SAN DIEGO TRUST SAVINGS BANK v. SAN DIEGO COUNTY (1939)

The plaintiffs were the owners of certain vaults, vault doors and other equipment, including marble and bronze decorations, iron grill work, cages and counters, all of which were used by them in conducting their respective banking businesses in the city of San Diego. On the first Monday in March, 1938, the county assessor proposed to enter this property upon the tax rolls as improvements and to assess the same as real property. Upon the theory that these articles were personal property and therefore exempt from such local taxation, this action was brought seeking an injunction to restrain the assessor from making the contemplated assessment.

At the opening of the trial it was stipulated that the decision with respect to the vault doors should control as to all other property in question, with the exception of the vaults and an elevator. At the close of the evidence it was further stipulated that the court might find that each of the vaults in question, as distinguished from the vault doors, were real property for the purpose of local taxation “except in those instances where the relationship of landlord and tenant or lessor and lessee exists”. The court found in accordance with these stipulations, and further found that the elevator mentioned was real estate for the purpose of local taxation and that all vault doors in question were personal property. As one of its conclusions of law the court found that the classification of “real and personal property” as set forth in section 61 of the Bank Act, Stats.1909, p. 87, as amended; Deering's Gen.Laws, Act 652, was here applicable. Judgment was entered accordingly and this appeal was taken from so much of the judgment as restrains the assessor from assessing any of the property in question as real estate for purposes of local taxation.

In view of the stipulations entered into, the main question presented on this appeal is whether bank vault doors are “real property” within the meaning of that phrase as used in section 3 of the Bank and Corporation Franchise Tax Act, Deering's Gen.Laws, Act 8488, which will be hereinafter referred to as the Tax Act. That section, pursuant to section 16, 1(a) of article XIII of the state Constitution, provides that the franchise tax imposed by sections 1 and 2 of the act shall be “in lieu of all other taxes and licenses, state, county and municipal” upon state and national banks “except taxes upon their real property”.

There is practically no conflict in the evidence and the controversy is entirely as to the principles of law which should be applied. It appears from the evidence that the walls, ceilings and floors of the vaults are constructed of heavy reinforced concrete and that a vault door comes anchored in a metal frame, the door and frame constituting one complete unit. The metal frame of the door has flanges at both the front and rear. The opening in the concrete vault is a little larger than the frame proper of the vault door. In installing the door and frame the rear flange is removed from the frame, the door and frame is set in the opening and the rear flange is again screwed to the frame. The door is then leveled and held in place by steel or wooden wedges, and concrete is then poured in between the sides of the vault opening and the door frame to keep the latter rigid. When it is desired to remove the door and frame it is only necessary to remove the inner flange and knock out the concrete wedge, when the whole assembly can be removed without injury to the vault itself. There is also evidence that vault door and frame units are often moved, and are frequently removed, replaced by other doors and the old ones again used in other locations.

The Tax Act imposes a different tax upon banks than that imposed upon other corporations referred to in the act. The franchise tax therein provided for is in lieu of all other taxes except upon real property owned by the banks. What constitutes real property is not defined in that act. The appellants contend that what is real property within the meaning of section 3 of the Tax Act is determined by section 3617 of the Political Code, which makes a general classification of property for the purpose of taxation. That section provides that real estate includes improvements, which in turn includes all structures and fixtures erected upon or affixed to the land. For a definition of fixtures they then turn to section 660 of the Civil Code where these are defined, among other things, as something which is permanently resting upon the land or permanently attached to what is thus permanent. It is argued that these sections of the Political and Civil Codes are alone controlling upon the question before us and that, under the evidence, these vault doors must be held to be improvements, structures and fixtures, and thus assessable as real property.

The question as to whether an article has been so affixed to real property as to become a part thereof usually arises in controversies between landlords and tenants or with respect to the rights of a mortgagee or vendee. In the absence of any agreement the rules applicable in such cases are those laid down in the Civil Code and the questions are largely determined by the manner in which the article is affixed to a portion of the real property and by the intention of the party affixing it, in which regard the matter of permanency is given great weight. Even when, under the general rules, an article is so affixed as to otherwise become an integral part of the premises and where it cannot be removed without affecting or injuring the building an agreement of the parties may prevail and cause it to be treated as personal property. While general rules are to apply in the absence of an agreement a specific agreement usually prevails over general rules. The appellants cite many cases illustrating these principles and applying the general rules under particular circumstances. They especially rely upon Realty Dock & Improvement Corp. v. Anderson, 174 Cal. 672, 164 P. 4, and Southern California Telephone Company v. State Board of Equalization, 12 Cal.2d 127, 82 P.2d 422. In the first of these cases the court was merely interpreting a lease and held that a vault was an addition and improvement within the meaning of a clause providing that additions and improvements should remain upon the property and become the property of the lessor. The other case, which was a tax case, applied the general rules in the absence of any agreement and of any other applicable statute and under peculiar circumstances where both the building and the equipment in question were constructed and installed to be used as a unit for a special purpose and where the building was largely useless for any other purpose.

In the instant case we have, in addition to the problem as presented under the general rules and in the absence of any agreement or particular statute, the question as to the effect of certain provisions of the Bank Act upon the tax question here involved. Section 61 of that act reads in part:

“Any savings bank may purchase, hold or sell real or personal property, as follows:

“1. The lot and building in which the business of the bank is carried on; furniture and fixtures, vaults and safe deposit vaults, and boxes and other personal property, such as may be necessary or proper to carry on its banking business; but no savings bank shall hereafter invest an amount exceeding one-half of its paid up capital and surplus in such lot and building, and banking equipment, except with the written consent of the Superintendent of Banks and hereafter, the authority of a two-thirds vote of all the directors shall be necessary to authorize the purchase of such a lot and building, or the construction of such building.”

Section 84 reads:

“No commercial bank shall hereafter invest an amount exceeding one-half of its paid-up capital and surplus in the lot and building in which the business of the bank is carried on, furniture and fixtures, vaults and safe-deposit vaults and boxes necessary or proper to carry on its banking business, except with the previous written consent of the superintendent of banks; and hereafter the authority of a two-thirds vote of all the directors shall be necessary to authorize the purchase of such lot and building or the construction of such building.”

Section 55 reads in part:

“The terms ‘real estate,’ or ‘real property,’ or ‘personal property,’ when used in this act, shall have the meaning defined in, and shall be construed in accordance with the provisions of Title I of Part I of division second of the Civil Code.”

The quoted portion of section 61 and section 84 relate to property which a bank may purchase and “hold” for use in carrying on its business. Section 61 not only distinguishes between the “lot and building” used in the bank's business and the furniture and fixtures, including vaults, but describes the latter as personal property. Section 84 makes a similar distinction between the lot and building and the furniture and fixtures, including vaults, although the latter are not mentioned as personal property. But the distinction between the two classes of property is clearly indicated in section 84 by requiring a two-thirds vote of the directors in purchasing the lot and building. It seems clear that these two sections of the Bank Act intentionally distinguish between the lot and building in which the business is carried on and the furniture and fixtures, including vaults, which the bank is authorized to purchase and hold. The appellants contend that this distinction has no meaning and that the only purpose of these sections is to regulate the amount of the bank's capital which may be invested in the building and equipment. If that were the only purpose, no reason appears for making any distinction between the two classes of property. The Bank Act controls and regulates the manner in which a banking business may be carried on and the sections referred to provide for the acquiring and also for the holding of two distinct classes of property for use in carrying on the business. If the only purpose was to regulate the total amount that might be thus invested there would have been no occasion to distinguish between real and personal property especially since, under general rules, fixtures and vaults might be so installed as to be a part of the realty.

It is significant that while section 55 provides that the terms “real estate” and “real property” are to be defined in accordance with the provisions of the Civil Code, no such provision is made for the term “lot and building”. The terms “real estate” and “real property”, used in section 55, are found in various other sections of the Bank Act relating to property held by banks other than for business purposes, and naturally the general rules and definitions of the Civil Code would there apply. The term “real property”, appearing in the first clause of section 61, clearly applies to real property taken through mortgage or other security as referred to in subdivisions 2 and 3 of that section. But in the quoted portion of subdivision 1 of that section, referring to property used for business purposes, the words “real property” do not appear and reference is made to “the lot and building”, these words being much more limited than the general term “real property” used in section 55. A clear distinction is drawn between the lot and building as thus limited and the other property mentioned in the section, including vaults. It seems clear that, in so far as the Bank Act itself is concerned, the bank vaults are treated as personal property as distinguished from real property.

It cannot be doubted that the word “vaults”, as used in these sections of the Bank Act, includes vault doors without which a vault would be useless for the banking business, and that within the meaning of and for the purpose of that act a vault door is a part of a vault. While the trial court was governed by the stipulation of the parties that the reinforced concrete portion of certain of the vaults should be considered as real property, this stipulation excluded the vault doors, and we must, therefore, consider the effect of the Bank Act upon the vault doors as a part of the vaults, in spite of the stipulation as to another part of some of those vaults. If the classification made by the Bank Act is here applicable, it applies to the vault doors, and they are personal property.

The distinction made in the Bank Act between what may be held by a bank for the purpose of its business by limiting real property to the lot and building and classifying vaults and what might otherwise be classed as fixtures as personal property is in accord with common sense and common experience. Banking is a highly specialized business which requires the use of vaults, marble decorations and other equipment not ordinarily used in general business. Most of this special equipment is more or less permanently attached to the building in which the business is carried on and under general rules the manner in which they are affixed might suggest that they had become a part of the realty. As a practical matter, however, they are useful only for the business of the bank and are no real improvement to the premises and would have to be removed if the building were to be used for ordinary purposes. They can readily be installed in any building, can be removed without substantial damage to the building itself, and are commonly bought, sold, moved and treated as personal property. As a practical matter they are more in the nature of furniture and removable equipment than of improvements to realty and they are generally so treated for other purposes than taxation. The Bank Act so treats them and, at least for its purposes, classifies them as personal property.

It is not without significance that when these provisions of the Bank Act were adopted the personal property of state banks could be taxed while the personal property of national banks could not be directly taxed, although their real property was subject to local taxation. It may well be that in adopting these provisions of the Bank Act, and in distinguishing between what part of the property used in conducting the business is real property and what personal property, it was desired to avoid any conflict with federal requirements and to lay down rules which might safely be followed. These provisions also enable a bank to make the required reports to both federal and state governments as to what part of the property used in their business is real property and what part is personal property.

The Bank Act was in force for many years before the Tax Act was adopted in 1929. Sections 1 and 2 of the Tax Act impose a tax upon national and state banks measured by their net income. Section 3 of that act provides that this tax shall be in lieu of all other taxes “except taxes upon their real property”. Under this provision personal property belonging to banks is not subject to local taxation. The in lieu tax thus imposed upon banks is considerably larger than that imposed upon other corporations covered by that act, presumably because personal property belonging to such other corporations is still subject to local taxation. While under section 3 of the act real property belonging to banks is subject to local taxation, the Tax Act does not define real property in the sense therein used, which omission has led to this controversy. No reason appears why the legislature, in passing the Tax Act, should have intended to refer to real property as defined in general statutes which were designed to apply in the absence of any specific agreement or provision, and to have ignored and intended to exclude from consideration the classification of real and personal property it had already made in the Bank Act passed for the very purpose of regulating the business which was being taxed, and which provided how both kinds of property might be acquired and held. In adopting a special system of taxation for the specialized business of banking the legislature must be presumed to have had in mind its own act regulating how that business could be carried on. In permitting a tax upon bank real estate and providing that the in lieu tax should be a substitute for all other taxes it must have had in mind its own determination of what was real property and what was personal property in the act authorizing the banks to acquire and hold that very property. It is unreasonable to believe that it was the intention of the legislature to refer only to general statutes for a definition of real property and to ignore the very definite definition and classification contained in the act which permitted the banks to carry on the business which was being taxed. Moreover, while sections 61 and 84 of the Bank Act were amended in 1931 after the adoption of the Tax Act, the provisions in question were not changed. We think that in seeking a definition of the words “real property”, as used in section 3 of the Tax Act, we must look to the specific provisions of the Bank Act as they modify more general rules and particularly classify vaults as personal property in connection with the particular business there taxed. Under this interpretation the vault doors here in question were not a part of the real property and not subject to local taxation, and the court correctly so held.

The well-established rule that tax proceedings are in invitum and that tax statutes are to be strictly construed against the state is particularly applicable here. The banks are permitted to do business under a statute which authorizes them to purchase and hold certain property as personal property. The state in another act taxes the business thus authorized to be conducted by imposing an in lieu tax on all property other than real property, which tax is considerably larger than that imposed upon other corporations whose personal property is otherwise taxed. In the absence of a specific declaration in the taxing statute, either defining real property or limiting the same to the definition supplied by general statutes, it should be held that in so far as property used in conducting a banking business is concerned they intended to use the word “real property” in the more limited sense in which such property was designated in the Bank Act, under which the business of the banks had long been conducted, and which authorizes them to acquire and hold property in a certain manner.

Under the views above expressed it becomes unnecessary to consider any other points raised, with one exception. The appellants contend that the judgment with respect to vaults owned by one of the respondents is inconsistent with the findings. In accordance with the stipulation, the court found that all the vaults, apart from the doors, were real property for purposes of taxation except where the relationship of landlord and tenant existed. It is argued that the evidence shows that this particular respondent owned the banking premises in question and that notwithstanding this fact the court enjoined the assessment of its vaults as real property. There is evidence that at the time here in question that bank was leasing the premises and that it later purchased the same. No error appears in this connection.

For the reasons given the judgment is affirmed.

BARNARD, Presiding Justice.

We concur: MARKS, J.; GRIFFIN, J.