Smith v. State Bd. of Equalization
GREGORY J. SMITH, as County Assessor, Etc., Plaintiff and Respondent, v. STATE BOARD OF EQUALIZATION, Defendant and Appellant
- Proceeding
- appeal
- Trial court
- Superior Court of San Diego County
- Trial judge
- Barbara T. Gamer
- Outcome
- affirmed — The judgment is affirmed.
- Area
- civil
- Panel
- Alex C. McDonald (author)
Analysis
The trial court granted summary judgment in favor of the Assessor, ruling that leasehold condominium owners were not entitled to the homeowners' exemption. The Court of Appeal affirmed the judgment, holding that leasehold condominium owners are 'owners' of condominiums under Section 218 and thus eligible for the exemption.
| Ruling reviewed | Standard | The court | The model |
|---|---|---|---|
Trial court's grant of summary judgment denying the homeowners' exemption to leasehold condominium owners.“On cross-motions for summary judgment, the trial court ruled in favor of Assessor.” | de novo | error | agree with court The appellate court exercised independent review because the material facts were undisputed and the issue was one of law. It concluded the trial court erred by failing to recognize that leasehold interests constitute condominiums under the Civil Code and that the exemption applies to owners of such interests, not just fee owners. |
Authorities
- relied: Mayhew Tech Center, Phase II v. County of Sacramento (1992) 4 Cal.App.4th 497 — Exemption statutes are applied based on the substance of the transaction rather than the terminology employed by the parties.
- relied: County of San Bernardino v. Flournoy (1975) 45 Cal.App.3d 48 — The purpose of the homeowners' exemption is to give tax relief to those who own and occupy the dwelling as their principal residence.
- relied: Delta Air Lines, Inc. v. State Bd. of Equalization (1989) 214 Cal.App.3d 518 — Interpretation and application of taxing statutes are questions of law subject to independent review when facts are undisputed.
- relied: Davies Machinery Co. v. Pine Mountain Club, Inc. (1974) 39 Cal.App.3d 18 — The use of the term 'rent' does not preclude a court from finding the payer is in fact a vendee rather than a lessee.
- relied: Granberry v. Islay Investments (1984) 161 Cal.App.3d 382 — A payment denominated 'rent' can be found to be 'additional security' based on the economic realities.
The appellate opinion: sound — The opinion is sound because it correctly identifies the legal issue as whether the leasehold interest constitutes a 'condominium' under the Civil Code rather than whether it is equivalent to fee ownership. It supports this conclusion with specific statutory definitions (Civ. Code §§ 783, 1351) and the assessment statute (Rev. & Tax. Code § 2188.3), which treats non-fee condominiums as owners for assessment purposes, logically extending this to the exemption.
How this analysis was made · dispute it
inconsistent with cited authorityOn cross-motions for summary judgment in the Assessor's declaratory relief action, the trial court ruled that owners of leasehold condominiums who occupy them as their principal residence are entitled to the $7,000 homeowners' exemption under article XIII, section 3, subdivision (k) and Revenue and Taxation Code section 218. The Court of Appeal, reviewing de novo, affirmed, holding that a leasehold condominium is a 'condominium' within the unqualified meaning of section 218 and that the 'property which is rented' exclusion does not apply where the economic substance shows the occupant owns the condominium.
| Ruling reviewed | Standard | The court | The model |
|---|---|---|---|
Grant of summary judgment to Assessor declaring that owners of leasehold condominiums occupying them as principal residences qualify for the section 218 homeowners' exemption“On cross-motions for summary judgment, the trial court ruled in favor of Assessor.” | de novo | correct | agree with court The facts were undisputed and the question was one of statutory interpretation, so independent review was proper. The court's textual reading is persuasive: Civil Code sections 783 and 1351 expressly define a condominium to include estates for years such as leaseholds and subleaseholds, section 218 uses 'condominium' without qualification, and section 2188.3 treats owners of non-fee condominiums as 'owners' for separate assessment. The result also fits the exemption's purpose of relieving occupants who are liable for the tax. The court did not, however, address the canon that tax exemptions are strictly construed, which SBE could have invoked. |
Rejection of SBE's argument that claimants' units are 'property which is rented' and thus excluded from the section 218 exemption“However, to interpret the phrase “property which is rented” to include a leasehold condominium would be inconsistent with the use of the unqualified term “condominium” in section 218.” | de novo | correct | agree with court The court reasonably looked to the substance of the transaction, consistent with Mayhew Tech Center, Davies Machinery, and Granberry, noting the de minimis $50-$70 monthly 'rent' against purchase prices of $174,500 and $351,000. Its construction gives the 'rented' exclusion meaningful content (a condominium owner who leases only the unit to a tenant) while harmonizing it with the unqualified term 'condominium.' The reasoning is sound, though it relies on the court's own characterization of what the exclusion covers rather than any authority directly on point. |
Authorities
- relied: Mayhew Tech Center, Phase II v. County of Sacramento (1992) 4 Cal.App.4th 497 — Property tax exemption statutes are applied according to the substance of the transaction rather than the labels used; state deemed beneficial owner of property it occupied under an arrangement denominated a lease.
- relied: County of San Bernardino v. Flournoy (1975) 45 Cal.App.3d 48 — The purpose of the homeowners' exemption is to provide tax relief to owner-occupants of dwellings.
- relied: Delta Air Lines, Inc. v. State Bd. of Equalization (1989) 214 Cal.App.3d 518 — Where material facts are undisputed, interpretation and application of taxing statutes are questions of law reviewed independently on appeal.
- relied: Davies Machinery Co. v. Pine Mountain Club, Inc. (1974) 39 Cal.App.3d 18 — Use of the term 'rent' does not preclude a court from finding the payer is in fact a vendee rather than a lessee of property.
- relied: Granberry v. Islay Investments (1984) 161 Cal.App.3d 382 — A payment denominated 'rent' may nevertheless be found to be something else, such as additional security, based on its true nature.
- relied: Savett v. Davis (1994) 29 Cal.App.4th Supp. 13 — 'Rent' is the consideration paid by a tenant to the landlord for the use, enjoyment and possession of leased premises.
- missed: Cedars of Lebanon Hospital v. County of Los Angeles (1950) 35 Cal.2d 729 — Constitutional and statutory tax exemptions are strictly construed and may not be enlarged beyond the plain meaning of the language employed, though the construction must still be reasonable.
The appellate opinion: sound with gaps — The court correctly reframed the issue from fee-versus-leasehold 'ownership' to whether the interest is a 'condominium,' and answered it with the governing Civil Code definitions, section 2188.3, and substance-over-form tax authority, producing a well-supported affirmance. It did not, however, address the Supreme Court's long-standing rule that tax exemptions are strictly construed against the taxpayer, an omission SBE could have pressed and that the court should have confronted even if the plain text of Civil Code sections 783 and 1351 would likely have overcome it.
Opinion — McDonald
Opinion
MCDONALD, J.In this case we decide that an owner of a leasehold condominium, who otherwise qualifies, is entitled to the $7,000 real property tax “homeowners exemption” created by article XIII, section 3, subdivision (k) of the California Constitution and section 218 of the Revenue and Taxation Code 1 (the exemption).
I
Facts
The facts are not in dispute. 2 The City of Oceanside (City) leased unimproved land owned by City to the Oceanside Small Craft Harbor District (District). In 1972 the District subleased a portion of the land to a developer. The developer constructed a 67-’¿nit building and other improvements on the land and conveyed by sublease leasehold interests in the land and improvements to members of the public. Each sublease conveyed a leasehold interest in a separate air space unit described on a recorded condominium plan 3 and a leasehold interest in an undivided l/67th fractional interest in the common area. 4
In August 1985 Gary T. and Shirley J. Benton (Bentons) purchased an assignment of a sublease for approximately $174,500 and acquired a leasehold interest in the land and improvements. In September 1991 William F. and Norma S. Belliston (Bellistons) purchased an assignment of a sublease *334 for approximately $351,000 and acquired a leasehold interest in the land and improvements.
In 1994 the Bentons and the Bellistons (collectively claimants) applied to the County of San Diego for the exemption. Respondent San Diego County Assessor (Assessor) asked the State Board of Equalization (SBE) whether claimants were eligible for the exemption. Although claimants occupy their units as their principal place of residence, SBE responded that the exemption was not available to claimants. Accordingly, claimants’ application for the exemption was denied.
II
The Lawsuit
Assessor filed an action for declaratory relief against SBE, seeking a declaration that claimants, as well as others similarly situated, were entitled to the exemption. The lawsuit alleged that because long-term leases have been interpreted as the equivalent of fee ownership for the purpose of “change of ownership” revaluation under article XIII A of the California Constitution, long-term leases are also the equivalent of fee ownership for the purpose of the exemption. On cross-motions for summary judgment, the trial court ruled in favor of Assessor.
III
Owners of Leasehold Condominiums Qualify for the Section 218 Exemption
A
The Exemption
Article XIII, section 3, subdivision (k) of the California Constitution exempts from real property taxation $7,000 of the full value of “a dwelling . . . when occupied by an owner as his principal residence . . . .” Section 218, subdivision (c) provides the exemption is available to a condominium occupied by the owner as his principal place of residence. Section 218 also specifies the exemption does not apply to rented property.
The parties phrase the issue in this case as whether claimants are “owners” within the meaning of the constitutional and statutory provisions of the exemption. The parties seem to assume “ownership” can only be fee ownership and therefore argue about whether a long-term lease arrangement is *335 sufficiently like fee ownership to be considered fee ownership for purposes of section 218. We perceive the issue to be somewhat different. There is no question that the claimants are the owners of the leasehold interests in real property they acquired by purchasing assignments of the subleases. In our view the issue is not ownership but whether the leasehold interest in the real property each claimant owns is a condominium within the meaning of that term as used in section 218. If it is, and the claimants satisfy the occupancy as a principal place of residence requirement of section 218, then claimants are entitled to the exemption under section 218.
B
Condominiums
“A condominium consists of an undivided interest in common in a portion of real property coupled with a separate interest in space called a unit, the boundaries of which are described on a recorded . . . condominium plan . . . .” (Civ. Code, § 1351, subd. (f).) Furthermore, “[a] condominium may, with respect to the duration of its enjoyment, be either (1) an estate of inheritance or perpetual estate, (2) an estate for life, (3) an estate for years, such as a leasehold or a subleasehold, or (4) any combination of the foregoing.” (Civ. Code, § 783.) “The estate in a separate interest may be a fee, a life estate, an estate for years, or any combination of the foregoing.” (Civ. Code, § 1351, subd. (l).) The real property interests acquired by claimants satisfy the definitional requirement of a condominium.
Because a condominium may be a leasehold or a subleasehold in duration and the real property interests of the claimants described in their subleases meet the definition of condominiums, each claimant owns a condominium within the meaning of section 218. Section 218 refers to a condominium without qualification; it does not limit the exemption to a fee interest condominium. The interests acquired and owned by claimants as described in their subleases include both an interest in the common area of the project and a separate interest in the space called a unit as described on a condominium plan; they therefore own a condominium within the meaning of section 218.
Our conclusion is confirmed by the provisions of section 2188.3 which provide: ’’Whenever real property has been divided into condominiums . . . (a) each condominium owned in fee shall be separately assessed to the owner thereof . . . ; (b) each condominium not owned in fee shall be separately assessed, as if it were owned in fee, to the owner of the condominium . . . .”
*336 In the context of separate tax assessments for condominiums the term “owner” is used for both fee and nonfee condominiums. Nonfee condominiums include leasehold and subleasehold condominiums (see Civ. Code, §§783, 1351, subd. (l)). The owner of a leasehold condominium is an “owner” of a condominium for the purpose of separate assessment of the condominium to the same extent the owner of a fee condominium is an owner of a condominium for the purpose of separate assessment of the condominium. There is no reason the owner of a leasehold condominium is not an owner of a condominium for the purpose of the exemption to the same extent as the owner of a fee condominium is an owner of a condominium for the purpose of the exemption.
SBE relies on the clause in section 218 stating the exemption is not available to “property which is rented,” to argue claimants cannot claim the exemption because the sublease under which they occupy their units describes claimants as tenants and specifies they agree to pay rent in consideration for the right to occupy the units. However, to interpret the phrase “property which is rented” to include a leasehold condominium would be inconsistent with the use of the unqualified term “condominium” in section 218. Furthermore, when the realities of the underlying transaction show the occupant is in fact the owner, the exemption statutes are applied based on the substance of the transaction rather than the terminology employed by the parties in structuring the transaction. (Mayhew Tech Center, Phase II v. County of Sacramento (1992) 4 Cal.App.4th 497, 504-507 [5 Cal.Rptr.2d 702] [state deemed beneficial owner even though it occupied property under transaction denominated a “lease”].) Here the sublease describes a payment using the nomenclature of rent, but the monthly amount payable is currently $50 per month for each unit or $70 per month for penthouse units. The de minimis rent suggests that the primary consideration paid to occupy the unit was not the monthly rental, but instead was the purchase price paid to the former owner to purchase the leasehold condominium. The economic realities show that although a monthly rent is paid, the condominium itself is not being rented. 5 We perceive the exclusion of “property which is rented” in the context of a condominium to apply to the situation in which the leasehold condominium owner rents his air space unit to another but does not assign *337 his leasehold interest in the common area. In that situation the owner has not transferred his leasehold condominium interest; he has leased only a portion of his condominium and the result is similar to leasing an apartment. The unit portion of the condominium by itself is only a part of the condominium and the lessee of that portion would not be entitled to the exemption.
Moreover, our interpretation accords with the purpose of the exemption. The purpose of the exemption is to give some tax relief (County of San Bernardino v. Flournoy (1975) 45 Cal.App.3d 48, 52 [117 Cal.Rptr. 732]), but only to those occupants who (1) own and are therefore liable to pay the tax on the “dwelling” and (2) occupy the taxed dwelling as their principal place of residence. There is no dispute claimants here are solely liable to pay the taxes on the occupied dwelling (§ 2188.3) and occupy the taxed dwelling as their principal place of residence. Because the purpose of the exemption is to give limited tax relief to persons, such as claimants, who both occupy the dwelling taxed and are liable to pay the taxes on the dwelling, we perceive no impediment to finding them owners of condominiums within the meaning of the section 218 exemption.
Disposition
The judgment is affirmed.
Huffman, Acting P. J., and Jones, J., * concurred.
All further statutory references are to the Revenue and Taxation Code unless otherwise specified.
Because the material facts are undisputed, interpretation and application of taxing statutes are questions of law and on appeal we exercise independent review. (Delta Air Lines, Inc. v. State Bd. of Equalization (1989) 214 Cal.App.3d 518, 524-525 [262 Cal.Rptr. 803].)
“ ‘Condominium plan’ means a plan consisting of (1) a description or survey map of a condominium project, which shall refer to or show monumentation of the ground, (2) a three-dimensional description of a condominium project... in sufficient detail to identify the common areas and each separate interest, and (3) a certificate consenting to the recordation of the condominium plan . . . .” (Civ. Code, § 1351, subd. (e).)
“ ‘Common area’ means the entire common interest development except the separate interests therein.” (Civ. Code, § 1351, subd. (b).) “ ‘Common interest development’ means any of the following: [¶ . . . [¶ (2) A condominium project. . . .” (Civ. Code, § 1351, subd. (c).)
“Rent” is the consideration paid by the tenant to the landlord “for the use, enjoyment and possession of the leased premises.” (Savett v. Davis (1994) 29 Cal.App.4th Supp. 13, 19 [34 Cal.Rptr.2d 550].) However, the fact that the periodic payments here are denominated “rent” does not preclude the court from evaluating the true nature of the legal status of the payer (see Davies Machinery Co. v. Pine Mountain Club, Inc. (1974) 39 Cal.App.3d 18, 27 [113 Cal.Rptr. 784] [use of term “rent” did not preclude court from finding payer was in fact vendee rather than lessee of property]) or of the payment itself (see, e.g., Granberry v. Islay Investments (1984) 161 Cal.App.3d 382, 389-391 [207 Cal.Rptr. 652] [payment denominated “rent” could nevertheless be found to be “additional security”]).
Judge of the San Diego Superior Court, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.
Cites, in this corpus
- Mayhew Tech Center, Phase II v. County of Sacramento Docket Nos. C008317, C008963 · 1992-03-10
- Delta Air Lines, Inc. v. State Board of Equalization B034339 · 1989-09-29
- Granberry v. Islay Investments Civ. 68686 · 1984-10-30
- County of San Bernardino v. Flournoy Civ. 43863 · 1975-01-31
- Davies MacHinery Co. v. Pine Mountain Club, Inc. Civ. 1863 · 1974-05-03
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