Opinion ID: 1386091
Heading Depth: 3
Heading Rank: 2

Heading: Alleged Exemption Under Section 62

Text: It remains to be seen whether the present transaction falls within any item on the list of tax-exempt transfers enumerated in section 62. (5) As we approach this task we pay heed to two precepts that govern interpretation of the statutes at issue: the drafters intended section 62 to provide examples of common applications of section 60 rather than exceptions to it (task force rep., supra, at p. 40), and therefore our reading of section 62 must be consistent with section 60 ( Industrial Indemnity Co. v. City and County of San Francisco, supra, 218 Cal. App.3d 999, 1006). In light of those precepts, we conclude that no subpart of section 62 exempts the conveyance before us.
(6) Subdivision (g) of section 62 provides that a change in ownership does not include Any transfer of a lessor's interest in taxable real property subject to a lease with a remaining term (including renewal options) of 35 years or more. Plaintiff contends this provision embodies the task force's conclusion that when a lessee has the exclusive right of occupancy for 35 years or more, the lessee and not the lessor is to be treated as the owner for property tax purposes because the value of the estate rests primarily with the former. Hence, in plaintiff's view, no change in ownership occurred. Two rules of statutory construction guide our inquiry. We look to the plain language of the statute. ( People v. Woodhead (1987) 43 Cal.3d 1002, 1007 [239 Cal. Rptr. 656, 741 P.2d 154].) And because sections 60, 61 and 62 are in pari materia, we strive to interpret them in a manner that gives effect to each yet does not lead to disharmony with the other two. (See Title Ins. & Trust Co. v. County of Riverside, supra, 48 Cal.3d 84, 91; California Mfrs. Assn. v. Public Utilities Com. (1979) 24 Cal.3d 836, 844 [157 Cal. Rptr. 676, 598 P.2d 836].) The rules of statutory construction are not akin to Robert's Rules of Order and we do not apply them hierarchically, but rather to achieve the primary and overriding goal of all statutory interpretation: ascertaining the lawmakers' intent. (See People v. Woodhead, supra, 43 Cal.3d at p. 1007.) Applying these principles, we conclude that the Legislature did not intend that its rule against finding a change in ownership upon the transfer of a lessor's interest encumbered by a 35-year lease should apply to a sale and leaseback. We have already observed that the task force decided that the creation, transfer or termination of a leasehold of 35 years or more should achieve a change in ownership because in that case the primary economic value of the land resides in the lease. (See ante, p. 165; task force rep., supra, at pp. 39-41.) The Legislature followed that recommendation. (§ 61, subd. (c).) By contrast, the Legislature decided that when the remaining term of an existing lease equaled or exceeded 35 years, any transfer of a lessor's interest would be excluded from a change in ownership. (§ 62, subd. (g).) In the transaction before us there was no existing lease and hence no remaining term. Because section 62, subdivision (g), by its plain language does not apply to the present transaction, our inquiry could end here. ( People v. Woodhead, supra, 43 Cal.3d at p. 1007.) But we believe the better method for extracting the legislative intent is to look to the language and purpose of sections 60, 61, and 62 as a whole. (See California Mfrs. Assn. v. Public Utilities Com., supra, 24 Cal.3d at p. 844.) The Legislature's intent is apparent when viewed through the filter of those sections and the task force report. Both the report and the statutes demonstrate that the drafters and the Legislature intended to find a change in ownership when the primary economic value of the land is transferred from one person or entity to another. That general rule applies here. When parties enter into a lease they create the legal relationship that governs their respective rights in the land, and either's successor in interest will be bound thereby. When the parties are sophisticated commercial entities of the type likely to sign leases for 35 or more years, such leases will often confer substantial rights on the lessee, such as the right to develop or modify capital assets, the long-term use or uses to which the land is to be put, and the like. [5] A long-term lease may also require the lessee to pay property taxes; indeed, the lease here imposes that duty on plaintiff. In sum, the primary economic value of land encumbered by a lease of such duration rests with the lessee; the lessor's rights as a practical matter are limited to receiving rental payments under a relationship the terms of which are fixed by prior agreement for a time substantially equivalent to the duration of a fee. The Legislature's determination that a change in the lessor under these circumstances will not work a change in ownership is consonant with the concern of the task force report drafters that a transaction should not trigger reassessment unless it transfers the interest of the party carrying the primary economic weight of the property. (Task force rep., supra, at p. 40.) Such a determination also comports with commercial reality and public expectations, both subjects of concern to the drafters of the report. (See id. at pp. 38, 41, 61.) The mischief a contrary rule could create is evident: for example, a rule permitting reassessment whenever the fee changed hands in land subject to a lease with a remaining term of 35 years could result in an enormous tax increase for a lessee that has erected major capital improvements on the land and whose lease requires the lessee to pay property taxes. The increase could occur merely because the lessor has sold that interest to a third party  a transfer over which the lessee has no control. The foregoing counterexample is well removed from the reality of the present transaction. Both parties did change their position. No prior agreement bound plaintiff to the terms of a lease of long duration. Plaintiff and Metropolitan Life established their relationship at the time of the conveyance, creating new interests both in plaintiff and in Metropolitan Life. Plaintiff's status changed from freeholder to tenant for years. To apply the rule of subdivision (g) of section 62 to such a transaction would be anomalous indeed: it would contravene the plain language of the code section and would defy Proposition 13's mandate that a change in ownership triggers reassessment of California property. We hold, therefore, that the Legislature did not intend the exception created in subdivision (g) of section 62 to apply to this transaction.
(7) Subdivision (e) of section 62 provides that a change in ownership does not include Any transfer by an instrument whose terms reserve to the transferor an estate for years or an estate for life; however, the termination of such an estate for years or estate for life shall constitute a change in ownership, except as provided in subdivision (d) and in Section 63. Calling to our attention the language of the purchase agreement, which specifically except[s] and reserv[es] from the property to be conveyed to Metropolitan Life an estate for years on the terms and conditions set forth in the Office Building Lease, plaintiff argues that subdivision (e) of section 62 exempts the conveyance at bench from reassessment. We cannot agree. Although plaintiff's interpretation arguably comports with the language of the code provision, it disregards other pertinent sections of chapter 2 of part 0.5 of division 1 of the Revenue and Taxation Code. As we have already observed, code sections in pari materia must be harmonized with each other to the extent possible; a section should be construed in light of the whole system of law of which it is a part. ( People v. Comingore (1977) 20 Cal.3d 142, 147 [141 Cal. Rptr. 542, 570 P.2d 723]; see Moore v. Panish (1982) 32 Cal.3d 535, 541 [186 Cal. Rptr. 475, 652 P.2d 32].) Considered in isolation, we might agree with plaintiff that the language of subdivision (e) of section 62 appears to confer an exemption from reassessment, for it provides that Any transfer by an instrument whose terms reserve to the transferor an estate for years shall not work a change in ownership. (Italics added; see Title Ins. & Trust Co. v. County of Riverside, supra, 48 Cal.3d 84, 93-94 [Statutes often use the word `any' to designate all those referred to....].) But we have already explained that the transaction did achieve a change in ownership within the meaning of section 60, which was intended as the fundamental rule implementing Proposition 13. As we have also observed, the report drafters declared their intention that the examples set forth in sections 61 and 62 were to be derivative or explanatory, and not to conflict with section 60's general rule. (Task force rep., supra, at p. 40.) We therefore conclude that the Legislature did not intend for a sale and leaseback to fall within the ambit of section 62, subdivision (e). Any other conclusion would render meaningless the preeminent command of section 60  a result we are constrained to avoid. Moreover, we find support for our conclusion in the task force report. The report originally proposed the following language for subdivision (e) of section 62: (e) Retained Life Estates. Any transfer in which the transferor retains beneficial use of the property for his lifetime. (Task force rep., supra, at p. 51.) As codified, however, the subdivision exempts Any transfer by an instrument whose terms reserve to the transferor an estate for years or an estate for life.... We believe the evolution of the provision explains the Legislature's intent as clearly as possible given the sparse legislative history. The drafters were concerned that individuals who proposed to convey title to property to others but retain the beneficial use of that property not have a change in ownership forced upon them while they retained the beneficial use and thereby the dominant or primary [economic] interest.... (Task force rep., supra, at p. 44.) A contrary rule would frustrate the intent of the voters, who adopted Proposition 13 in part out of concern that high property tax rates were burdening senior citizens and others whose home values had soared but whose incomes were fixed. (See Sears, Tax Revolt: Something for Nothing in California (1982) p. 122.) Of course, a conveyance of fee simple with a reserved life estate is a common means for parents to convey property to children. But the Legislature was apparently also mindful of the desire of some parents to convey a remainder or reversionary interest to their children to vest at adulthood, at an age of greater maturity (e.g., 35 years), or, as suggested at oral argument, upon the planned retirement of the fee owner. The reservation of a life estate would not serve the transferor's goals if the intent was to convey property in this manner, but the reservation of an estate for years in the transferor would accomplish that end. It is therefore not surprising that the Legislature added the phrase estate for years to subdivision (e) of section 62; and it is equally unsurprising that the beneficial use language in the task force's proposed subdivision disappeared from the codified version, because section 60 includes that language, making its repetition superfluous. Construing subdivision (e) of section 62 to provide an exemption from the general rule of section 60 when the transferor retains the beneficial use of the property during the transferor's life or for years harmonizes those two sections and meets the voters' and the Legislature's apparent intent. We therefore adopt that construction. It is immediately evident that the transaction before us does not fall within the exemption set forth in subdivision (e) of section 62 as we have construed it. Plaintiff did not retain a beneficial use of the property for itself; it pays rent to Metropolitan Life, which enjoys the entire beneficial interest in the property. Therefore, we cannot apply the rule of subdivision (e) of section 62 to provide the relief plaintiff seeks.
For the foregoing reasons we also cannot accept plaintiff's view of the effect of section 462, subdivision (k)(4) of title 18 of the California Code of Regulations. That administrative rule provides: Sale and leaseback. A sale of real property, coupled with a leaseback which is not reserved to the transferor by the terms of the sale instrument, constitutes a change in ownership of such property; provided however, a sale and leaseback transaction shall be rebuttably presumed to be a non-reappraisable financing transaction upon a proper written showing [that the transaction is a financing for income-tax purposes]. As plaintiff was constrained to concede at oral argument, an administrative rule that exceeds the Legislature's grant of authority as expressed in section 60 et seq. is without effect and may not be enforced. (See Ralphs Grocery Co. v. Reimel (1968) 69 Cal.2d 172, 176, fn. 3 [70 Cal. Rptr. 407, 444 P.2d 79]; University Ford Chrysler-Plymouth, Inc. v. New Motor Vehicle Bd. (1986) 179 Cal. App.3d 796, 805 [224 Cal. Rptr. 908].) Therefore, to the extent the regulation conflicts with the Constitution and the Revenue and Taxation Code as construed in this opinion, well-settled principles of administrative law proscribe its enforcement. [6] The judgment of the Court of Appeal is reversed with directions to order the trial court to enter judgment for defendants.