted section 214 of the Revenue and Taxation Code, which imposes conditions in addition to those found in the constitutional amendment. It is therefore a question of the construction to be placed on the conditions set forth in said section 214 which is presented by this appeal.

Said section 214 contains six numbered subdivisions of general application, but only the pertinent provisions of the main paragraph and three of the subdivisions need be considered here. It is provided that 'Property used exclusively for * * * hospital * * * purposes owned and operated by * * * corporations organized and operated for * * * hospital * * * purposes is exempt from taxation if: (1) The owner is not organized or operated for profit; (2) No part of the net earnings of the owner inures to the benefit of any private shareholder or individual; (3) The property is not used or operated by the owner or by any other person for profit regardless of the purposes to which the profit is devoted; * * *.'

Plaintiff was organized as a nonprofit corporation in 1935. It acquired the physical assets of its predecessor by giving in exchange its bonds. In 1945 plaintiff's physical assets for accounting purposes had a value of $764,895.39 and its then bonded indebtedness was some $292,000. For 1945 the surplus of income over current expenses, which expenses included interest payments and depreciation on the buildings, machinery and equipment, amounted to.$86,609.24; for 1946, the surplus was $106,603.12. Reduced to percentages, the surplus for each year was slightly in excess of eight per cent of gross income. The surplus was mingled with other cash on hand and was used for debt retirement and for expansion. Instance of this latter use was the building and equipping of an X-ray room in 1947 at a cost of $60,000.

It is conceded that plaintiff operated its hospital properties with the intent of producing, if possible, a surplus of income over expenses so as to permit the periodic retirement of a portion of its bonded indebtedness and to permit the expansion of its facilities. It is further conceded that it had succeeded and was succeeding in accomplishing this purpose. Defendant argues that by reason of plaintiff's profitmaking intent and purpose, the allowance of the claimed exemption would run counter to the statutory condition that such property be 'not used or operated by the owner * * * for profit regardless of the purposes to which the profit is devoted'. Rev. & Tax. Code, § 214, subd. (3). Under a strict but reasonable construction of the tax exemption law, Cedars of Lebanon Hospital v. County of Los Angeles, 35 Cal.2d 729, 734-735, 221 P.2d 31, 15 A.L.R.2d 1045, defendant's contention must be sustained.

The word 'profit' has been defined in various ways, as appears by reference to any standard dictionary. In dealings between parties to a commercial venture, it has been defined as 'acquisition beyond expenditure' or 'excess of value received over cost.' Prince v. Lamb, 128 Cal. 120, 126, 60 P. 689, 691. In relation to tax laws, the phrase 'conducted for profit,' which appears to be the equivalent of 'operated for profit', has presented some difficulty but has been generally held to convey the meaning of operated or conducted for the purpose of making a profit. See Mayor and Common Council of Borough of Princeton v. State Board of Taxes & Assessments, 96 N.J.L. 334, 115 A. 342, 344; Buxton Country Day School, Inc., v. Millburn Tp., 14 A.2d 269, 270, 18 N.J.Misc. 443. Accordingly, the test indicated by such phrases, as so construed, is not necessarily whether there is or may be a profit but whether the claimant is operated or conducted for the purpose of making a profit: that is, whether the charges are fixed with the intention of yielding a surplus over and above operating expenses. See Rider College v. City of Trenton, 19 A.2d 22, 23, 19 N.J.Misc. 304; College of Paterson v. City of Paterson, 29 A.2d 402, 403, 21 N.J.Misc. 13. It thus appears that plaintiff can find little comfort in the ordinary meaning of the word 'profit' or in the construction which has been given to the phrase 'conducted for profit' in the above cited authorities. Plaintiff relies heavily, however, on the construction of the phrase 'used or held for profit' as found in San Gabriel Cemetery Ass'n v. County of Los Angeles, 1947, 49 Cal.App.2d 624, 122 P.2d 330, 332.

In the San Gabriel case it was held that net earnings derived from the cemetery's sale of burial lots in excess of their cost did not constitute 'profit' within the ban of the constitutional exemption disqualifying property 'used or held for profit', where such excess was used for the purchase of more land and other cemetery purposes. Art. XIII, § 1b. It was there said, 49 Cal.App.2d at page 626, 122 P.2d at page 332: 'The word 'profit' does not mean financial benefit that accrues to the association through the sale of burial space at a price in excess of its cost where such gain is used for the unkeep of the cemetery property. The word 'profit' in article XIII, section 1b, means net earnings the benefits of which accrue directly or indirectly to the stockholders or members of the association.'

The Legislature presumably had knowledge of the quoted judicial construction of the word 'profit' when it subsequently enacted the section now under consideration. Rev. & Tax. Code, § 214; see 23 Cal.Jur. § 159, p. 782; Miller v. McColgan, 17 Cal.2d 432, 439, 110 P.2d 419, 134 A.L.R. 1424. Furthermor...