Court Opinion

ID: 9631284
Source: CourtListenerOpinion
Date Created: 2023-08-22 10:33:36.103454+00
Date Added: 2024-06-11T18:07:51.678026
License: Public Domain

MOSK, J.
I dissent.
The majority’s construction of the “in lieu” provision creates a loophole in the tax laws in favor of insurance companies so sweeping, so obvious, and so burdensome on other taxpayers that it manifestly violates the intent of the voters in adopting section 28 of article XIII of our Constitution (section 28).
Without considering the language or history of subdivision (f) of that provision or the cases interpreting its language, it is obvious from the consequences which will follow the majority’s holding that the construction it advances is unsound. If, as the majority hold, an insurer is exempt from taxation (except for real property and motor vehicle taxes) on any noninsurance business it may conduct solely because the business is owned by an insurance company, it may operate a chain of restaurants, a department *418store, theaters, clothing stores, video parlors, or any other enterprise, and the profits of these businesses will be virtually free of taxation because the insurer pays 2.35 percent of the gross premiums produced by its insurance business to the state. (Rev. & Tax. Code, § 12202.) Even if the premiums realized would be relatively low and the profits from noninsurance businesses in the millions, nevertheless the exemption granted by the majority’s interpretation of subdivision (f) of section 28 would render those profits exempt from taxes with the minor exceptions stated above. Thus, the ordinary citizen who owns a neighborhood grocery store will be subject to taxes on his profits, as well as other business taxes, whereas his competitor down the street, a profitable chain grocery store owned and operated by an insurance company with huge assets, will be virtually exempt from all business taxes.
In order to take advantage of this enormously lucrative loophole, existing insurance companies would be well advised to invest in profitable businesses of all types; in order to render its profits free of taxation, a corporation could purchase an insurance company, even one that operates at a loss; and it is not inconceivable that insurance companies would be organized for the purpose of realizing tax-free profits from noninsurance related enterprises, with the insurance business being only a minor factor in their operations.
The majority’s only answer to these obviously inequitable consequences which follow from its interpretation of the constitutional provision is that this potential scenario is unsupported by the record or authority. But these possibilities cannot be dismissed as merely the exaggerated fancies of a suspicious mind. Counsel for Mutual Life Insurance Company of New York (MONY) freely conceded at oral argument that if the majority’s construction of the “in lieu” provision prevails an insurance company may own and operate a doughnut shop, a bowling alley, a beauty parlor, a restaurant, an auto shop or any other venture, and the profits and operations of these enterprises would be free of all taxes except for real property and motor vehicle taxes. Indeed, he conceded that if Allstate Insurance Company owned and operated the numerous Sears department stores Sears’s profits would be exempt from taxation with these minor exceptions.
Although the majority refer to these prospects as a “parade of horribles,” they do not deny that insurers may in fact take advantage of the “in lieu” provision in this manner, as MONY conceded. It is almost certain that following the filing of the majority opinion insurers, anxious like everyone else to reap tax-free income, will increase their investments in such enterprises.
It is unthinkable that the voters intended to grant insurers such an enormous competitive advantage in the operation of a noninsurance related *419business over other businesses, or for that matter over the nonbusiness taxpayer who must pay taxes on his wages.
The majority’s policy arguments to support their broad construction of the exemption are untenable. They point to the fact that the tax imposed by section 28 is on gross premiums, and state that the “in lieu” provision was granted in exchange for the payment of a tax on gross rather than net premiums. But business taxes on gross receipts are not unusual, and in no other context do they exempt the taxpayer from other types of taxes. To hold that not only is the insurer granted exemption from taxes for its insurance business and its passive investment income under the “in lieu” provision but that it is also exempt from taxation as to other noninsurance businesses in which it may engage, merely because its gross premiums are taxed, is manifestly discriminatory.
In fact, the taxes on the rental business and the business of operating a parking lot involved in this case are on gross receipts. It is difficult to justify a holding which allows an insurance company simply because of its status as an insurer to escape taxes on such enterprises on the ground that it pays taxes on its gross receipts in the insurance business, whereas the owner of a commercial building or a parking lot not in the insurance business who pays taxes on his gross receipts enjoys no such privilege.
Another policy argument made by the majority is that insurers must invest their income from premiums to generate sufficient funds to pay the claims of policyholders and that public policy is served when insurers remain solvent. Contrary to the majority’s criticism, I freely concede the correctness of these propositions. But they are a non sequitur, irrelevant to the conclusion reached by the majority. Since the founding of this state, insurers have been able to sustain their operations with income derived from premiums and passive investments like stocks and bonds; the taxation of revenues from such investments is not challenged in this proceeding. There is no evidence that unless insurance companies can also operate carwashes, boutiques and department store chains virtually free of taxation they will be unable to pay the claims of their policyholders. And the majority do not mention that excess income of an insurer realized from the advantage gained by such investments may not be necessarily used to pay off policyholders but may increase the dividends received by investors.
The majority also seek to justify their holding by pointing out that the Legislature has limited the amount insurers may invest in unrelated businesses. (Ins. Code, §§ 1100-1107, 1150-1250.) For example, they point out that insurers are permitted to invest no more than 10 percent of their admitted assets in real estate. (Ins. Code, § 1194.8.) Presumably, the *420inference the majority draw from these limitations is that insurers cannot take advantage of the “in lieu” provision to reap large profits from noninsurance business. But because insurance companies have such enormous assets, the limitations still allow insurers to obtain large profits from noninsurance business practically tax free, since even 10 percent of their admitted assets amounts to many millions of dollars.
The majority opine that we must turn a blind eye to the gross injustices created by their holding because the Constitution must be interpreted according to its “plain terms” in spite of “any inconveniences” that may be result, that the wisdom of a constitutional provision is not for the court to judge, and any inequity resulting from our interpretation is for the people or the Legislature to correct. I disagree. There is no principle of statutory or constitutional construction that takes precedence over the rule that an interpretation which leads to unreasonable and inequitable results will not be adopted if there is a reasonable alternative. (Moyer v. Workmen’s Comp. Appeals Bd. (1973) 10 Cal.3d 222, 232 [110 Cal.Rptr. 144, 514 P.2d 1224]; Friends of Mammoth v. Board of Supervisors (1972) 8 Cal.3d 247, 260 [104 Cal.Rptr. 761, 502 P.2d 1049]; People ex rel. S.F. Bay etc. Com. v. Town of Emeryville (1968) 69 Cal.2d 533, 543-544 [72 Cal.Rptr. 790, 446 P.2d 790].) Sutherland calls this the “golden rule of statutory interpretation.” (2A Sutherland, Statutory Construction (4th ed. 1984) § 45.12, p. 54.)
As I shall demonstrate, there is such an alternative: the “plain meaning” rule does not call for the result reached by the majority because the “in lieu” provision is ambiguous; even if that was not the case, we would not be prohibited from considering whether the voters intended subdivision (f) to mean that insurance companies would be virtually free from taxation on any extraneous business conducted by them simply because of their status as insurers; and finally, the legislative history of section 28 shows that the voters made clear in successive elections precisely that they did not wish to grant such unprecedented privileges to insurance companies.
Section 28 is in fact ambiguous. Subdivision (b) provides that an annual tax is imposed “on each insurer doing business” in California, and subdivision (c) states that the basis of the tax is the “gross premiums received . . . by such insurer upon its business done in this state.” (Italics added.) Under subdivision (f), the tax imposed by the section is “in lieu of all other taxes . . . upon such insurers and their property.” As amicus curiae point out,1 it is not clear from this language whether the term “insurer doing business” in California in subdivision (b) refers to any type of business operated by an *421insurer in this state, or only to the insurer’s participation in what is ordinarily viewed as the insurance business, i.e., issuing policies and paying claims and activities ancillary to these functions. The language could be viewed to favor the position of amicus curiae, since the reference in subdivision (c) to gross premiums on an insurer’s “business done in this state” can mean only insurance business, and it may be argued that the phrases underlined above in subdivision (b) and (c) should be interpreted in a similar fashion. On the other hand, subdivision (b) must be read in conjunction with subdivision (f), which broadly exempts insurers and their property from “all other taxes.” In view of this ambiguity as to the meaning of the section, a consideration of its origins and purpose would clearly be justified.2
But even if section 28 did not contain an ambiguity, we would not be prohibited from attempting to determine whether the voters intended it to be read, as MONY contends, to exempt insurers, solely because of their status as such, from all taxes except those specified on the revenues and property of any business they may own and operate.
It is often said that the words of a statute should be given the meaning they bear in ordinary use (e.g., In re Rojas (1979) 23 Cal.3d 152, 155 [151 Cal.Rptr. 649, 588 P.2d 789]), and that there is no need for construction if the language used in the provision is unambiguous (In re Lance W (1985) 37 Cal.3d 873, 886 [210 Cal.Rptr. 631, 694 P.2d 744]). But these rules do not prevent a court from determining whether the literal meaning of a statute is consistent with its purpose. (Dyna-Med, Inc. v. Fair Employment & Housing Com. (1987) 43 Cal.3d 1379, 1386-1387 [241 Cal.Rptr. 67, 743 P.2d 1323]; County of San Diego v. Muniz (1978) 22 Cal.3d 29, 36 [148 Cal.Rptr. 584, 583 P.2d 109]; Younger v. Superior Court (1978) 21 Cal.3d 102, 113 [145 Cal.Rptr. 674, 577 P.2d 1014]; People v. Davis (1978) 85 *422Cal.App.3d 916, 924 [149 Cal.Rptr. 777].) The intent of a statute prevails over the letter, and the letter will, if possible, be read so as to conform to the spirit of the enactment. (People v. Belton (1979) 23 Cal.3d 516, 526 [153 Cal.Rptr. 195, 591 P.2d 485]; Amador Valley Joint Union High Sch. Dist. v. State Bd. of Equalization (1978) 22 Cal.3d 208, 245 [149 Cal.Rptr. 239, 583 P.2d 1281].) In order to make sense out of an initiative voted on by the people, we held in People v. Skinner (1985) 39 Cal.3d 765 [217 Cal.Rptr. 685, 704 P.2d 752] that “and” really meant “or.” We declared that where the purpose or intent of a statute seems clear, drafting errors or uncertainties “may properly be rectified by judicial construction.”(Id. at p. 775; see also People v. Horn (1984) 158 Cal.App.3d 1014 [205 Cal.Rptr. 119].)
As an eminent authority on statutory interpretation has observed, “Although many expressions favoring literal interpretation may be found in the cases, it is clear that if the literal import of the text of an act is inconsistent with the legislative meaning or intent, or such interpretation leads to absurd results, the words of the statute will be modified to agree with the intention of the legislature .... ‘While the intention of the legislature must be ascertained from the words used to express it, the manifest reason and obvious purpose of the law should not be sacrificed to a literal interpretation of such words.’ ” (2A Sutherland, Statutory Construction, supra, § 46.07, p. 110.) These rules apply to the interpretation of constitutional provisions as well as to statutes. (Stanton v. Panish (1980) 28 Cal.3d 107, 115 [167 Cal.Rptr. 584, 615 P.2d 1372].)
The literal interpretation of section 28 would lead to a result obviously not intended by the voters who adopted that provision. Its language is sweeping: it provides that the gross receipts tax is “in lieu of all other taxes and licenses, state, county, and municipal, upon insurers and their property” except taxes on real estate and motor vehicles. (Italics added.) Construed literally, the provision would lead to the unreasonable and unjust results referred to above. Unless it is clear that the voters intended that insurers were to be exempted from taxes on any type of business in which they chose to engage, we should not slavishly adhere to the literal language of the section. The voters have made clear in several elections their intention not to grant such unprecedented benefits to insurance companies.
The tax on gross premiums and the “in lieu” provision first appeared in the Constitution in 1910 as subdivision (b), former section 14 of article XIII. It was part of a “radical change in the system of taxation” in that it divided “the subjects of state and location taxation by imposing on . . . corporations engaged in certain callings [including] insurance companies . . . the obligation to pay certain taxes to be applied exclusively to state purposes. At the same time, the persons engaged and the property *423employed in these callings were, to a greater or less degree, to be free from the burden of local taxation.” (San Francisco v. Pacific Tel. & Tel. Co. (1913) 166 Cal. 244, 247 [135 P. 971].) Over the years, the constitutional provision has been amended a number of times. The history of these amendments makes it abundantly clear that section 28 was not to be construed to afford insurance companies a competitive advantage in the operation of a commercial real estate business or any other business over others engaged in similar enterprises. While the matters discussed below refer to the gradual elimination by the voters of an exemption for real property taxes which insurers were granted in the original “in lieu” provision of 1910, the reasons for the elimination of that exemption are instructive in determining the intent of the voters regarding the taxes involved in this case as well.
As noted above, the tax on gross premiums and the “in lieu” exemption first appeared in the Constitution in 1910 as former section 14, subdivision (b) of article XIII. It provided that insurers would be taxed 1V2 percent of their gross premiums, and that this tax was in lieu of any other state, county, or municipal taxes, except for local taxes on real estate. However, to the extent real estate taxes were paid, they were deducted from the gross premiums tax payable to the state. In effect, therefore, insurance companies were exempt from the payment of real estate taxes.
In 1942, this provision was amended (by the addition of former section 14 4/5 to article XIII) to deprive insurance companies of the deduction of real estate taxes from the state tax (over a five-year period), except for the taxes paid on their principal or home offices, which would continue to be deductible from the gross premiums tax. The reason for the change, as explained in the argument in favor of the measure in the voter’s pamphlet, was that the deduction of real estate taxes from the gross premiums tax had an unexpected and unintended effect. In 1942, insurance companies were permitted to own real property for use as their home offices, or, for a period of five years, property acquired by foreclosure of loans. Insurers that had made loans on property during the depression and had foreclosed on those loans, acquired more real estate than they would have under normal circumstances. As a result, they paid higher real estate taxes to local governments and deducted these payments from their gross premiums tax, depriving the state of much needed revenue. These companies thus “inadvertently” received preferential treatment over insurers which had not invested in mortgages as well as “over citizens who own and operate similar properties in that the insurer’s expense of operation of such properties is lessened by the credit against State taxes in the amount of local real estate taxes thereon. [fl] This amendment was drawn to correct these inequalities . . . .” (Ballot Pamp., argument in favor of Prop. 7, Gen. Elec. (Nov. 3, 1942) pp. 12-13.)
*424Thus, after 1942, except during a five-year phase-out period, insurance companies were in effect exempt from real estate taxes only to the extent that they owned property used for their principal or home office. The voters then turned their attention to this exemption. In a report issued by the Assembly Interim Committee on Revenue and Taxation in 1964, which contained a thorough review of the history and effects of the principal office deduction, it was recommended that the deduction be eliminated altogether. (See 4 Rep. of the Assem. Interim Com. on Revenue and Taxation No. 15, The Insurance Tax, A Major Tax Study, pt. 8 (Dec. 1964) 1 Appen. to Assem. J. (1965 Reg. Sess.) [hereafter cited as Assem. Com. Rep.].) The report observed that some insurance companies, spurred on by the advantage of owning real estate without being obligated to pay property taxes, had built large buildings, occupying only a small part and leasing the rest to other tenants (id. at pp. 44-45, 53). It concluded that the exemption should be repealed because it gave insurance companies which owned office buildings a competitive advantage over other owners of such buildings as well as over insurers which did not own these facilities, in the form of a tax-sheltered rental income, amounting to an unfair subsidy. (Id. at pp. 39, 44, 53.)
However, the Legislature proposed a modified version of this recommendation to the electorate as Proposition 8 at the election in 1966. The measure limited but did not eliminate the home office deduction, basing the deduction on the amount of space occupied in the building by the insurance company and its affiliates, and making the measure prospective as to California insurers. The argument in favor of the measure stated that it would remove the advantage enjoyed by out of state insurance companies which owned large office buildings rented to others, over other suppliers of office space. (Ballot Pamp., argument in favor of Prop. 8, Gen. Elec. (Nov. 8, 1966) pp. 13-14.) The argument against the measure advocated the repeal of the entire home office deduction on the ground that it is “inequitable as between various insurance companies as well as with regard to other industry.” (Id., argument against Prop. 8, p. 14.) The proposal was adopted by the voters as an amendment to former section 14 4/5 of article XIII.
The principal office deduction was eliminated entirely in 1976, when the voters amended the section (renumbered section 28 of article XIII), to except real estate taxes from the scope of the “in lieu” provision altogether, so that all insurers are now liable for the payment of real property taxes even if the property is the home office of the company, without any deduction of such payments from the gross premiums tax. The 1976 ballot argument of the proponents of the measure noted that the deduction was a “65-year old tax loophole which allows a few big insurance companies to escape paying their fair share of state taxes,” and that the tax was “unfair to the *425average taxpayer,. . . [and] gives an unwarranted competitive advantage to these specially privileged companies.” (Ballot Pamp., argument in favor of Prop. 6, rebuttal to argument against Prop. 6, Primary Elec. (June 8, 1976) pp. 28, 29.)
This history demonstrates unmistakably that the voters wanted to deny to insurance companies an exemption from taxes on real property which they operated as a commercial rental business. An important reason for eliminating the exemption was that it gave an insurer operating such a business a competitive advantage over similar businesses conducted by noninsurers as well as over insurance companies that did not own real estate. It is inconceivable, then, that the electorate intended by the “in lieu” provision to exempt insurers from taxes, such as those in issue here, which are incident to the operation of a commercial real estate business. Whether the tax is on the real property as such, or on the business of operating it as a commercial venture in competition with other like enterprises, the advantage enjoyed by the insurance company is the same: it is exempt from taxes that other owners of commercial property must pay. This reasoning applies with equal force to other kinds of businesses operated by an insurance company.3
The majority’s criticism of the holding in Massachusetts Mutual Life Ins. Co. v. City and County of San Francisco (1982) 129 Cal.App.3d 876 [181 Cal.Rptr. 370] is unwarranted. They state, for example, that the decision was wrong in holding that profits derived by an insurer from the operation of a noninsurance business are not used to produce gross premiums because, according to the majority, income from investments is necessary to maintain sufficient reserves to meet policyholders’ claims. As I observe above, there is no evidence that income derived by an insurer from the active operation of a business, as opposed to passive investments, is “necessary” to maintain reserves to pay claims. Even if there were some indirect connection between the profits of an unrelated business and the production of premiums, nothing prevents profits from such a business to be used not to make payments to policyholders but to increase the dividends paid to the stockholders of the insurer.
*426Although the majority criticize Massachusetts Mutual for failing to recognize that the Legislature can raise the tax on gross premiums from 2.35 percent if it chose to do so, such an action would have little effect on the situation sanctioned by the majority’s holding, i.e., the minor insurance business tail wagging the hugely profitable noninsurance business dog.
Finally, I draw a different inference than that drawn by the majority from the fact that the voters decided in 1942 that trust business of title insurers, which is classified as noninsurance business, was subject to taxation to the same extent as other trust businesses. Prior to the 1942 amendment to former section 14 4/5 of article XIII of our Constitution, the trust business engaged in by title insurers was exempt from taxation to the same extent as its other operations. In 1942, however, the electorate made it clear that a title insurer was not to be permitted to operate under the insurance exemption for revenues produced by its noninsurance trust business, even though the trust business was the only noninsurance enterprise that title insurers had traditionally conducted. Although the majority draw from this the inference that the electorate knows how to exclude insurers from the “in lieu” exemption when it wishes, in my view it demonstrates, rather, that when the electorate was given a choice whether or not to withdraw the insurance exemption from noninsurance business conducted by an insurance company, it chose to do so. So far as I am aware, there was no suggestion prior to the Massachusetts Mutual case that insurance companies (with the exception of title insurers) were actively operating businesses unrelated to their insurance business, except for the “home office” exemption discussed above. When the electorate was asked whether insurers should enjoy tax exemptions on their noninsurance business, they unmistakably responded in the negative, even as to the trust business that title insurers had traditionally conducted. It is unreasonable to hold that the voters intended the far broader exemption granted by the majority, which will allow insurance companies to realize tax sheltered income, amounting to a subsidy (Assem. Com. Rep., supra, at pp. 39, 44, 53) in the operation of any extraneous business in which the insurer chooses to engage.4
In the final analysis, the majority decision grants insurance companies that operate extraneous businesses a virtual exemption from taxes, a benefit *427that has heretofore belonged only to churches and charities. I know of no insurance carrier that qualifies as a church or charity.5
It now appears that the people must amend section 28 of the Constitution or the Legislature must confine insurance company investments to the traditional source of nonpremium income, i.e., passive investments like stocks and bonds, to correct the unconscionable advantage granted to insurers by the majority’s unprecedented holding.
Broussard, J., and Kennard, J., concurred.

The City and County of San Francisco, and the Cities of San Diego, Roseville, Santa Clara, Tustin and Santa Barbara have filed an amicus curiae brief on behalf of the City of Los Angeles.

 1 am unimpressed with the majority’s reliance on Pacific Gas & Electric Co. v. Roberts (1914) 168 Cal. 415 [143 P. 597], for the proposition that the “in lieu” provision is not ambiguous. The issue there was whether the motor vehicle tax was included in the “in lieu” exemption as a privilege or excise tax. In the first place, the constitutional provision applicable in that case provided an exemption only for property “used exclusively” in the operation of the business of the utility. Second, the case was decided at a time when insurers such as MONY were confined to passive investments and decades before they were permitted to invest in real estate (see Stats. 1945, ch. 1073, § 3, p. 2072) or to operate any other business aside from the insurance business. The statement in the decision that the “in lieu” provision was clear must be read in the light of these crucial differences.
Of the remaining cases relied on by the majority for the proposition that no court “faced with the issue ever found” the “in lieu” provision ambiguous, only one case cited discussed the question of ambiguity (First American Title Ins. & Trust Co. v. Franchise Tax Bd. (1971) 15 Cal.App.3d 343 [93 Cal.Rptr. 177]), and it refused to consider the legislative history and purpose of the predecessor provision to section 28 on the ground that its meaning was clear and no extrinsic aids to construction were required. For the reasons stated below, this refusal to look beyond the statutory language, even to decide whether a literal interpretation of a statute is consistent with its purpose, is incorrect.

 The majority miss the point in claiming that we are compelled to adopt their interpretation of the “in lieu” provision because the Constitution itself does not make a distinction between an insurer’s investment in stocks and bonds and operating a chain of video parlors. At the time the constitutional provision was adopted in 1910, insurance companies like MONY were not permitted to own real estate for investment or to engage in any other noninsurance business. Our task is to decide whether the voters intended by the “in lieu” provision to open the floodgates so as to render any business in which an insurance company chooses to engage virtually free of taxation. In making this determination, the majority give no consideration whatever to the consequences of their holding, in violation of the rules of construction noted above.

 Although the majority are critical of the fact that I offer no guidance for drawing a line between passive and active investments, a similar distinction exists in the federal income tax laws for the purpose of determining whether certain losses or credits may be used as deductions. (See 26 U.S.C. §§ 162, 469; Bittker & Lokken, Federal Taxation of Income, Estates and Gifts (2d ed. 1989) §§ 20.1.1 et seq., 28.1 et seq.) Certainly there can be no problem in distinguishing between the traditional investments made by insurance companies in stocks, bonds and mortgages and the operation of a parking facility.

 But see Jimmy Swaggart Ministries v. Bd. of Equalization (1990) 493 U.S. _ [107 L.Ed.2d 796, 110 S.Ct. 688], in which even a church activity was subject to taxation.