Texas Co. v. Los Angeles County

• Decision Date: 24 April 1959
• Court: California Supreme Court
• Parties: TEXAS COMPANY (a Corporation), Appellant, v. COUNTY OF LOS ANGELES et al., Respondents. FORSTER SHIPBUILDING CO., Inc. (a Corporation), et al., Appellants, v. COUNTY OF LOS ANGELES et al., Respondents. L. A. 24968, 25102.

Page 440

338 P.2d 440

52 Cal.2d 55

TEXAS COMPANY (a Corporation), Appellant, v. COUNTY OF LOS ANGELES et al., Respondents.

FORSTER SHIPBUILDING CO., Inc. (a Corporation), et al., Appellants, v. COUNTY OF LOS ANGELES et al., Respondents.

L. A. 24968, 25102.

Supreme Court of California, In Bank.

April 24, 1959.

Rehearing Denied May 20, 1959.

J. A. Tucker, C. L. Mead, Jr., R. K. Barrows, Holbrook, Tarr & O'Neill, W. Summer Holbrook, Jr., and Francis H. O'Neill, Los Angeles, for appellants.

J. Kerwin Rooney, Port Atty., Oakland, and Robert G. Cockins, City Atty., Santa Monica, amici curiae on behalf of appellants.

Harold W. Kennedy, County Counsel, Los Angeles, and Alfred Charles DeFlon, Deputy County Counsel, Hollywood, for respondents.

Stanley Mosk, Atty. Gen., James E. Sabine, Asst. Atty. Gen., Ernest P. Goodman, Deputy Atty. Gen., Felix S. Wahrhaftig, Sacramento, Albert E. Weller, County Counsel, J. B. Lawrence, Deputy County Counsel, San Bernardino, James Don Keller, Dist. Atty. and County Counsel, San Diego, Carroll H. Smith, Deputy County Counsel, San Diego, Roy A. Gustafson, Dist. Atty., Ventura, Joel E. Ogle, County Counsel, Orange, Stephen K. Tamura, Asst. County Counsel, Santa Ana, and Mandle Rottman, Los Angeles, amici curiae on behalf of respondents.

TRAYNOR, Justice.

Plaintiffs brought these actions to recover taxes for the years 1956 and 1957 on possessory interests in tax-exempt lands owned by the City of Los Angeles. Judgments for defendants were entered after their demurrers were sustained, and plaintiffs appeal.

The basic issue presented is whether the value of a possessory interest in tax-exempt land under the capitalization of income method of valuation is the present worth of the use of the land for the unexpired term of the lease or that worth less the present worth of rentals to become due.

Plaintiff contend that the county board of equalization erred in sustaining assessments based on the present worth of the use of the land for the unexpired term of the lease. They point out that the 'full cash value' standard of assessment (Const. art. XI, § 12; Rev. & Tax.Code, § 401), is defined as 'the amount at which property would be taken in payment of a just debt from a solvent debtor' (Rev. & Tax. Code, § 110), or 'the price it would bring if offered on an open market under conditions in which neither buyer nor seller could take advantage of the exigencies of the other' (DeLuz Homes, Inc. v. County of San Diego, 45 Cal.2d 546, 563, 290 P.2d 544, 554), and that a prospective assignee of the lease would pay only the difference between the value of the use he would receive and the rental obligation he would assume. Accordingly, they conclude that it is that difference or bonus value, if any, that is the taxable value of the leasehold.

Plaintiffs would also arrive at the same valuation for the leasehold by deducting the value of the chaimed interests of the lessor in the land from the value of the fee. Thus, the value of the fee is taken as the present worth of the use of the land in perpetuity. The lessor retains the present value of the use of the reversion plus the present value of the rents reserved. If the present value of the rents reserved is equal to the present value of the use for the unexpired term of the lease, the lessor's interest would be equal to the fee value and the lessee's interest would be valueless. Plaintiffs conclude that under either of these approaches a possessory interest has value only if the value of the use of the land exceeds the rent payable under the lease.

Defendants contend that the taxable interest is the right to possession and use of the land for the unexpired term of the lease and that its value is not lessened by the amount the lessee has agreed to pay for it. They contend that there is no distinction for tax purposes between granting the possession and use in perpetuity by a sale of the fee and granting them for a limited period by a lease, that in neither case may the cost of the interest granted be deducted from its value. In the case of a lease, they would divide the total value of the fee as determined by its use according to the value of the uses for the respective periods involved. Thus the value of the lessee's interest would be determined by the present value of the use for the period of the lease and the value of the lessor's interest by the present value of the use thereafter. Together they would equal the present value of the use in perpetuity, or fee value. They conclude that the lessor's right to receive rent is not an interest in the land that must be deducted to determine the value of the lessee's interest but only the price the lessee must pay for it.

DeLuz Homes, Inc. v. County of San Diego, 45 Cal.2d 546, 290 P.2d 544; Fairfield Gardens v. County of Solano, 45 Cal.2d 575, 290 P.2d 562; Victor Valley Housing Corp. v. County of San Bernardino, 45 Cal.2d 580, 290 P.2d 565, and El Toro Dev. Co. v. County of Orange, 45 Cal.2d 586, 290 P.2d 569, fully support defendants' contentions. Those cases all involved the valuation of long-term possessory interests in federally owned property by the capitalization of income method. Relying on Blinn Lbr. Co. v. County of Los Angeles, 216 Cal. 474, 14 P.2d 512, 84 A.L.R. 1304, and Hammond Lbr. Co. v. County of Los Angeles, 104 Cal.App. 235, 285 P. 896, the taxpayers contended that deductions from expected gross income should be made both for rent and amortization of the costs of improvements that became the property of the lessor and would revert to it on the termination of the lease. Although the assessors had allowed deductions for the nominal ground rentals of $100 per year applicable to each leasehold, they had denied deductions for amortization. We concluded, however, that no distinction could be made between rent and the cost of improvements that revert to the lessor, for both were part of the purchase price of the leasehold, and held that no deduction could be made for that purchase price. We disapproved statements to the contrary in the Blinn case and pointed out that the assessor's allowance of a deduction for rent in the Hammond case did not control that decision. DeLuz Homes, Inc. v. County of San Diego, 45 Cal.2d 546, 567, 570, 290 P.2d 544.

Plaintiffs contend, however, that in the DeLuz case and its companion cases the court was concerned only with deductions for rent paid in the past, not rent to become due in the future. There is no merit in this contention. We were concerned with deductions from expected gross income, deductions that would necessarily be made, if allowed, against income to accrue in the future. Obviously only future rent could be relevant in this context. Thus, in Fairfield Gardens v. County of Solano, 45 Cal.2d 575, 578-579, 290 P.2d 562, 564, we stated: 'The method used by the assessor in the present case is similar to that approved in DeLuz, but we must disapprove it to the extent that it deducts rent paid by Fairfield to the government from anticipated annual gross income. The rent that a leasehold would command on an open market under conditions in which neither buyer nor seller could take advantage of the exigencies of the other is based on expected future net income from the leasehold without regard to the rent presently paid by the lessee, and therefore such rent is not deducted in estimating the earning power of the leasehold. The assessment of the possessory interest of Fairfield for the tax year 1953-1954, however, need not be set aside because of the erroneous deduction of the $200 rent paid to the government (two leaseholds were involved), for although the error was favorable to the taxpayer, the county did not appeal (citations), and, moreover, de minimus non curat lex. (Citations.)' Since the deduction involved had been made from 'anticipated annual gross income,' it is clear that the $200 rent referred to was not a single payment made in the past but the obligation to pay $200 each year in the future pursuant to the terms of the existing leases.

A leasehold is not less valuable because it has not been paid for in advance, and to draw a distinction between rent paid and rent to be paid confuses the equity the lessee has in the leasehold with its value. That equity may arise either from the lessee's prepayment of rent or from an excess of the value of the use over the future rent agreed to be paid for it. It may not exist at all. In any event it is of no moment to a prospective purchaser interested only in the value of the use and possession of the property for the unexpired term of the lease. Such a purchaser will pay for that interest what it is worth, and since it belongs to the lessee, it is taxable to him at that value whether or not he has assumed rental or other obligations that will prevent his realizing any return to himself. 'The present owner may have invested well or poorly, may have contracted to pay very high or very low rent, and may have built expensive improvements or none at all. To value the property by capitalizing his anticipated net earnings would make the value of property equal to the present value of his profits, since, however, the legislative standard of value is 'full cash value', it is clear that whatever may be the rationale of the property tax, it is not the profitableness of property to its present owner. If a purchaser would buy a given property on an open market, the property has a value equal to the price such purchaser might be expected to pay.' DeLuz Homes, Inc. v. County of San Diego, 45 Cal.2d 546, 566, 290 P.2d 544, 557.

Taxation of property at its value without regard to the owner's equity therein is an established principle of ad valorem taxation. Thus, a conditional vendee or a mortgagor is taxable at the full value of property as its owner even though he could realize little or nothing by its sale. S. R. A., Inc. v. Minnesota, 327 U.S. 558, 569-570, 66 S.Ct. 749, 90 L.Ed. 851; Eisley v. Mohan,...