INTERNATIONAL SOCIETY FOR KRISHNA CONSCIOUSNESS INC v. COUNTY OF LOS ANGELES (1980)

These are cross-appeals by plaintiff, International Society for Krishna Consciousness of California, Inc. (hereafter “Society”), and four taxing authorities (hereafter “County”),¹ from a judgment granting to the Society and another like plaintiff,² specified refunds of property taxes paid under protest to the County for the tax years 1972-1973 through 1976-1977 upon the multiply used temple complex of the Society consisting of the temple itself, a parking lot and six apartment buildings. The trial court concluded that the Society and the other plaintiff were entitled to the California welfare exemption (Cal.Const. art. XIII, § 4, subd. (b); Rev. & Tax.Code, § 214) as to 50% of the seven parcels so used on the basis that the real property was used approximately 50% for exempt purposes. The trial court expressly concluded, however, that the Society's use of this property to house certain of its members was not an exempt use, i.e., a use for exclusively religious purposes. The Society and the other plaintiff had also sought a declaration as to which of the Society's uses of the property qualified for the welfare exemption.

The Society appeals primarily from the adverse determination regarding the eligibility of its housing use of the property for the welfare exemption. But it also challenges the federal constitutionality of the California welfare exemption and of the inquiry with respect thereto made herein. The County in its cross-appeal challenges the eligibility of the Society to claim the welfare exemption, the trial court's application of the exemption on a time rather than a space basis,³ and its implied conclusion that the Society's use of the subject property for its book publishing and incense businesses were exempt uses.

Our examination of the record and of the applicable law leads us to conclude that: (1) the California welfare exemption and the factual inquiry pursuant thereto made in this case are both federally constitutional; (2) the Society is entitled to claim the welfare exemption; (3) the trial court erred in granting the Society a partial exemption on the basis of time rather than space and in its determination of which uses of the subject property by the Society qualified for the welfare exemption.

FACTS

The Krishna movement began in the United States in 1966. The Society was formed a few years later for the purpose of spreading throughout the western world an ancient Hindu faith which is commonly referred to as Hare Krishna. The Society enjoys exemption from the payment of both federal and state income taxes.

As of the time of trial the temple complex at issue housed and provided working areas for some 250 devotees,⁴ approximately one-half of whom were involved in the publishing and distribution to the various temples of the movement on a wholesale basis and to the general public on a retail basis of the Society's religious books and magazines. This is the primary missionary activity of the Society.⁵

The Society sells its books at a substantial markup over cost. Consequently between 1973 and 1977 the Society realized from this activity a net income of over $4 million and the net worth of its book publishing division increased from $1,247,000 in 1972 to $4,059,821 in 1976. The Society obtains some 70 to 80% of its support from these book sales and essentially all of such income was expended either for such support or for the building and expansion of other temples of the movement elsewhere in the United States and in India. Some relief work was also done with these monies in India.

Prior to January 1, 1976, the Society and the other plaintiff engaged in the manufacture and sale of incense and related products under the name “Spiritual Sky Scented Products”.⁶ Spiritual Sky became the largest manufacturer of incense in the United States and the Society operated it strictly to earn profits. Net sales of these products to the temples of the movement and to the general public during the years 1972 through 1976 averaged over $2 million a year, while gross profits on such sales averaged close to $1 million a year. In January 1976 Spiritual Sky became a wholly owned subsidiary of the Society.⁷

Apparently all of the Society's income from these two business operations was devoted entirely to the Society's religious purposes.

The devotees of the Society, who live in the temple complex, follow a most rigorous daily regimen seven days a week on pain of expulsion from the complex otherwise. They begin communal and individual prayers, meditations, chanting and attendance at temple services, including classroom instruction, not later than 4 a. m. These exclusively religious activities last for at least four hours. They then work at their assigned activities, which may be multiple in nature, until 5 p. m. They then engage in personal cleansing for about an hour and thereafter, until 9 or 10 p. m. when they retire, they repeat much the same worship activities as occupied them in the very early morning hours. While living in the temple they observe their vow of poverty and receive from the Society nothing but food, clothing, shelter and necessary medical expenses. They eat only two meals a day prepared in the temple and first blessed. Their diet is very strictly vegetarian. They may not use intoxicants. Only married couples are permitted to associate with members of the opposite sex and then only with their spouses. Sexual activity may be engaged in only by married couples and only for procreation at specific times.⁸ Each living apartment within the temple complex contains an altar.

Devotees are directed by their religious leaders and by various of the scriptures of the movement to live in the temple complex, if possible, to minimize their exposure to outside materialistic influences and to further their individual progression in the Krishna faith by spending their time wholly with other devotees. Within the complex the lives of the devotees are dedicated entirely to the service of Krishna (God). Living within the temple complex permits them to spend essentially all their time in Krishna service. Persons so living are known as pure devotees or pujaris.

DISCUSSION

1. Both the California welfare exemption and the taxing authorities inquiry thereunder in this case are federally constitutional.

Our Supreme Court held in Lundberg v. County of Alameda (1956) 46 Cal.2d 644, 654-655, 298 P.2d 1, that this exemption did not contravene that portion of the First Amendment of the United States Constitution which forbids the enactment of laws respecting the establishment of religion. The Court rested its holding on two grounds. The first of these was that the exemption was enacted to promote the general welfare rather than to favor religion since the exemption covers property used for hospital and charitable purposes as well as that used for religious purposes. Secondly, this type of exemption of religious property from taxation is quite ancient in this country since it goes back to colonial times. It is also universal throughout the 50 states and it has never been held to impair the constitutional separation of church and state.

Similarly, in Walz v. Tax Commission (1969) 397 U.S. 664, 672, 90 S.Ct. 1409, 1413, 25 L.Ed.2d 697, 703, the United States Supreme Court pointed out that the legislative purpose of such a property tax exemption for churches was neither the advancement nor the inhibition of religion (Id. at p. 672, 90 S.Ct. at p. 1413, 25 L.Ed.2d at p. 703) and that such an exemption creates only a minimal and remote involvement between church and state and one far less than the taxation of churches would necessitate. (Id. at p. 676, 90 S.Ct. at p. 1405, 25 L.Ed.2d at p. 705.) Accordingly, the High Court held that such an exemption did not violate the First Amendment of the United States Constitution. (Id. at p. 680, 90 S.Ct. at p. 1417, 25 L.Ed.2d at p. 708.)

The inquiry by the taxing authorities into the internal affairs of the Society in order to determine whether the real property at issue was exempt from taxation under the welfare exemption did not violate the free exercise of religion enjoined by the First Amendment to the United States Constitution. Free exercise of religion under the amendment includes two concepts-freedom to believe and freedom to act. The former is absolute; the latter is not. The inquiry here constitutes but an incidental burden on the Society's exercise of its religion, which burden the Society may avoid by not claiming the welfare exemption with respect to its real property. (See United States v. Holmes (5th Cir. 1980) 614 F.2d 985, 989-990; cf. Gallagher v. Boller (1964) 231 Cal.App.2d 482, 490-492, 41 Cal.Rptr. 880.) Tax exemption is a privilege and not a right and the free exercise of religion clause of the First Amendment may not be used as a shield by a religious organization to prevent reasonable inquiry into the validity of its claim for tax exemption. (See Christian Echoes National Ministry, Inc. v. United States (10th Cir. 1972) 470 F.2d 849, 855-857.) As the United States Supreme Court pointed out in Lemon v. Kurtzman (1971) 403 U.S. 602, 614, 91 S.Ct. 2105, 2112, 29 L.Ed.2d 745, 756, the state has a continuing obligation under this type of property tax exemption to ascertain whether the property claimed to be exempt has actually been used for religious purposes.

2. The Society is entitled to claim the welfare exemption with respect to its property here involved.

The County contends that the Society is ineligible for the welfare exemption with respect to its real property here at issue because it is not a nonprofit corporation as required by the applicable constitutional provision (see Cal.Const., art. XIII, § 4, subd. (b)) and because, in any event, it operates for profit in contravention of the express statutory requirement to the contrary. (See Rev. & Tax.Code, § 214, subd. (1).) The County bases its contention upon the fact that during the tax years in question the Society realized intentionally in net income from its publishing and incense businesses literally millions of dollars. In this connection the trial court expressly found that the Society's income producing activities associated with its sale of books, magazines, flowers, candy and incense were intentionally profit-making endeavors, were of a substantial nature, and that they constituted the predominant activity of the Society's devotees.

The purposes for which a corporation is organized are to be determined from its papers of incorporation. (House of Rest v. County of Los Angeles (1957) 151 Cal.App.2d 523, 527, 312 P.2d 392.) Our inspection of the Society's certificate of incorporation reveals that it was organized principally to propagate a consciousness of Krishna (God) and thereby to educate all peoples in the techniques of spiritual life. This certificate goes on to provide that the Society shall not be operated for the purpose of conducting a trade or business for profit.

Nevertheless, the fact remains that the Society has made millions for its religious purposes during the tax years in question from its publishing and incense businesses. But the Society's very profitable publishing business has been only a means to the religious end of educating the western world in the tenets of the Krishna faith. The aforementioned certificate of incorporation so states in effect.

The Society's incense business stands on a different footing, but since January 1976 it has been conducted entirely as a wholly owned subsidiary of the Society. We do not agree with the trial court's legal conclusion that this subsidiary has been and is an alter ego of the Society. It is true that the Society and its subsidiary have had some of the same directors and the same attorneys, that all directors and officers of both corporations are devotees of the Society and that some of the personnel of the subsidiary are also devotees of the Society and reside in the temple complex. But this is not enough to disregard the separate corporate existence of the subsidiary in determining the eligibility of the parent to claim the benefit of the welfare exemption. There has been no showing in the record before us that the separate individuality of the subsidiary has not been respected and that either fraud and injustice would result from recognition of its separate existence. (See Minifie v. Rowley (1921) 187 Cal. 481, 487, 202 P. 673.) Normally in tax matters a parent and its wholly-owned subsidiary will be deemed separate entities. (Rexall Drug Co. v. Peterson (1952) 113 Cal.App.2d 528, 530, 248 P.2d 433.)

Finally, as we have already noted, both the federal and state income taxing authorities have granted the society continuing exemptions from those taxes presumably on the basis of its nonprofit nature. We therefore hold, as did the trial court in effect, that the Society is entitled to claim the welfare exemption with respect to its real property here at issue.

3. The Trial Court's Errors

(a) The partial exemption granted the Society was both factually and legally erroneous.

Both sides in this litigation agree that the trial court's award of a 50% welfare exemption to the Society is legally incorrect. It is also factually unsupportable. The trial court made this allocation after finding expressly that it was impossible for it to determine from the evidence before it, with any exactitude, the percentage of nonexempt use as compared with that of exempt use. It then, however, immediately found and concluded from such evidence and its view of the subject property that approximately 50% of the subject property was used for exempt purposes and approximately 50% was used for nonexempt purposes.

This allocation was obviously based on time of use because that is the only type of mixed use of the subject property that is referred to in the findings.

The California cases on the welfare exemption afford no support whatsoever for a partial exemption based only on time of use. A partial welfare exemption may be granted, however, on the basis of exempt exclusive use of an identifiable portion of the real property at issue. Mixed use of such portions clearly would not qualify. (See Cedars of Lebanon Hosp. v. County of Los Angeles (1950) 35 Cal.2d 729, 736-740, 744-745, 221 P.2d 31; Y.M.C.A. v. County of Los Angeles (1950) 35 Cal.2d 760, 762, 221 P.2d 47; St. Francis Hospital v. City & County of S. F. (1955) 137 Cal.App.2d 321, 326-327, 290 P.2d 275; Saint Germain Foundation v. County of Siskiyou (1963) 212 Cal.App.2d 911, 916-918, 28 Cal.Rptr. 393; Peninsula Covenant Church v. County of San Mateo (1979) 94 Cal.App.3d 382, 393-397, 399-400, 156 Cal.Rptr. 431.)

(b) The Society's business uses of the subject property were nonexempt; its residential use thereof was.

The Society's business uses of its property were nonexempt contrary to the trial court's implied conclusion otherwise.⁹ Its book publishing and incense businesses were both intentionally profitable and were essentially commercial in nature. Both made sales to the general public as well as to temples of the movement and presumably competed with businesses not enjoying the welfare exemption. The fact that the Society's net income from these businesses was devoted apparently entirely to its religious purposes did not make these uses of its property exempt under Revenue and Taxation Code, section 214, subdivision (3), as rewritten in 1953. (See San Francisco Boys' Club v. County of Mendocino (1967) 254 Cal.App.2d 548, 557-558, 62 Cal.Rptr. 294; Christ the Good Shepherd Lutheran Church v. Mathiesen (1978) 81 Cal.App.3d 355, 363, 146 Cal.Rptr. 321; Peninsula Covenant Church v. County of San Mateo, supra, 94 Cal.App.3d at pp. 394-397, 399-400, 156 Cal.Rptr. 431.) This is because under this subdivision the property claimed to be exempt must be used “for the actual operation of the exempt activity.” In other words, so far as this qualification for the welfare exemption is concerned, it is the use of the property rather than the use of the income therefrom that controls. (Cf. Cedars of Lebanon Hospital v. County of Los Angeles, supra, 35 Cal.2d at p. 746, 221 P.2d 31; Honeywell Information System, Inc. v. County of Sonoma (1974) 44 Cal.App.3d 23, 29, 118 Cal.Rptr. 422.)¹⁰ Comparable out-of-state authority is to the same effect. A commercial profit-making use of otherwise exempt property by an organization qualifying for a particular property tax exemption destroys its right to the exemption by such use, notwithstanding the fact that the net proceeds of such use are applied exclusively to exempt purposes. (See, e.g., American Sunday School Union v. Philadelphia (1894) 161 Pa. 307, 317 [29 A. 26, 27]; United Brethren Publishing Establishment v. Shaffer (1919) 74 Ind.App. 178, 182, 123 N.E. 697, 698; Incorporated Trustees of Gospel Worker Soc. v. Evatt (1942) 140 Ohio 185, 189, 42 N.E.2d 900, 902; Multnomah School of the Bible v. Multnomah County (1959) 218 Or. 19, 42, 343 P.2d 893, 904; Hairenik Ass'n v. City of Boston (1943) 313 Mass. 274, 279-280, 47 N.E.2d 9, 12.)

On the other hand, and again contrary to the trial court's conclusion of law in this respect, the portion of the temple complex exclusively devoted by the Society to the housing of its pure devotees or purjaris constituted an exempt use of the subject property. Not only is living with only other purjaris in a holy place, such as the temple complex, expressly enjoined by the scriptures and spiritual leaders of the Krishna faith, but also observance of the seven hour daily worship schedule at the beginning and end of each day and of the strict diet required by the sect essentially compels all purjaris to live in the temple complex.¹¹ In short, housing the purjaris in the temple complex was reasonably necessary for the fulfillment of the Society's religious objectives with respect to these people. (Cf. Y.M.C.A. v. County of Los Angeles, supra, 35 Cal.2d at pp. 767-770, 221 P.2d 31; House of Rest v. County of Los Angeles, supra, 151 Cal.App.2d at p. 536, 312 P.2d 392; Church Divinity Sch. v. County of Alameda (1957) 152 Cal.App.2d 496, 505-508, 314 P.2d 209; Saint Germain Foundation v. County of Siskiyou, supra, 212 Cal.App.2d at pp. 917-918, 28 Cal.Rptr. 393; Sarah Dix Hamlin School v. City, etc. of San Francisco (1963) 221 Cal.App.2d 336, 342, 34 Cal.Rptr. 376; English v. County of Alameda (1977) 70 Cal.App.3d 226, 231, 236, 138 Cal.Rptr. 634.)

DISPOSITION

The judgment under appeal is reversed for further proceedings below consistent with the views expressed in this opinion. Appellant and cross-appellants shall each bear their own costs on appeal.

FOOTNOTES

1.  These are the County of Los Angeles, the City of Los Angeles, the City of Culver City and the State Board of Equalization.

2.  The other plaintiff herein is the New York incorporated International Society for Krishna Consciousness which qualified to do business in California. Aside from one parcel at issue, it conveyed the real property involved on July 15, 1976 to the Society. The Society thereafter acquired the one remaining parcel.

3.  The Society concedes error in this respect.

4.  In addition at said time there were 110 children living in the temple complex. These children go into nurseries within the complex when they reach the age of three. The work areas of the complex are frequently used at night as sleeping areas since most of those working for the Society live in the rooms in which they work.

5.  The Society exclusively publishes and distributes the religious literature of the Krishna movement to the non-Indian world. About 50 of the devotees are engaged on week days disseminating the Society's publications to the general public at the Los Angeles Airport and other public places. This number rises to 100 over the weekends.

6.  It was stipulated at trial that the incense operation was not located on the subject property.

7.  In 1973 the temple incense department of the Society financed the refurbishment of the temple here involved at over $100,000.

8.  About 100 of those living in the temple complex are family members or Grihastas.

9.  The Society's gift shop appears to be a nonexempt use. (See Cedars of Lebanon Hospital v. County of Los Angeles, supra, 35 Cal.2d at p. 745, 221 P.2d 31; Y.M.C.A. v. County of Los Angeles, supra, 35 Cal.2d at pp. 775-776, 221 P.2d 47; Saint Germain Foundation v. County of Siskiyou, supra, 212 Cal.App.2d at p. 917, 28 Cal.Rptr. 393.) Whether the recording facilities, if still in the temple complex, are an exempt use is not clear from the record.

10.  This holding of nonexemption for commercial or business use of real property has been predicated in at least one case upon the general requirement of exclusivity of exempt use contained in both the constitutional authorization of the legislatively granted welfare exemption at issue here and the opening words of the applicable statute, section 214. (See Greek Theatre Assn. v. County of Los Angeles (1978) 76 Cal.App.3d 768, 780, 142 Cal.Rptr. 919.) We believe, however, that this holding preferably should rest on the wording we have just quoted from subdivision (3) of section 214.Such nonexempt commercial or business use of real property by an exempt taxpayer destroys its exemption partially but not completely. It eliminates from the exemption only that portion of the real property actually devoted to a nonexempt use. In this manner we look at both sides of the coin—the taxpayer's exempt purpose in the commercial or business use and the nonexempt manner it has chosen to accomplish that purpose.

11.  It is true that a few mothers of very small children on welfare were required by the Society to live outside of the temple complex in order to qualify for this public assistance. But, by and large, no pure devotees lived outside the temple complex. Ordinary devotees, however, did.

COBEY, Acting Presiding Justice.

ALLPORT and POTTER, JJ., concur. Hearing denied; BIRD, C.J., and MOSK, J., dissenting.