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District Court of Appeal, Second District, Division 1, California.


Civ. 16530.

Decided: May 31, 1949

Gibson, Dunn & Crutcher, Los Angeles, Bert A. Lewis and Samuel O. Pruitt, Jr., Los Angeles, of counsel, for appellant. Harold W. Kennedy, County Counsel, Andrew O. Porter, Deputy County Counsel, Los Angeles, for respondent.

This action is one of a series of consolidated cases involving the question of exemption of various hospital properties under the recently enacted Welfare Exemption Act, Const. of Calif., Art. XIII, sec. 1c; Revenue & Taxation Code, sec. 214.

Plaintiff's complaint contained two causes of action, the first of which involved property used for the housing of student nurses, registered nurses and a supervisor of nurses, as well as for a nurses' school. The second cause of action involves only the question of irrevocable dedication. Rev. & Tax.Code, sec. 214(6).

Insofar as plaintiff's first cause of action is concerned, our views thereon are stated in the consolidated cases numbered Civil 16531, 16532, 16533, 16534, 16535, 16536 and 16537, Cedars of Lebanon Hospital v. Los Angeles County, 206 P.2d 915; Serra Retreat v. Los Angeles County; 206 P.2d 940, in which we have this day filed an opinion. Under the holding in the cases just referred to it is manifest that so far as this plaintiff's first cause of action is concerned, the demurrer of defendants thereto should have been overruled, if in other respects the institution qualified under the welfare exemption statute.

The instant case, however, differs from the aforesaid hospital cases in that the trial court held that none of the property of this plaintiff was entitled to the welfare exemption for the reason that it was not irrevocably dedicated to religious, charitable or hospital purposes as required by section 214(6) of the Revenue and Taxation Code.

The sole question presented on this appeal is whether this plaintiff's property was irrevocably dedicated on the first Monday in March, 1946.

Section 214(6) of the Revenue and Taxation Code provides that property used exclusively for hospital purposes is exempt from taxation if “the property is irrevocably dedicated to religious, charitable, scientific, or hospital purposes and upon the liquidation, dissolution or abandonment of the owner will not inure to the benefit of any private person except a fund, foundation or corporation organized and operated for religious, hospital, scientific, or charitable purposes.”

According to plaintiff's complaint, it was organized as a nonprofit corporation in 1892 and has been operated exclusively as such ever since. For many years it has been exempt from all federal and state income, corporation, franchise and social security taxes, as a charitable hospital. All of plaintiff's assets have their source in charitable gifts to it through the years and are irrevocably dedicated to charitable hospital purposes, except for the excess of receipts over disbursements which has been realized in certain of its prior years' operations and invested in hospital property. Plaintiff has never made any distribution of assets to any individual and has never used any asset except in furtherance of the charitable hospital purpose for which it was organized.

In 1932, in satisfaction of a legacy of $2,000,000, the executors of the Estate of Henry E. Huntington distributed funds to certain trustees, in trust however, to use a portion of the gifts for the purpose of establishing a memorial hospital and to use the remainder as an endowment fund to invest and reinvest so that it would yield an income for the perpetual maintenance of the hospital. In 1936 the directors and members of the Pasadena Hospital Association accepted a proposal of the trustees under the Huntington will that the hospital then owned by plaintiff be operated thereafter as the “Collis P. and Howard Huntington Memorial Hospital,” which should be the hospital referred to in the will of Henry Huntington and would be operated in accordance with the terms of the trust. At that time, all the members and directors of plaintiff resigned, and the trustees of the aforesaid trust became the only members and directors of plaintiff. None of the trustees has ever contributed any property to plaintiff or had ever been a member or director of plaintiff prior to the amalgamation. Since 1936 the entire hospital property has been operated as one unit, under the sole control of the Huntington trustees.

Plaintiff's articles of incorporation are set forth in full as Exhibit “A,” attached to the complaint; the provisions thereof pertinent to the question of dedication are as follows:

“Know All Men by These Presents: That we, the undersigned, citizens and residents of the State of California, do hereby voluntarily associate ourselves together for the purpose of incorporating under the laws of the State of California a private corporation.

“And we do hereby certify:

“Second—(A) That the objects and purposes for which this corporation are (is) formed are:

“(1) To establish, maintain, and carry on within the County of Los Angeles, State of California, a hospital for the sick and injured, and for that purpose or any other lawful purpose where pecuniary profit is not the object thereof, to purchase, lease * (etc.)

“(4) To promote or to aid in any manner, financially or otherwise, any corporation or association of which any stocks, bonds or other evidences of indebtedness or securities are held directly or indirectly by this corporation; and for this purpose to guarantee the contracts, dividends, stocks, bonds, notes and other obligations of such corporation or association; and to do any other acts or things designed to protect, preserve, improve or enhance the value of such stocks, bonds or other evidences of indebtedness or securities.

“(7) To convey all or any portion of the corporate property in trust for such lawful purposes as the Board of Directors may deem advisable; to receive endowments and to invest the same.

“(9) To do and perform every act and thing necessary to carry out the foregoing purposes and powers in other states and jurisdictions, which like corporations or corporations organized for social, charitable or religious purposes under the laws of such states and jurisdictions may lawfully do or cause to be done therein.

“(10) To do each and every thing necessary, appropriate or adapted to carry into effect any and all of the foregoing purposes and powers, or to attain any one or more of the objects herein enumerated, or which shall at any time appear conducive to or expedient for the protection or benefit of this Corporation, and, generally, to do any act, or transact any business in connection with said purposes and powers which a copartnership or natural person could do or exercise, and which now or hereafter may be authorized by law; to carry on any other lawful business, enterprise, or activity whatsoever which may seem capable of being carried on in connection with the foregoing, or calculated, directly or indirectly, to promote the interests of this Corporation or to enhance the value of its properties.

“(B) This is a corporation which does not contemplate pecuniary gain or profit to the members thereof. No part of the net earnings of this corporation shall inure to the benefit of any private member or individual, and no substantial part of the activities of this corporation shall be devoted to carrying on propaganda or otherwise attempting to influence legislation.”

(Emphasis added.)

After the welfare exemption became a part of the Revenue and Taxation Code, plaintiff, on December 21, 1945, adopted a resolution amending the foregoing section “B” to read as follows:

“(B) This corporation has no capital stock, is not formed for profit, and is a corporation which does not contemplate pecuniary gain, profit or dividends to the members thereof. No part of the net earnings of this corporation shall inure to the benefit of any member or individual, and no part of the activities of this corporation shall be devoted to carrying on propaganda or otherwise attempting to influence legislation. The property of this corporation is irrevocably dedicated to charitable, scientific, educational and hospital purposes, and upon the abandonment, liquidation or dissolution of this corporation said property shall not inure to the benefit of any private person but shall be distributed to a fund, foundation or corporation organized and operated for hospital, scientific, educational or charitable purposes, or to the United States of America, the State of California, or any political subdivision thereof.” (Emphasis added.)

This amendment was consented to by all the members of plaintiff on March 1, 1946, but was not indorsed as filed in the office of the Secretary of State until March 14, 1946.

In the interest of clarity we shall first give consideration to respondent's contention that the foregoing 1946 amendment to appellant's articles of incorporation was not effective for the tax year 1946–1947. That pursuant to section 8, Article XIII, of the Constitution and section 441 of the Revenue and Taxation Code, each taxpayer is required to file a declaration of his property as of noon on the first Monday in March. That for tax purposes or tax exemption purposes, the status of property is fixed at noon on the first Monday in March. It is conceded that in the year 1946 this was March 4, or ten days before the amendment to appellant's articles of incorporation was filed with the Secretary of State. Respondent contends that under the provisions of sections 605d and 362b of the Civil Code the articles of incorporation here in question cannot be deemed amended for any purpose until they were lodged with the Secretary of State on March 14, 1946.

There can be no question under the admitted allegations of the complaint that prior to the adoption and filing of the amendment to the articles of incorporation, appellant was organized exclusively for non-profit hospital purposes and that its property was used exclusively to effectuate such purpose for more than fifty years. As heretofore pointed out, the provisions of the welfare exemption are begotten from principles of public policy and are not to be so narrowly construed as to lead to injustice, oppression or absurd consequences. We therefore conclude that the statute does not make so rigid a requirement as that contended for by respondent. The amendment was as irrevocable before it was filed with the Secretary of State as it was thereafter. To hold otherwise would be to ignore the element of intent which is decisive of the question.

Respondent, however, urges that though we hold, as we do, that the amendment to appellant's articles of incorporation was timely and did not defeat the exemption, nevertheless such an amendment would not constitute an irrevocable dedication to charitable or hospital purposes. This, it is argued, for the reason that the new amendment purports to make an irrevocable dedication to “hospital, scientific, educational and charitable purposes” (emphasis added). Respondent urges that under the 1946 amendment it was possible for the board of directors to divert the association's property to scientific purposes or to educational purposes of less than collegiate grade, and that neither of said purposes is exempt under the welfare exemption or under any law. When read in its entirety it seems obvious that the words “educational” and “scientific” as used in the amendment would not give the appellant association power to use its property for any educational or scientific non-hospital purpose. That a hospital may have an educational feature as an incident to its main purpose and usefulness was the holding in Lutheran Hospital Society v. County of Los Angeles, 25 Cal.2d 254, 153 P.2d 341. When words are lifted from the context there is always danger that the intended meaning may be distorted if not actually destroyed. The only safe way to avoid such a pitfall is to read the context as a whole. When so read, the words “educational” and “scientific” as used in the amendment to the articles of incorporation of appellant association are only an embellishment and adjunct to its hospital purposes.

There is much to be said in favor of appellant's contention that its articles of incorporation prior to the 1946 amendment, interpreted in the light of the methods of its operation as a non-profit charitable hospital for fifty-four years prior to said date, operated effectively to dedicate said property to the requisite hospital purpose. Dedication of property is simply setting it apart or devoting it to a particular use. And the vital principle of “dedication” is the intention to dedicate. Whenever such intention is unequivocally manifested, the dedication, so far as the owner of the property is concerned, has been made. Smith v. City of San Luis Obispo, 95 Cal. 463, 465, 30 P. 591. In the instant case, the history of appellant association and the manner in which it was conducted for more than half a century clearly indicate the dedication of its property to the requisite purpose of the welfare exemption.

Respondent seizes upon some isolated excerpts from appellant's articles of incorporation, such as “to carry on any other lawful business, enterprise, or activity whatsoever,”as indicative of the power vested in appellant association to divert its property from charitable and hospital purposes to non-exempt uses. We are not impressed with this argument, because the test of exemption is the actual purpose which an organization serves and for which its funds are used—in the instant case for more than fifty years—rather than in the possibility that, as organized, it might pursue objects or use its funds for purposes beyond the scope of the exempting statute. The other excerpts relied upon by respondent, one of which provides rather broadly that appellant's purposes include any lawful purpose where pecuniary profit is not the object thereof, and the other giving it the right in certain instances to protect its investment in other corporations by guaranteeing their indebtedness, must be regarded, in the light of appellant's history, as intended to implement appellant's basic purpose to maintain and operate a charitable, non-profit hospital. Indeed, such is their obvious effect. People ex rel. Untermyer v. McGregor, 296 N.Y. 237, 66 N.E.2d 292; People ex rel. Goodman v. University of Illinois Foundation, 388 Ill. 363, 58 N.E.2d 33, 157 A.L.R. 851.

The power to devote funds to any lawful purpose is circumscribed within charitable bounds by the cy pres doctrine. Any departure from the general purposes for which appellant association was formed, or any failure on its part to comply with trusts which it has assumed would subject appellant to an action by the Attorney General in the name of the State to correct such noncompliance or departure. Corporation Code, sec. 9505.

In any event, the language of the 1946 amendment amounted to a complete irrevocable dedication of its property to hospital purposes as contemplated by section 214 of the Revenue and Taxation Code, and appellant is therefore entitled to the welfare exemption.

For the foregoing reasons, the judgment is reversed and the cause remanded with directions to the court below to overrule defendant's demurrer and grant to it a reasonable time within which to answer plaintiff's complaint if it be so advised.

WHITE, Presiding Justice.

DORAN, J., concurs. (DOOLING, J., assigned, deeming himself disqualified, did not participate. DRAPEAU, J., did not participate.)