FRANKLIN LIFE INSURANCE COMPANY v. STATE BOARD OF EQUALIZATION

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District Court of Appeal, First District, Division 2, California.

FRANKLIN LIFE INSURANCE COMPANY, a corporation, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION of the State of California, Defendant and Respondent.

Civ. 21798.

Decided: October 20, 1964

McCutchen, Doyle, Brown, Trautman & Enersen, John N. Hauser, San Francisco, Frederick H. Stone, Springfield, Ill, of counsel, for appellant. Bert W. Levit, Victor B. Levit, Long & Levit, San Francisco, amici curiae in support of contentions of appellant. Stanley Mosk, Atty. Gen., of State of California, Harold B. Haas, Asst. Atty. Gen., San Francisco, for respondent.

Plaintiff Franklin Life Insurance Company brought this action against defendant State Board of Equalization to recover certain retaliatory taxes paid under protest. The complaint alleged that Insurance Code, sections 685 through 685.4, pursuant to which said taxes were assessed, were unconstitutional and void in their entirety, and, in any event, had been unconstitutionally applied to plaintiff. The cause was submitted to the court without the taking of oral testimony, plaintiff and defendant having filed a joint pretrial statement stipulating to the material facts. Judgment was for defendant, and plaintiff appeals therefrom.

Appellant is an Illinois corporation licensed to transact insurance business in this state. On March 31, 1960, appellant filed a tax return for the year 1959 with the California Insurance Commissioner. Pursuant to subdivisions (a) through (d), section 14 4/5, of article XIII of the California Constitution, insurers doing business in this state are subject to an annual tax of 2.35 per cent of the gross premiums received in a given year on business done in California, less certain deductions. Subdivision (e) of the same section of the Constitution provides that each insurer shall have the right to deduct from said annual tax the amount of real estate taxes paid in that year on its home or principal office in California. Appellant's return showed that 2.35 per cent of its gross premiums received on business done in California amounted to $191,188.25, that it had paid real estate taxes on its principal California office in the amount of $69,354.53, and that the net premium tax due for the year 1959 was $121,833.72. Prior to June 15, 1960, appellant paid this amount in full.

On March 31, 1960, appellant also filed a ‘Retaliatory Tax Statement’ for the year 1959. This statement showed that appellant's aggregate California taxes, licenses and fees for that year amounted to $191,223.25–$121,833.72 in premium taxes, $69,354.53 in real estate taxes on its principal California office, $25 as a fee for filing its annual statement of financial condition, and $10 as a fee for renewal of its certificate of authority. The statement also showed that appellant's home state of Illinois would impose insurance taxes, licenses and fees in the aggregate amount of $176,173.41 upon a California insurer transacting the same amount of business in Illinois in 1959 as appellant transacted in California during that year, but would impose insurance taxes, licenses and fees in the aggregate amount of only $107,942.29 upon an Illinois insurer transacting the same amount of business in that state in 1959.

From the data set forth in appellant's statement, respondent State Board of Equalization assessed retaliatory taxes in the amount of $54,304.69 against appellant. In arriving at this figure, respondent first determined that the ‘retaliatory excess' (the amount by which the total Illinois taxes, licenses and fees which would be imposed upon a California insurer doing the same amount of business in Illinois in 1959 as appellant did in California during that year would exceed those which would be imposed upon an Illinois insurer doing the same amount of business in that state in 1959) was $68,231.12. Respondent then deducted the amount which appellant had paid in real estate taxes on its principal California office ($69,354.53) from the total amount of California taxes, licenses and fees which appellant had paid during the year 1959 ($191,223.25), arriving at an adjusted total of $121,868.72. Respondent made this deduction for the reason that the real estate taxes paid on appellant's principal California office had already been taken into consideration in connection with appellant's premium tax, which had been arrived at by deducting the amount of these real estate taxes from 2.35 per cent of appellant's gross premiums on business done in California. Respondent then deducted appellant's adjusted California tax total for 1959 ($121,868.72) from the Illinois tax total which would be imposed on a California insurer doing the same amount of business in that state in 1959 ($176,173.41), and arrived at a ‘deficiency’ of $54,304.69. Since this figure was less than the ‘retaliatory excess' of $68,231.12. a retaliatory tax in the amount of $54,304.69 was assessed against appellant.

On August 4, 1960, appellant filed with respondent an application requesting that the retaliatory tax assessment be reduced to zero, alleging that the tax statute was unconstitutional and had been unconstitutionally applied to appellant. On October 5, 1960, after a hearing, appellant's application was denied in its entirety. On October 14, 1960, appellant paid the retaliatory tax of $54,304.69, plus interest from June 15, 1960, to the State of California under protest. After exhausting its administrative remedies, appellant commenced the instant action.

Appellant first contends that Insurance Code, sections 685 through 685.4, are in direct conflict with subdivision (f)(3), section 14 4/5, of article XIII of the California Constitution, and are therefore void in their entirety. That this argument may be properly evaluated, we summarize the overall scheme of taxation provided for in section 14 4/5 of article XIII of the Constitution: Subdivisions (a) through (e), as above noted, impose upon each insurer doing business in this state a tax equal to 2.35 per cent of the gross premiums received in a given year on business done in California, less the amount of real estate taxes paid in that year on its principal California office. Pursuant to subdivision (f), the 2.35 per cent gross premium tax is expressly declared to be in lieu of all other state, county and municipal taxes and licenses, except for real estate taxes, taxes on the trust business or department of an insurer doing title insurance and trust business, retaliatory taxes, the tax on ocean marine insurance, and taxes or license fees imposed by the state on motor vehicles. Subdivision (f)(3) defines retaliatory taxes as follows: ‘When by the laws of any other state or country any taxes, fines, penalties, licenses, fees, deposits of money or securities or other obligations or prohibitions are imposed on insurers of this State doing business in such other state or country, or upon their agents therein, in excess of those imposed upon insurers of such other state or country or upon their agents therein, so long as such laws continue in force, the same obligations and prohibitions of whatsoever kind may be imposed by the Legislature upon insurers of such other state or country doing business in this State, or upon their agents herein.’ (Emphasis added.)

In 1959, the California Legislature enacted Insurance Code, §§ 685 through 685.4 (Stats.1959, ch. 2120, § 1, pp. 4945–4946). Section 685 provides in relevant part as follows: ‘When by or pursuant to the laws of any other state or foreign country any taxes, licenses and other fees, in the aggregate, and any fines, penalties, deposit requirements or other material obligations, prohibitions or restrictions are or would be imposed upon California insurers, or upon the agents or representatives of such insurers, which are in excess of such taxes, licenses and other fees, in the aggregate, or which are in excess of the fines, penalties, deposit requirements or other obligations, prohibitions, or restrictions directly imposed upon similar insurers, or upon the agents or representatives of such insurers, of such other state or country under the statutes of this State, so long as such laws of such other state or country continue in force or are so applied, the same taxes, licenses and other fees, in the aggregate, or fines, penalties or deposit requirements or other material obligations, prohibitions, or restrictions, of whatever kind shall be imposed upon the insurers, or upon the agents or representatives of such insurers, of such other state or country doing business or seeking to do business in California.'1

Appellant points out that the retaliatory tax which section 685 imposes upon the insurers of another state or country is in no way conditioned upon that other state or country having discriminated against California insurers by subjecting them to greater tax burdens than it imposes upon its own insurers. Under the statute, the sole prerequisite for imposition of a retaliatory tax is that the other state or country shall subject California insurers to a greater total tax burden than California imposes upon the insurers of that state or country—regardless of whether the other state or country taxes its own insurers in the identical manner in which it taxes California insurers. Appellant asserts that by the elimination of the discrimination requirement provided for in subdivision (f)(3), section 14 4/5, of article XIII of the Constitution, the Legislature has exceeded its constitutional authorization by enacting a broad ‘comparative’ type of tax law when it was empowered only to enact in ‘antidiscrimination’ type of tax law. Appellant further asserts that since subdivision (f), section 14 4/5, of article XIII of the Constitution, provides that the gross premium tax shall be ‘in lieu’ of all other taxes except those enumerated in subdivisions (f)(1) through (f)(5), it follows that a statute which creates a retaliatory tax broader than that authorized by subdivision (f)(3) must be held void and of no effect whatever.

Respondent concedes that the effect of the ‘in lieu’ clause contained in subdivision (f) is to deprive the Legislature of power to enact a retaliatory tax law which does not comply with the specifications set forth in subdivision (f)(3). Respondent also admits that Insurance Code, section 685, does omit a restriction specified in subdivision (f)(3) and that the statute, when ‘literally read,’ authorizes the imposition of a retaliatory tax in every case where the tax burden imposed upon California insurers by another state or country is greater than that which California imposes upon the insurers of such other state or country. However, respondent asserts that the statute has an ample field of operation within the constitutional limits, that the inconsistency between the terms of the statute and the requirements of the Constitution is literal only, and that the language of Insurance Code, section 685.3, clearly demonstrates that the Legislature intended section 685 to be operative only to the extent permitted by the Constitution.2

The inherent weakness in this line of reasoning is that section 685 does not merely ‘authorize’ the imposition of a broader retaliatory tax than that specified in subdivision (f)(3), but on the contrary, the statute expressly requires that a retaliatory tax ‘shall be imposed’ whenever another state or country subjects California insurers to a greater tax burden than California imposes upon the insurers of such other state or country. In the face of this mandatory language, it is apparent that the statute could not be held operative within the constitutional limits, as respondent suggests, unless this court were to ‘rewrite’ the statute so as to add a limiting or qualifying clause which the Legislature chose nodt to include.

It is settled that in construing statutes, the courts are limited to the intention expressed and are not entitled to insert qualifying provisions not included or to rewrite a statute to conform to an assumed intention which does not appear from its language. (Vallerga v. Dept. Alcoholic Bev. Control (1959) 53 Cal.2d 313, 318, 1 Cal.Rptr. 494, 347 P.2d 909.) It is also the rule that a statute which expressly permits an application which is unconstitutional may not be upheld merely because its provisions also permit another application which is legal and proper. (County of Los Angeles v. Jessup (1938) 11 Cal.2d 273, 278, 78 P.2d 1131; People v. Stevenson (1962) 58 Cal.2d 794, 798, 26 Cal.Rptr. 297, 376 P.2d 297.)

In City of Los Angeles v. Lewis (1917) 175 Cal. 777, 167 P. 390, a statute authorizing county boards of supervisors to purchase, lease, construct or otherwise acquire, own, operate, manage and control cement plants was attacked as unconstitutional on the ground that it was so broadly drawn as to allow the county to engage in the general business of manufacturing and selling cement and therefore authorized taxation for a private purpose. Although respondents contended that the problem was merely one of choosing between two permissible interpretations and that the statute could be upheld by construing its provisions to require that the product of a cement plant so operated could be used solely for the public purposes of the county, the court rejected this argument, stating : ‘No court, in its effort to save a law, can properly pervert or destroy its plain meaning, and so make it express that which the Legislature itself did not declare. ‘But the courts cannot go beyond the province of legitimate construction in order to save a statute; and where the meaning is plain, words cannot be read into it or out of it for that purpose.’ (Lewis' Sutherland on Statutory Construction, par. 83; Rogers-Ruger Co. v. Murray, 115 Wis. 267, 91 N.W. 657, 59 L.R.A. 737, 95 Am.St.Rep. 901. * * * No man can doubt but that under this law a county acquiring a cement plant is authorized to manufacture all of the cement which that plant can produce and sell all that it desires to private consumers. To deny this right and power under the law is to destroy the law itself and to frame a law distinctly the contrary of that which the Legislature deliberately and advisedly formulated and passed. So plain is this that respondents cannot successfully urge the severability of the statute and that a part of it can be saved by a construction limiting the cement production to the public needs of the county; for this, as we have said, would be to make a law which the Legislature has not made and which requires legislative deliberation and determination before it can be made.' (Pp. 781, 783–784, of 175 Cal. 167 P.2d pp. 392–393.)

Respondent contends, however, that a different rule is applicable in the instant case because Insurance Code, § 685.3, is indicative of legislative intent that section 685, even if not enforceable as written, should remain operative to the extent permitted by the Constitution. We are not impressed by this argument, since a severability clause can save a portion of a partially unconstitutional statute only if that portion is severable and constitutes a completely operative expression of legislative intent. (In re Portnoy (1942) 21 Cal.2d 237, 242, 131 P.2d 1.) In the instant case, the fatal defect in section 685 is that it requires the imposition of a broader retaliatory tax than that authorized by the Constitution. Since the statute could be rendered consistent with the controlling constitutional provision only by rewriting it so as to include a qualifying clause, it is apparent that the section does not contain valid portions which may be separated from the remainder.3

Moreover, a reading of Insurance Code, § 685.3, rather clearly indicates that it was not intended to constitute a severability or saving clause. That section provides that, ‘To the extent permitted by the Constitution of this State there is hereby imposed upon the commissioner the duty of enforcing the execution of the provisions of Section 685. It shall be the duty of the commissioner to initiate the enforcement and execution of the provisions of Section 685 in respect to all matters which by the Constitution or laws of this State require further or final action by other officials of this State. In respect to any matter initiated by the commissioner, it shall be the duty of the Board of Equalization, Board of Control and State Controller to complete the enforcement and execution of the provisions of Section 685 in respect to such matter within the scope of the duties and powers of each as set forth in the Constitution and laws of this State.’ When the statute is read as a whole, it becomes apparent that it was designed to activate the machinery for the collection of the retaliatory tax imposed by section 685 and to delegate duties in connection with its enforcement and execution to the various officials and governmental agencies specified. Such was the view taken by the Attorney General in an advisory opinion, where it is stated: ‘By section 685.3 * * * there is imposed on the Insurance Commissioner the duty of enforcing the execution of the retaliatory provisions of the Insurance Code, and to initiate the enforcement and execution of the provisions of that section in respect to all matters which under the Constitution or laws require further or final action by other officials. In respect to any matter initiated by the commissioner it becomes the duty of the Board of Equalization, Board of Control and State Controller to ‘complete’ the enforcement and execution of the retaliatory section within the scope and duties and powers of each as set forth in the Constitution and laws of this state.' (35 Ops.Cal.Atty.Gen. 182, 188.)

Since the statutory scheme of taxation provided for in Insurance Code, §§ 685 through 685.4, is in direct conflict with subdivision (f)(3), section 14 4/5, of article XIII of the Constitution, and must be declared wholly invalid, it becomes unnecessary to discuss appellant's further contentions that the sections were applied in an unconstitutional manner.

The judgment is reversed, with directions to the trial court to enter judgment in favor of appellant as prayed for in its complaint.

FOOTNOTES

1.  Section 685.1 provides that the article containing the retaliatory tax provisions shall not apply to ad valorem taxes on real or personal property nor to certain other specified taxes, obligations or assessments imposed by another state or country, except that deductions allowed for real estate or personal property taxes shall be considered in determining the propriety and extent of retaliatory action.Section 685.2 defines the domicile of an alien insurer as the state in which its principal place of business is located. Section 685.3 outlines the duties of the Insurance Commissioner, the Board of Equalization, Board of Control and State Controller with respect to the enforcement and execution of section 685.Section 685.4 provides that the article containing the retaliatory tax provisions shall apply to reciprocals or interinsurance exchanges and fraternal benefit societies.

2.  It may be noted that the California Attorney General advocated in similar construction of section 685 in an opinion rendered May 17, 1960. (35 Ops.Cal.Atty.Gen. 182.) After commenting upon the obvious disparity between the newly enacted sections of the Insurance Code and the controlling constitutional provision, the Attorney General expressed the view that the Insurance Code sections were susceptible of two alternative interpretations: (1) the sections could be held inoperative only to the extent that they provided for the exaction of retaliatory charges in cases where there was no discrimination by another state or country against California insurers in favor of its own insurers, and (2) the sections could be held inconsistent with and in violation of the constitutional provision and consequently invalid. Although conceding that there was no ‘direct judicial authority’ to that effect, the Attorney General concluded that the former construction would more likely prevail (supra, at p. 185).

3.  It is of interest to note that the Legislature is apparently not unaware of the constitutional objections to Insurance Code, § 685 et seq. In 1963, a proposes constitutional amendment broadening the scope of the retaliatory tax authorized under subdivision (f)(3), section 14 4/5 of article XIII, passed the two houses of the Legislature. This amendment (Assembly Const.Amend. No. 27, 1963; Stats.1963, ch. 183, p. 4975) provides for a retaliatory tax identical to that now imposed by Insurance Code, § 685.

SHOEMAKER, Presiding Justice.

AGEE and TAYLOR, JJ., concur.