SUTTER HOSPITAL OF SACRAMENTO v. CITY OF SACRAMENTO (1951)

This is an appeal by the Sutter Hospital from a judgment in favor of the City of Sacramento in an action brought by the hospital to recover real property taxes paid under protest for the fiscal year 1946–1947. Appellant here, as in the trial court, claims exemption under the provisions of Section 214 of the Revenue and Taxation Code.¹

In general, the findings of the trial court were favorable to the city. Among other things the court specifically found that the hospital was operated for profit within the meaning of subdivision (3) of Section 214. From an examination of said subdivision it is readily apparent that if such finding was proper under the record before us, and we conclude it was, such determination is decisive of the present appeal and hence it becomes unnecessary to discuss the remaining questions raised by the parties, or the facts relative thereto.

The record shows that in the year 1935 appellant was organized as a non-profit corporation, acquiring the assets of a predecessor profit corporation by the exchange of its bonds equivalent in amount to the outstanding stock of the predecessor corporation. In the year 1945 the value of the corporation's land, buildings, machinery and equipment was for accounting purposes estimated at $764,895.39, and its then bonded indebtedness was approximately $292,000. The surplus of income over current expenses for that year, which expenses included interest payments and depreciation on the buildings, machinery and equipment, was $86,609.24. For the year 1946 the surplus was $106,603.12. Reduced to percentages the surplus for each year was slightly in excess of eight per cent of its gross income. No part of these surpluses was paid to any individual. Apparently these earnings were mingled with other cash on hand and the only uses to which they were put were debt retirement, maintenance and replacement of equipment, and expansion. Subsequently in 1947 a part thereof was used to build and equip an X-Ray room costing approximately $60,000.

Appellant contends that it does not fail to qualify for the welfare exemption merely because it realizes net earnings; that the requirements of said Section 214 are satisfied so long as its earnings do not inure to the benefit of any individual or shareholder. Appellant further contends that subdivision (3) of Section 214 is limited in its application to property claimed to be exempt but which is, in fact, used or operated for purposes other than the exempt purposes provided in the section; that any other construction of subdivision (3) would be in conflict with subdivision (2), which by its use of the term ‘net earnings' clearly implies that there may be a surplus of income over cost of operation of the property claimed to be exempt, so long as that surplus does not inure to the benefit of any private shareholder or individual. The question thus squarely presented is whether or not the hospital can qualify for the welfare exemption when its operation has resulted in substantial earnings, which, though not inuring to the benefit of any individual, admittedly have been and will be devoted to expansion and improvement of a substantial character, which question, in turn, depends, first, on whether or not subdivision (3) refers to profits from the operation of property used for one of the exempt purposes, and, second, on whether or not the earnings here involved properly may be termed profit within the meaning of said subdivision (3).

As stated in Cedars of Lebanon Hospital v. County of Los Angeles, 35 Cal.2d 729, 734, 221 P.2d 31, 34, 15 A.L.R.2d 1045, ‘Constitutional provisions and statutes granting exemption from taxation are strictly construed to the end that such concession will be neither enlarged nor extended beyond the plain meaning of the language employed.’ The plain meaning of the language employed in the first paragraph of said section is to enumerate the purposes to which the property must be devoted in order to qualify for the exemption. Subdivisions (1) and (2) clearly deal with the status of the owner of the property while the remaining subdivisions clearly deal with the status of the property itself and the uses to which it is put. The manifest purpose of subdivision (2) is to establish as a requirement that the owner of the property claimed to be exempt must occupy a non-profit status. This appears obvious since by the use therein of the phrase ‘net earnings of the owner’ (emphasis added) it necessarily is not limited to net earnings resulting from the operation of the property claimed to be exempt. Subdivision (3), on the other hand, deals with the operation of the property itself, and provides expressly and unequivocally that the property may not be ‘used or operated * * * for profit regardless of the purposes to which the profit is devoted’. (Emphasis added.) However, before the provisions of subdivision (3) come into play, it must first be established that the property for which exemption is claimed is used exclusively for one of the enumerated exempt purposes, and then that the net earnings of the owner do not inure to the benefit of any individual.

In the present case it is not disputed that the two parcels of realty for which exemption is claimed are operated exclusively for hospital purposes. Likewise, it is clear that the net earnings of appellant have not inured to the benefit of any private shareholder or individual.

All but two of the cases relied upon by appellant were decided prior to the effective date of the welfare exemption and are obviously not controlling on the question of the interpretation of that statute. Nor do either of the two cases decided subsequent to the effective date of the act, Cedars of Lebanon Hospital v. County of Los Angeles, 35 Cal.2d 729, 221 P.2d 31, 15 A.L.R.2d 1045, and Y. M. C. A. v. County of Los Angeles, 35 Cal.2d 760, 221 P.2d 47, involve the precise question here presented. In the Cedars of Lebanon case, the property which was operated for a profit was not used for one of the exempt purposes, and the court predicated its denial of exemption on the ‘determinative prerequisite’—‘the use of the property itself’. 35 Cal.2d at page 746, 221 P.2d at page 41. In the Y. M. C. A. case the court found that the property in question, which was used for dormitory purposes, was not operated for a profit, but rather its operation resulted in a net loss, and on that ground the court refused to deny exemption under the provisions of subdivision (3) of Section 214. Lastly, neither case holds, as contended by the petitioner, that subdivision (3) is limited in its application to property used for non-exempt purposes.

In determining whether or not appellant is eligible for the welfare exemption under the provisions of subdivision (3) thereof, it is first necessary to ascertain whether these surplus earnings labelled in appellant's 1945 financial statement as ‘margin for expansion and debt retirement’ may be classed as profit. Profit is ordinarily understood to refer to ‘acquisition beyond expenditure’ or ‘excess of value received over cost.’ Prince v. Lamb, 128 Cal. 120, 126, 60 P. 689, 691. While appellant might properly have deducted the necessary sums for maintenance and debt retirement—uses to which the surplus here in question has apparently in part been put—from gross receipts, in order to determine net earnings, no such computation appears in the record before this court. However, from the testimony of appellant's superintendent it does appear beyond any question that a large portion of this surplus has been and will be devoted to expansion. In so far as the surplus earnings of appellant are accumulated and used for that purpose, those earnings are profit within the meaning of subdivision (3), and they are no less so because used to further the exempt purpose for which appellant is organized, since subdivision (3) refers to any profit, ‘regardless of the purposes to which the profit is devoted.’

Although it is apparent that at least for the years here involved a profit was realized from the operations of appellant's property for which exemption is claimed, there remains the question of whether or not appellant's property was in fact operated for a profit, that is, was there a substantial surplus of earnings in excess of operating costs by design, or by mere chance. The evidence received at the trial indicated beyond any doubt that appellant's properties are operated on a sound financial basis in a manner befitting any modern commercial institution. While there was no testimony to reveal the method of computation by which appellant's directors fixed charges for hospital services, suffice it to say that the ‘margin for expansion and debt retirement,’ which for two successive years exceeded eight per cent of appellant's gross receipts, was not attained by accident. We conclude that the properties for which exemption is here claimed were operated for a profit within the meaning of Section 214 of the Revenue and Taxation Code, and therefore the exemption must be denied.

Judgment affirmed.

FOOTNOTES

1.  Sec. 214: ‘Property used exclusively for religious, hospital, scientific, or charitable purposes owned and oprated by community chests, funds, foundations or corporations organized and operated for religious, hospital, scientific, or charitable purposes is exempt from taxation if:‘(1) The owner is not organized or operated for profit;‘(2) No part of the net earnings of the owner inures to the benefit of any private shareholder or individual;‘(3) The property is not used or operated by the owner or by any other person for profit regardless of the purposes to which the profit is devoted;‘(4) The property is not used or operated by the owner or by any other person so as to benefit any officer, trustee, director, shareholder, member, employee, contributor, or bondholder of the owner or operator, or any other person, through the distribution of profits, payment of excessive charges or compensations or the more advantageous pursuit of their business or profession;‘(5) The property is not used by the owner or members thereof for fraternal or lodge purposes, or for social club purposes except where such use is clearly incidental to a primary religious, hospital, scientific, or charitable purpose;‘(6) 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;‘(7) The property, if used exclusively for scientific purposes, is used by a foundation or institution which, in addition to comply with the foregoing requirements for the exemption of charitable organizations in general, has been chartered by the Congress of the United States, and whose objects are the encouragement or conduct of scientific investigation, research and discovery for the benefit of the community at large.‘The exemption provided for herein shall be known as the ‘welfare exemption.’ This exemption shall be in addition to any other exemption now provided by law. This section shall not be construed to enlarge the college exemption or to extend an exemption to property held by or used as an educational institution of less than collegiate grade.'

PEEK, Justice.

ADAMS, P. J., and DEIRUP, J., pro tem., concur.