Title Ins. Co. of Minnesota v. State Bd. of Equalization

• Decision Date: 24 June 1991
• Docket Number: No. A045664,A045664
• Citation: 2 Cal.App.4th 1006,282 Cal.Rptr. 570
• Court: California Court of Appeals Court of Appeals
• Parties: Previously published at 231 Cal.App.3d 626, 2 Cal.App.4th 1006, 8 Cal.App.4th 1368 231 Cal.App.3d 626, 2 Cal.App.4th 1006, 8 Cal.App.4th 1368 TITLE INSURANCE COMPANY OF MINNESOTA, Plaintiff and Respondent, v. STATE BOARD OF EQUALIZATION, Defendant and Appellant. *

Page 570

282 Cal.Rptr. 570

Previously published at 231 Cal.App.3d 626, 2 Cal.App.4th 1006, 8 Cal.App.4th 1368

231 Cal.App.3d 626, 2 Cal.App.4th 1006, 8 Cal.App.4th 1368

TITLE INSURANCE COMPANY OF MINNESOTA, Plaintiff and Respondent, v. STATE BOARD OF EQUALIZATION, Defendant and Appellant [And six other cases.] ^*

No. A045664.

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

June 24, 1991.

As Modified on Denial of Rehearing

July 24, 1991.

Review Granted Oct. 23, 1991.

John K. Van de Kamp, Atty. Gen., Timothy G. Laddish, Asst. Atty. Gen., Oakland, for defendant and appellant.

Stanford H. Atwood, Jr., Robert Knox, John H. Blake, Atwood, Knox & Anderson, San Jose, for plaintiff and respondent.

POCHE, Associate Justice.

The questions presented in these consolidated actions for refund of taxes are whether a title insurance company which issues a policy of title insurance realizes taxable income from the total amount of the premium the insured pays for the policy, and from payments made by the title insurance company's local agent who satisfies claims against the title insurance company under the policy. We conclude that the State Board of Equalization correctly determined that the title insurance company is liable to taxation on the full amount of the premium and on the payments made to discharge its indemnity obligation.

BACKGROUND

As is common in refund litigation, the refund complaints were submitted for decision on the basis of a written stipulation of facts executed by the parties' counsel. We summarize the pertinent contents as follows:

Plaintiffs are seven corporations in the business of issuing title insurance policies within California. They do so through an underwritten title company, acting as their agent, which: conducts a search of the public records affecting title; prepares a preliminary report, which indicates the conditions under which title insurance would be available, including a statement of what would be excepted from coverage; prepares and issues the title insurance policy using the forms provided by the title insurer; determines the premium from the title insurer's rate schedule; and collects the premium. ¹

The relationship between plaintiffs and the underwritten title companies is set forth in written underwriting agreements between them. In addition to the duties to be performed by the underwritten title companies as just detailed, these agreements specify that each underwritten title company retains most of the premium fee (usually about 90 percent) for itself and pays the remainder to the title insurer for its acceptance of the hazard in insuring title as set forth in the policy. Plaintiffs reported and paid taxes upon that portion of each title insurance premium which was passed on to them by the underwritten title companies. What they did not report was that portion of the insurance premiums which was retained by the underwritten title companies.

Although the title insurer and its insured were the only parties to the title insurance policy, under the underwriting agreement the underwritten title company was obligated to the title insurer to pay a specified portion of certain insurance claims. In some circumstances and under some underwriting agreements, the underwritten title company would make such payment to the insured party; in others the underwritten title company would make such payment to the title insurer. ²

The Board issued deficiency assessments covering various years between 1975 and 1984, which plaintiffs unsuccessfully contested in administrative proceedings before the Board. Once those were concluded, plaintiffs paid the assessments and commenced separate actions for refunds. After the actions had been consolidated and a nonjury trial conducted on the stipulated facts, the trial court found in favor of plaintiffs. A judgment ordering refunds totalling approximately $93,000 was entered in due course. The Board then perfected this timely appeal. ³

REVIEW

Taxation of title insurance companies doing business in California is governed by section 28 of Article XIII of the California Constitution (hereinafter cited as "section 28"). It subjects title insurers to a tax based on "all income upon business done in this state." (Emphasis added.)

Section 28 spells out the details in these terms: "In the case of an insurer not transacting title insurance in this state, the 'basis of the annual tax' is, in respect to each year, ... all income upon business done in this state, except: [p] (1) Interest and dividends. [p] (2) Rents from real property. [p] (3) Profits from the sale or other disposition of investments. [p] (4) Income from investments." (§ 28, subd. (c) [emphasis added]; see Rev. & Tax.Code, § 12231.)

Title insurers are taxed at a rate of 2.35 percent (§ 28, subd. (d)), and (subject to certain exceptions not applicable here) "[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" (§ 28, subd. (f)).

The entire amount of the premium paid for a title insurance policy constitutes income to the title insurer.

The sole constitutional phrase about which the parties cannot agree is the central one, the "all income" concept, which section 28 does not define. They do, however, submit that we may attempt a definition using the federal income tax concept of "gross income." This agreement accords with established practice allowing us to look to the national analogue for guidance. (See Holmes v. McColgan (1941) 17 Cal.2d 426, 430, 110 P.2d 428; Spurgeon v. Franchise Tax Board (1984) 160 Cal.App.3d 524, 528, 530, 206 Cal.Rptr. 636.)

This is the pertinent text of the federal statute:

"[G]ross income means all income from whatever source derived, including (but not limited to) the following items:

"(1) Compensation for services, including fees, commissions, fringe benefits, and similar items;

"(2) Gross income derived from business;

"(3) Gains derived from dealings in property;

"(4) Interest;

"(5) Rents;

"(6) Royalties;

"(7) Dividends;

"(8) Alimony and separate maintenance payments;

"(9) Annuities;

"(10) Income from life insurance and endowment contracts;

"(11) Pensions;

"(12) Income from discharge of indebtedness;

"(13) Distributive share of partnership gross income;

"(14) Income in respect of a decedent; and

"(15) Income from an interest in an estate or trust...." (26 U.S.C. § 61, subd. (a).)

As might be expected from the sweeping language employed, the scope of the federal definition of gross income is quite expansive. Treating income in its "plain popular meaning" (United States v. Kirby Lumber Co. (1931) 284 U.S. 1, 3, 52 S.Ct. 4, 4, 76 L.Ed. 131), the United States Supreme Court "has given a liberal construction to this broad phraseology in recognition of the intention of Congress to tax all gains except those specifically exempted." (Commissioner v. Glenshaw Glass Co. (1955) 348 U.S. 426, 430, 75 S.Ct. 473, 476, 99 L.Ed. 483.) In accordance with this approach, the Court has deemed the statutory language indicative of an obvious intent to comprehensively encompass sources of income to the fullest extent of constitutional taxing power. (See Commissioner v. Kowalski (1977) 434 U.S. 77, 82-83, 98 S.Ct. 315, 318-319, 54 L.Ed.2d 252; Commissioner v. Jacobson (1949) 336 U.S. 28, 49, 69 S.Ct. 358, 369, 93 L.Ed. 477; Helvering v. Clifford (1940) 309 U.S. 331, 334, 60 S.Ct. 554, 556, 84 L.Ed. 788.) In doing so the Court has retreated from the definition of income enunciated in Eisner v. Macomber (1920) 252 U.S. 189, 207, 40 S.Ct. 189, 193, 64 L.Ed. 521 ⁴ (construing a predecessor version of 26 U.S.C. section 61 which contained language not continued in the present version)--a definition upon which plaintiffs and the dissenting opinion place substantial reliance. (See Commissioner v. Kowalski, supra, 434 U.S. at p. 94, 98 S.Ct. at 325; Commissioner v. Glenshaw Glass Co., supra, 348 U.S. at pp. 430-431, 75 S.Ct. at pp. 476-477; Helvering v. Bruun (1940) 309 U.S. 461, 468-469, 60 S.Ct. 631, 634-635, 84 L.Ed. 864.)

At present, income is generally equated with "undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion." (Commissioner v. Glenshaw Glass Co., supra, 348 U.S. 426 at p. 431, 75 S.Ct. at p. 477; accord Commissioner v. Kowalski, supra, 434 U.S. 77 at p. 83, 98 S.Ct. at p. 319.) "Consistent with ... economic reality," and "recogniz[ing] that 'income' may be realized by a variety of indirect means," the Court--with a preference for substance over form--now tests for the presence of "economic benefit" realized by taxpayers. (See Diedrich v. Commissioner (1982) 457 U.S. 191, 194-198, 102 S.Ct. 2414, 2417-2419, 72 L.Ed.2d 777.)

There can be no question that the premiums paid in exchange for title insurance policies issued by plaintiffs are income to plaintiffs. The economic reality of the transactions is a simple bilateral exchange between insured and insurer: the insureds made unconditional payments of money in consideration for the policies. Without question, those payments qualify as "undeniable accessions to wealth, clearly realized" (Commissioner v. Glenshaw Glass Co., supra, 348 U.S. 426 at p. 431, 75 S.Ct. at p. 477), and thus constitute income to the insurers.

The fact that most of the premium remained with the underwritten title companies reinforces the characterization of the entire premium as income to the title insurers. Retention by the underwritten title companies was in accordance with the underwriting agreements with the insurers. Under both the form and substance of those arrangements, the premiums were left with the underwritten title companies at the express direction of the title insurers. The premiums are regarded as income to the insurers because "The power to dispose of income is the equivalent of ownership of it. The exercise of that power ... is the enjoyment, and...