Opinion
Certified for Partial Publication
Pursuant to rule 976.1 of the California Rules of Court, the Reporter of Decisions shall publish all portions of this opinion except Part III, which shall not be published.
Review Granted Feb. 14, 1986.
Previously published at 172 Cal.App.3d 1219, 182 Cal.App.3d 890.
Bourdette, Benjamin & Weill and Andrew J. Weill, Badger, for plaintiff and appellant.
John K. Van de Kamp, Atty. Gen., Edward P. Hollingshead, Charles C. Kobayashi, Deputy Attys. Gen., Michael L. Vinson, Deputy Dist. Atty. (San Mateo), Kathleen Bales-Lange, Deputy County Counsel, Tulare, Allen A. Haim, Chief Deputy Counsel, San Rafael, John J. Doherty, Deputy City Atty. (San Francisco), for defendants and respondents.
BLEASE, Associate Justice.
The Synanon Church (Synanon), a California non-profit corporation, seeks a refund of property taxes paid Tulare County, Marin County, San Mateo County, and San Francisco County for the tax years 1978, 1979 and 1980. (Rev. & Tax.Code, § 5140). It claims exemption from the taxes under the state welfare exemption for charitable and religious purposes. (Cal. Const., art. XIII, § 4, subd. (b); Rev. & Tax.Code, § 214 et seq.) To be exempt Synanon must be "qualified as an exempt organization under ... Section 501(c)(3) of the Internal Revenue Code of 1954." (Rev. & Tax.Code, § 214.8.) Synanon was held unqualified on the ground that the federal Internal Revenue Service (IRS) had found that it was not federally exempt under section 501(c)(3) in tax years ending August 31, 1977 and 1978. We will reverse the summary judgments predicated upon that ground because section 214.8 requires that the organization meet the criteria of section 501(c)(3) and such criteria do not include registration for or determination of qualified status by the IRS.
Except as otherwise noted, all further references are to the Revenue and Taxation Code.
FACTS AND PROCEDURAL BACKGROUND
The complaint seeks a refund of property taxes from defendants, in sums aggregating from $80,000 to $100,000, for the tax years in issue which were imposed as a result of findings by the defendant State Board of Equalization under section 254.5 that plaintiff is ineligible for exemption from taxation.
The trial court granted defendants' motions for summary judgment on the ground that plaintiff was not a qualified organization under 501(c)(3). In so doing the court took judicial notice, without objection from Synanon, of the judgment of the United States District Court for the District of Columbia in the Synanon Church v. United States of America, Civil Action No. 82-2303. It also took judicial notice of the action of the IRS finding plaintiff was not exempt under section 501(c)(3) for fiscal years ending August 31, 1977 and 1978.
The IRS action was announced in a letter to Synanon which reads in pertinent part:
"Tax Years: FYE August 31, 1977
"FYE August 31, 1978
"This is a final adverse ruling as to your exempt status under section 501(c)(3) of the Internal Revenue Code.
"Our adverse ruling was made for the following reason(s):
"Your net earnings inure to the benefit of private individuals. The provision of such net earnings to private individuals further serves a private rather than a public interest. Due to the conduct of certain activities, you are also not operated exclusively for any exempt purpose.
"Contributions to your organization are not deductible under Code section 170.
"You are required to file Federal income tax returns on the above form. Based on the financial information you furnished, it appears that returns should be filed for the years shown above. These returns should be filed with your Key District Director for exempt organization matters within 30 days from the date of The judgment in the federal lawsuit is amplified by two reported decisions: Synanon Church v. United States (D.D.C.1983) 557 F.Supp. 1329 and Synanon Church v. United States (D.D.C.1984) 579 F.Supp. 967. The first reviews the order granting partial dismissal of plaintiff's complaint. Synanon sought a declaration that it is an organization exempt under section 501(c)(3) for all years after fiscal 1976. (Synanon Church, supra, 557 F.Supp. at p. 1332.) The court held that it lacked subject matter jurisdiction for the tax years subsequent to the two addressed in the IRS action because Synanon had not applied to the IRS for exempt status for them and thereby failed to exhaust its administrative remedies. (Ibid.)
The second decision reviews the dismissal of the remainder of the plaintiff's action. (Synanon Church, supra, 579 F.Supp. 967.) The dismissal was grounded on fraud upon the court, "due to plaintiff's wilful, systematic, and extensive destruction and alteration of documents and tapes relevant to a determination of Synanon's tax-exempt status." (Id., at p. 972.)
In this case the summary judgments were granted on the ground that "the Internal Revenue Service, as expressed in its letter dated May 19, 1982, constitutes a final determination that [Synanon] for fiscal year ending August 31, 1977, and all following fiscal tax years, is not qualified for the tax exemption provided by Section 501(c)(3)...." The trial court reasoned that it had no authority to decide "questions of Federal law at variance with final adverse rulings of the Internal Revenue Service absent some judicial stay or overruling ... by the Federal Courts...." This appeal followed.
DISCUSSION
I
The dispositive issue is whether Synanon's entitlement to the California exemption pursuant to section 214.8 is dependent upon an affirmative federal determination of qualification under 501(c)(3). We hold that it is not. That means that there remain triable issues of fact concerning Synanon's exempt status for the years subsequent to August 31, 1978, and therefore the summary judgments were improperly granted.
A.
The California Constitution, article XIII, section 4, subdivision (b) provides that the Legislature may exempt from property taxation: "(b) Property used exclusively for religious, hospital, or charitable purposes and owned or held in trust by corporations or other entities (1) that are organized and operating for those purposes, (2) that are nonprofit, and (3) no part of whose net earnings inures to the benefit of any private shareholder or individual." This is known as the welfare exemption.
The Legislature has provided for the welfare exemption in Revenue and Taxation Code sections 214 et seq. It has also provided, in section 214.8, that "the 'welfare exemption' shall not be granted to any organization which is not qualified as an exempt organization under Section 23701d of this code or Section 501(c)(3) of the Internal Revenue Code of 1954. This section [further provides that it] shall not be construed to enlarge the 'welfare exemption' to apply to organizations qualified under Section 501(c)(3) of the Internal Revenue Code of 1954 but not otherwise qualified for the 'welfare exemption' under other provisions of this code."
As a condition to the exemption the property owner must apply for it from the assessor on or before March 15 preceding the tax year in question. (Rev. & Tax.Code, B.
Preliminarily we address Synanon's claim that the defendants' claim of non-qualification under section 501(c)(3) was untimely. It asserts that this ground was not the actual basis for denial of its claims of exemption by defendant board and accordingly, it should be viewed as waived. Synanon relies on case law holding that the taxpayer may not assert in court a claim for refund which was not asserted in antecedent administrative proceedings. (Cf., e.g., King v. State Bd. of Equalization (1972) 22 Cal.App.3d 1006, 99 Cal.Rptr. 802, claim that sales tax was collected after statute of limitations had run was untimely for failure to assert before board; also cf. Rev. & Tax.Code, § 5142, no recovery may be allowed on a ground not asserted in the claim.) This authority is not apposite.
Synanon offers no persuasive reason why a court should be barred from entertaining defensive matter of the variety in issue here. There is no statutory basis for such exclusion. Nor is there a sensible rationale offered why the authority upon which Synanon relies should be extended to bar a defense of this nature. If the monies sought in a refund suit are owed as taxes then it is no injustice that they are retained by government. Where the reasoning of taxing authorities is incorrect in imposing a tax, a refund will nonetheless be denied if it appears that the action of imposing the tax is correct. (See Pacific Fruit Express Co. v. McColgan (1944) 67 Cal.App.2d 93, 103-105, 153 P.2d 607.) If the taxpayer's ability to meet a defense to refund is impaired by an unreasonable delay in asserting a known defense some variety of laches might apply. However, the facts upon which the 501(c)(3) defense depends were unknown at the time Synanon asserts the defense should have been asserted. Estoppel is often applied with greater stringency against a private party than against the government; what is sauce for the goose is not necessarily sauce for the gander.
C.
That brings us to the merits of the claim upon which the summary judgments were based: that a federal administrative determination of qualification of exemption from the federal income tax law is a condition for qualification for exemption from the California tax laws. To obtain summary judgment the moving defendant must tender a showing of uncontroverted facts which establish a complete defense to the Synanon's cause of action. (See, e.g., Andalon v. Superior Court (1984) 162 Cal.App.3d 600, 605, 208 Cal.Rptr. 899.) Here, the only facts shown uncontroverted are those judicially noticed by the trial court. The issue is, do they conclusively show that Synanon was "not qualified as an exempt organization under [501(c)(3) ]" for the property tax fiscal years in question? That in turn depends upon the construction of that phrase in section 214.8.
"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." (Cedars of Lebanon Hosp. v. County of Los Angeles (1950) 35 Cal.2d 729, 734-735, 221 P.2d 31.) "But the rule of strict construction does not require that the narrowest possible meaning be given to words descriptive of the exemption, for a fair and reasonable interpretation must be made of all laws, with due regard for the ordinary acception of the language employed and the object sought to be accomplished thereby." (Id., at p. What is the meaning of the phrase "qualified as an exempt organization under [section 501(c)(3) ]" as it is used in section 214.8? The Oxford English Dictionary (1978) says that "qualified" means "Legally, properly, or by custom, capable of doing or being something specified or implied." This definition finds application when the term is used in one statute to refer to eligibility under another law. In Minges v. Board of Trustees (1915) 27 Cal.App. 15, 148 P. 816, the court held that the term "qualified elector" refers to the criteria for voting contained in the California Constitution, notwithstanding that the elector had not registered to vote in compliance with registration statutes. Analogously, under federal law "[a] charitable organization's tax-exempt status [must satisfy] the statutory requirements of [section] 501(c)(3), [and does not depend] on action by the IRS." (See 4 Bittker, Federal Taxation of Income, Estates and Gifts (1981) § 100.2.8, p. 100-45; fn. omitted.) Thus, at first glance, "the ordinary acception" of the phrase "qualified as an exempt organization under [section 501(c)(3) ]" is that the organization be legally capable of exemption under that provision regardless of IRS recognition of that status.
"Qualified" is a term frequently employed in the Revenue and Taxation Code, usually as an adjective which incorporates by reference a definition from another statutory provision. (See e.g. Rev. & Tax.Code, §§ 6010.11, 17053.5, 17053.7-9, 17053.11, 17276.)
An organization can apply to the Internal Revenue Service for tentative recognition of qualification under section 501(c)(3). (See Bob Jones University v. Simon (1974) 416 U.S. 725, 727-728, 94 S.Ct. 2038, 2041, 40 L.Ed.2d 496, 504-505.) There is substantial fiscal pressure to do so in order to obtain advance assurance for donors that their contributions will be tax deductable. (Id., at pp. 728-730, 94 S.Ct. at pp. 2041-2042, 40 L.Ed.2d at pp. 504-505.) If the IRS issues a favorable letter ruling the organization is placed on the roster of tax exempt organizations. (Ibid.) The IRS may summarily revoke a favorable ruling. (See Note, Procedural Due Process Limitations on the Suspension of Advance Assurance of Deductability (1974) 47 S.Cal.L.Rev. 427, 432-435.) This is apparently what occurred to Synanon.
In addition to the desire to obtain IRS recognition of exempt status to induce donations, since 1969 most section 501(c)(3) organizations have had an additional incentive to apply for such recognition. With limited exceptions, notably for churches, an organization organized after October 9, 1969, is not legally capable of obtaining the federal exemption unless it gives the prescribed notice to the IRS that it is applying for recognition of exempt status. (26 U.S.C. § 508) One might take the position that in order to "qualify as an exempt organization under [section 501(1)(3) ]" as that phrase is used in section 214.8 the organization should have applied for and received recognition of exempt status from the IRS. However, two considerations persuasively weigh against this view.
The first consideration is the text of section 214.8. Of direct importance it makes no mention of the procedural provisions of federal law by which federal recognition of the status is obtained. It provides that the exemption "shall not be granted to any organization which is not qualified as an exempt organization under ... Section 501(c)(3) of the Internal Revenue Code of 1954." Section 214.8 does not say "qualified for exemption from the federal income tax by the IRS under 501(c)(3)." Nor does it refer to section 501(a) of the Internal Revenue Act by which the criteria of 501(c)(3) are invoked in the determination whether the organization shall be exempt from federal income taxes. Section 214.8 says simply "qualified ... under ... 501(c)(3)". Its purpose is to set forth the qualifications of an organization for purposes of exemption under the California tax laws. In so doing section 214.8 has incorporated the substantive criteria of 501(c)(3), which means that the organization applying for exemption under California
There is an additional point of grammar. The section uses the present tense "is not qualified". If it were meant to require IRS recognition of exempt status the appropriate usage would be the past tense "has not qualified". If one is qualified under some provision of law it means that the standard set forth in that law is met.
The second consideration concerns the objects sought by the welfare exemption. The defendants' construction would make entitlement to exemption from local property taxes turn upon the vagaries of federal bureaucratic processing. A new organization which meets all of the criteria of 501(c)(3) for the exemption would be denied exemption if the federal authorities were unable to complete the application for federal recognition of exempt status by the deadline for filing the state tax exemption. A similar injustice would occur if an organization were incorrectly denied federal recognition, even if the denial were subsequently reversed in judicial or administrative review proceedings. Accordingly, "qualification" in section 214.8 refers to exempt status under the substantive criteria of 501(c)(3) and not IRS recognition of the status. (Cf. City and County of San Francisco v. Carpenter Funds Admin. Office (1984) 162 Cal.App.3d 896, 901, 208 Cal.Rptr. 824.)
We note that there is reason to believe that such erroneous administrative determinations can occur in this complex arena. (See generally, Alexander v. 'Americans United' Inc. (1974) 416 U.S. 752, 773-782, 94 S.Ct. 2053, 2064-2068, 40 L.Ed.2d 518, 534-539 (dis.opn. of Blackmun, J.).)
Section 501(c)(3) describes the kinds of organizations which are exempt from federal income taxation, absent other provisions of law. In the absence of a showing that Synanon is not capable of exemption under the criteria of section 501(c)(3) by means of res judicata or collateral estoppel the issue of satisfaction of these criteria for exemption is amenable to a factual showing. Accordingly, summary judgment was inappropriate.
II.
The Attorney General implies that Synanon is collaterally estopped on these issues as a consequence of the antecedent federal district court proceedings. As related, Synanon sought a federal court declaration that it was exempt from the federal tax for years after the fiscal year ending August 31, 1978. The opinion noted that IRS had placed Synanon "in the category of organizations subject to taxation" for future years as a result of its audits. (Synanon Church v. United States, supra, 557 F.Supp. at p. 1332.) However, the federal court found this insufficient to permit review of exemption status under the statute providing for a declaratory relief action concerning denial of federal tax exemption. (U.S.C. § 7428.) A prerequisite to relief under that statute is exhaustion of administrative remedies and Synanon had not done so. The available avenue of administrative relief was to petition IRS for a finding of exempt status for those years. (Synanon, supra, 557 F.Supp. at pp. 1332-1333.) Synanon argued that it could avoid this prerequisite on the theory that it was a church and thus not obligated to request a determination as to its status in order to gain entitlement to exemption. The federal court rejected the argument. The Attorney Nor is the administrative action of IRS sufficient to warrant issue preclusion. The administrative action of the IRS can only be dispositive of the factual issue of Synanon's qualification for entitlement to 501(c)(3) exemption for the property tax years in issue in this refund action by means of the issue preclusion doctrine of collateral estoppel. Administrative adjudicative determinations may be given the same effect as a judgment if comparable safeguards are available. (See Rest.2d Judgments, § 83.) However, assuming for the sake of argument that the IRS proceedings could qualify under this rule, preclusion on this issue can only derive from a showing that the fact now in issue was actually litigated and determined in the administrative forum, essential to the administrative action, and that the resolution in the administrative forum is final. (See Rest.2d Judgments, §§ 27 and 83; cf. 4 Davis, Administrative Law Treatise (1983) ch. 21.) But no such showing was made regarding the fact of Synanon's qualification for exemption for the years after July 1, 1978. It appears that an organization may be not exempt in one year and yet meet the criteria for exemption the next year. Moreover, preclusion would be inappropriate so long as the administrative determination is appealable within the federal system. (See Agarwal v. Johnson (1979) 25 Cal.3d 932, 954, fn. 11, 160 Cal.Rptr. 141, 603 P.2d 58.)
We imply no view on the question of the issue preclusion effect of the overlap of one month of the IRS finding of not-exempt under 501(c)(3). That finding was put in issue in the federal litigation of which judicial notice was taken. Conceivably the dismissal of the litigation may be an adjudication adverse to Synanon on that issue for the property tax year 1978 in view of the grounds of dismissal. However, no defendant has urged or briefed this point here or in the trial court and no motion for less than full blown summary judgment was tendered below.
The most that may be said of the IRS action placing Synanon prospectively in the category of organizations subject to taxation is that IRS rebuttably presumes that Synanon is not qualified for 501(c)(3) exemption in years after July 1, 1978. But a presumption does not alone serve to establish as without material dispute the fact that is presumed. A rebuttable presumption is wholly insufficient in the context of summary judgment to rule out triable issues of fact. Accordingly, the granting of summary judgment was error.
See footnote 1, ante.
CONCLUSION
The judgment is reversed with directions to vacate the order granting defendants' motion for summary judgment.
REGAN, Acting P.J., and RYAN, J.
Assigned by the Chief Justice.