Subdivision 5. As to Taxes and Assessments.

Introductory Note.

The taxation of mortgages, mortgaged property, and the obligations secured by mortgages, is controlled in California by sections 4 and 5 of article 13 of the state constitution.

The system of taxation is set forth in the earlier portion of section 4, which provides:

"A mortgage, deed of trust, contract or other obligation by which a debt is secured, shall, for the pur

paying the debt is subrogated and he alone should

sue.

Is Mortgagee's Interest as Such Insurable.—In the light of Civil Code, sections 2547 and 2549, this is per haps a close question, the code commissioners' note, 1872, saying in respect to insurable interest: "It must be a direct interest in reference to the perils secured against, and not of a remote, circuitous, consequential effect, such as a creditor's interest in the safety of his debt or property." In Iowa, however, the courts have held that a mechanic's lienor has an insurable interest, and in Ohio that both mortgagor and mortgagee have insurable interests.

In White v. Gilman, 138 Cal. 375, 71 Pac. 436, it was held that both a vendor of immovable property under an executory contract of sale pursuant to which the vendee is in possession, and the vendee in possession himself, has an insurable interest in the building erected by the vendee on the land at his own expense, the vendor's insurable interest being to the extent of the unpaid purchase money. But before the vendee's default in payment of the purchase money the vendor had no interest in the building. Moreover, he did not pay for it, and lost nothing by its destruction; thus it seems extraordinary to say that he should actually gain the amount of the insurance money by the fire. The case would have been entirely different if the vendor had owned the building.

poses of assessment and taxation, be deemed and treated as an interest in the property affected thereby. Except as to railroad and other quasi public corporations, in case of debts so secured, the value of the property affected by such mortgage, deed of trust, contract or obligation, less the value of such security shall be assessed and taxed to the owner of the property, and the value of such security shall be assessed and taxed to the owner thereof, in the county, city, or district in which the property affected thereby is situate. The taxes so levied shall be a lien upon the property and security, and may be paid by either party to such security; if paid by the owner of the security, the tax so levied upon the property affected thereby shall become a part of the debt so secured; if the owner of the property shall pay the tax so levied on such security, it shall constitute a payment therefrom, and to the extent of such payment a full discharge thereof."

The first proposition established by this constitutional provision is that for the purposes of taxation every obligation of every sort secured by an encumbrance against property situate in the state of California inheres in, or is deemed an interest in, the property affected thereby.

Thus in Germania Trust Co. v. San Francisco, 128 Cal. 589, 594, 61 Pac. 178, the court in bank, speaking through Mr. Commissioner Britt, McFarland, Temple, and Harrison, JJ., adopting his discussion of the case as the opinion of the court, and Garoutte, J., concurring "in the views and conclusions of the court promulgated through Mr. Commissioner Britt," said in reference to the constitutional provision quoted above (Van Dyke, J., dissenting):

"This declaration is comprehensive; no class of se

cured obligations is excepted from it; such obligations being made an interest in the affected property for the purposes stated, necessarily the property affected includes, for the same purposes, the obligations which affect it, as well as the remaining interest of the debtor. The form which credits should take for the purposes of taxation being thus fixed as an interest in the affected property, it remained to determine from whom payment of the tax on the aggregate of values comprised in the property should be exacted; as to credits secured on the property of individuals and strictly private corporations, the burden is divided and adjusted by assessing the interest separately -the owner of the secured credit being taxed on its value, and the owner of the encumbered property being taxed on the value thereof remaining after deducting the amount assessed to the secured creditor. But in the case of credits secured on the property of 'railroad and other quasi public corporations' no deduction from the value of the property is allowed on account of the indebtedness; the whole of the property-precisely commensurate with the interests of both debtor and creditor-is assessed to such corporation; and thus, as an interest in the affected property (which it is declared to be for this purpose by the first clause of section 4) the secured obligation is assessed, and the tax is paid by the debtor corporation. It necessarily follows that to assess and tax the obligation again to the holder thereof, as if it were an unsecured credit, would be to tax the same property twice, which in this instance, at least, is made impossible by the terms of the constitution; for, since the secured obligation is for the purposes of assessment and taxation to be deemed and treated as an interest in the property affected, it cannot be taxed except as such interest.''

This statement of the law was approved in Estate of Fair, 128 Cal. 607, 610, 61 Pac. 184, and in Estate of Pichoir, 128 Cal. 615, 61 Pac. 1130.

Before the decision in Germania Trust Co. v. San Francisco, however, it was held that an obligation secured by an encumbrance against the property of a railroad or other quasi public corporation was not deemed an interest in the property affected by the encumbrance. Thus in Central Pacific R. R. Co. v. State Board of Equalization, 60 Cal. 35, 59, the court, in department, speaking through Mr. Justice McKinstry, said: "Reading the whole section, it seems very plain that as to mortgages, deeds of trust, contracts, or other obligations secured upon the property of railroad and other quasi public corporations, they should not be deemed and treated as an interest in the property affected by them 'for the purposes of taxation.' Under the constitution of this state the property of such corporations is subject to assessment and taxation, without deduction of the amount of any mortgage or like lien thereon." In Mackay v. San Francisco, 113 Cal. 392, 397, 45 Pac. 696, the court, in department, speaking through Mr. Commissioner Hayne, said: "Railroads and other quasi public corporations are excepted from the above provision [that is, from the first sentence of the constitutional provision above quoted]." And the legislature, by the amendment of March 7, 1881, to Political Code, section 3627, adopted the same construction of the constitution. But this construction has been repudiated.

In Savings etc. Soc. v. Multnomah County, 169 U. S. 421, 18 Sup. Ct. Rep. 392, 42 Law ed. 803, the contention was made that a statute of Oregon in this respect similar to the California constitution was in conflict with the United States constitution, as a secured obligation owned by a nonresident followed his residence,

and was taxable only at his residence. But the court, by Mr. Justice Gray, Fuller, C. J., Brewer, Brown, Shiras, and Peckham, JJ., concurring, Harlan and White, JJ., dissenting said:

"The statute of Oregon, the constitutionality of which is now drawn in question, expressly forbids any taxation of the promissory note, or other instrument of writing, which is the evidence of the debt secured by the mortgage; and, with equal distinctness, provides for the taxation, as real estate, of the mortgage interest in the land. Although the right which the mortgage transfers in the land covered thereby is not the legal title, but only an equitable interest and by way of security for the debt, it appears to be clear to us upon principle, and in accordance with the weight of authority, that this interest, like any other interest, legal or equitable, may be taxed to its owner (whether resident or nonresident) in the state where the land is situated, without contravening any provision of the constitution of the United States' (pp. 431, 432).

"The state may tax real estate mortgaged, as it may all other property within its jurisdiction, at its full value. It may do this, either by taxing the whole to the mortgagor, or by taxing to the mortgagee the interest therein represented by the mortgage, and to the mortgagor the remaining interest in the land. And it may, for the purposes of taxation, either treat the mortgage debt as personal property, to be taxed, like other choses in action, to the creditor at his domicile, or treat the mortgagee's interest in the land as real estate, to be taxed to him, like other real estate, at its situs" (pp. 427, 428).

The court (p. 428) distinguished the decision in Cleveland, Painesville & Ashtabula Railroad v. Pennsylvania (Case of the State Tax on Foreign-Held