Opinion
Review Granted March 16, 1989.
Previously published at 206 Cal.App.3d 943
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.
The judgment against MONY and in favor of the state was in action number C605065. In its notice of appeal MONY refers to that judgment as being in case number C587986. While that reference is technically correct due to the consolidation of the two actions, for clarity we will continue to refer to MONY's action against the state as case number C605065.
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 [181 Cal.Rptr. 370] (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 [145 P. 94] (1914); Hartford Fire Insurance Company v. Jordan, 168 Cal. 270 [142 P. 839] (1914); and First American Title Insurance & Trust Company v. Franchise Tax Board, 15 Cal.App.3d 343 [93 Cal.Rptr. 177] (1971)."
DISCUSSION
The City contends that "an insurance company is subject to local taxation on 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 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 tax upon fire insurance corporations violated the predecessor of section 28. That section provided that the prescribed taxes paid by an insurer " 'shall be in lieu of all other taxes and licenses, state, county and municipal, upon the property of such companies.' " (168 Cal. at p. 276, 142 P. 839.) The state attempted to support its "license tax" by claiming that no express exemption was provided for license taxes imposed on the intangible right of an insurer to do business in this state. Rather, the state argued that by its terms the "in lieu of" exemption was directed only to taxes on the tangible property of the insurer.
In rejecting this assertion, the Hartford court pointed to the use of the word "license" in the subject provision and reasoned: " 'In order to construe the clause as relieving from taxes or charges upon property alone, we [would] be required to deny meaning and significance to the word "license...." Every word in the clause under discussion can be given a reasonable and legitimate effect by reading the term "licenses" as including revenue charges of any character upon the exercise of the franchises....' " (168 Cal. at p. 286, 142 P. 839.)
Finally, in Hughes v. Los Angeles, supra, 168 Cal. 764, 145 P. 94, the court concluded that a municipal tax on insurance agents was unconstitutional under the predecessor to section 28 which contained a substantially identical "in lieu of" exemption. The City attempted to uphold the validity of the tax by urging "that this particular license fee is not imposed upon the companies but upon the agents of the companies." (Id., at p. 765, 145 P. 94.) In rejecting this attempted distinction the court reasoned:
"[E]very insurance corporation must act through agents and can act only through agents, and that, therefore, in a direct and immediate sense a tax upon such agents for the right to do business is a tax upon the corporation's right to do business." (Id., at p. 765, 145 P. 94.)
The City urges us to reject our opinion in First American and adopt the reasoning employed in Massachusetts Mutual by asserting: "In First American a simplistic interpretation of the in lieu exemption prevailed, whereas the decision in Massachusetts Mutual was supported by much more In Massachusetts Mutual, the court recognized that the words used in section 28 " 'should be accorded the ordinary and usual meaning given them among people by whose vote [it] was adopted.' " (129 Cal.App.3d at p. 881, 181 Cal.Rptr. 370.) We have no quarrel with this basic tenet of statutory construction. Our disagreement with the analysis employed in Massachusetts Mutual stems from its deviation from the "ordinary and usual" meaning of the clear language in section 28 that "[t]he tax imposed on insurers by this section is in lieu of all other taxes and licenses, state, county, and municipal, upon ... insurers and their property, except: [those listed in this section]." (Italics added.)
"[I]n arriving at the meaning of a [constitutional provision] consideration must [first] be given to the words employed, giving to every word, clause and sentence their ordinary meaning." (State Board of Education v. Levit (1959) 52 Cal.2d 441, 462, 343 P.2d 8.) "Where [that] language is clear and unambiguous ... 'there is no need for construction, and courts should not indulge in it.' [Citation.]" (Board of Supervisors v. Lonergan (1980) 27 Cal.3d 855, 866, 167 Cal.Rptr. 820, 616 P.2d 802, cert. den. 450 U.S. 918, 101 S.Ct. 1362, 67 L.Ed.2d 344.) The sole exception to this rule is when "language that appears unambiguous on its face is shown to have a latent ambiguity, customary rules of construction" apply. (Stanton v. Panish (1980) 28 Cal.3d 107, 115, 167 Cal.Rptr. 584, 615 P.2d 1372.)
We perceive no ambiguity either patent or latent in section 28, subdivision (f) which would authorize us to explore the intent behind that provision and exclude from its scope an insurer's investments which are deemed incidental to the insurance enterprise.
We appreciate the concern expressed by the Massachusetts Mutual court which is echoed by the City in this case that a tax exemption in this setting might result in the insurer receiving a tax windfall. As we explained in First American, however, "[w]e are mindful of the consequential loss of [tax] revenue from [this] tax [source], but this loss, even though serious, is but a result of the system put in operation by the Constitution, which we and the Legislature are powerless to change." (15 Cal.App.3d at pp. 347-348, 93 Cal.Rptr. 177.)
We, therefore, conclude the trial court correctly determined that the City's imposition of the subject municipal taxes violated article XIII, section 28, subdivision (f) of the California Constitution.
Since, as MONY acknowledges, our affirmance of the judgment in case number C587986 renders its appeal in case number C605065 moot, we dismiss that appeal.
The judgment in Los Angeles Superior Court number C587986 is affirmed. Plaintiff Mutual Life Insurance Company of New York shall recover its costs in that appeal. Plaintiff's appeal in case No. C605065 is dismissed as moot. Defendant State Board of Equalization shall recover its costs in that appeal.
We concur:
ARLEIGH M. WOODS, P.J., and GOERTZEN, J., concur.