Union Oil Associates v. Johnson

43 P.2d 291, 2 Cal. 2d 727, 98 A.L.R. 1499, 1935 Cal. LEXIS 387

• Court: California Supreme Court
• Decided: March 26, 1935
• Docket: L. A. 14286
• Status: Published

Opinions

SEAWELL, J.

The plaintiff, Union Oil Associates, a California corporation, brought this action in the Superior Court of Los Angeles County to recover from Charles G. Johnson, State Treasurer, $49,099.72, which sum represents the amount of taxes, plus interest, levied against plaintiff for the year 1931 under the Bank and Corporation Franchise Tax Act, and paid by it under protest. The defendant State Treasurer demurred to the complaint on the ground that it did not state a cause of action. The court below overruled the demurrer, and upon defendant’s failure to answer entered judgment for plaintiff.

Section 16, article XIII, state Constitution, as it read at the time of levy and payment of the tax herein, provided that “all financial, mercantile, manufacturing and business corporations doing business within the limits of this state, subject to be taxed pursuant to subdivision (d) of section 14 of this article (Article XIII), in lieu of the tax thereby provided for, shall annually pay to the state for the privilege of exercising their corporate franchises within this state a tax according to or measured by their net income. ...” Plaintiff is a holding company organized under the laws of this state to own and hold stock of the Union Oil Company of California and distribute dividends paid thereon to its own stockholders. It is conceded that plaintiff is neither a financial, mercantile, nor manufacturing corporation. It contends that it is not a “business corporation” or “doing business” within the meaning of section 16, article XIII, and the Bank and Corporation Franchise Tax Act enacted pursuant thereto. It is plaintiff’s contention, sustained by the court below, that the phrases “doing business” and “business corporation”, as used in federal excise tax acts, have acquired a well-defined meaning through judicial interpretation, which precludes their application to a holding company such as plaintiff; and that in view of the history of the constitutional amendment (section 16, article XIII), and the Bank and Corporation Franchise Tax Act, enacted pursuant thereto, said phrases must be given the same interpretation when used therein as in the federal statutes. Defendant State Treasurer contends that it was not the intention of the people or the legislature to adopt the federal construction; that when a corporation is doing the very things it was organized to do, and it is not a charitable, benevolent, or social corporation, it is a “business corporation” and subject to pay the tax according to or measured by net income.

We have quoted above the provision of subdivision 2(a), section 16, article XIII, Constitution, providing for a tax to be paid by financial, mercantile, manufacturing and business corporations. Subdivision 5 of said section provides as follows : ‘ ‘ The legislature shall define ‘ corporations ’ and ‘ doing business’ ...”

The Bank and Corporation Franchise Tax Act, enacted in 1929 to carry the constitutional provision into effect, provided that every corporation “of the classes referred to in subdivision 2(a) of section 16 of article thirteen of the constitution of this state”, should pay annually to the state for the privilege of exercising its corporate franchises within this state a tax at the rate of four per centum upon the basis of its net income for the next preceding fiscal or calendar year. (Stats. 1929, p. 19, sec. 4.) In section 5 of the act the legislature defined the term “corporation” as follows: “The term ‘corporation’, as herein used, shall include every financial corporation, other than a bank or banking association, and every mercantile, manufacturing and business corporation of the classes referred to in subdivision one (c) of section 5219 of the Revised Statutes of the United States.” “Doing business” is defined in said section 5 as follows: “The term ‘doing business’, as herein used, means any transaction or transactions in the course of its business by a corporation created under the laws of this state, or by a foreign corporation qualified to do or doing intrastate business in this state.” (Italics supplied.)

In 1933 the act was amended by addition of the following provision in section 4: “Any corporation organized to hold the stock or bonds of any other corporation or corporations, and not trading in such stock or bonds or other securities held, and engaging in no other activities than the receipt and disbursement of dividends from such stock or interest from such bonds, shall not be considered a financial, mercantile, manufacturing or business corporation or a corporation doing business in this State for the purposes of this act.” (Stats. 1933, p. 693.) Plaintiff corporation, upon the basis of the allegations contained in its complaint, brings itself within this proviso. However, the taxes which it seeks to recover were for the year 1931, prior to the amendment. Although exempted from payment of the tax according to or measured by net income, such companies as plaintiff, in 1933, after change in the constitutional provisions of section 16, article XIII, were made subject to an annual tax of $25 by the amendatory provisions of the act. The definition of the term ‘‘ doing business” was changed in 1933 to read as follows: “The term ‘doing business’, as herein used, means actively engaging in any transaction for the purpose of financial or pecuniary gain or profit.” (Stats. 1933, p. 694.)

Section 16, article XIII, state Constitution, and the Bank and Corporation Franchise Tax Act also provide for “a tax according to or measured by their net income to be paid by-banks and banking associations, both state and national.” (Subd. 1 [a], sec. 16, art. XIII.) In 1928, the tax commission appointed by the Governor pursuant to an act of the 1927 legislature reported" that the existing share-tax method (subd. c, sec. 14, art. XIII, state Const.) as applied in this state to shares of stock in national banks was “probably invalid” as a result of several recent decisions of the Supreme Court of the United States, commencing with Merchants National Bank of Richmond, Virginia, v. City of Richmond, 256 U. S. 635 [41 Sup. Ct. 619, 65 L. Ed. 1135], and including First National Bank of Hartford, Wisconsin, v. City of Hartford, 273 U. S. 548 [47 Sup. Ct. 462, 71 L. Ed. 767, 59 A. L. R. 1], and State of Minnesota v. First National Bank of St. Paul, 273 U. S. 561 [47 Sup. Ct. 468, 71 L. Ed. 774]. The commission found that unless an amendment to the state Constitution should be passed in the fall of .1928 to lay the foundation for a valid system of bank taxation, revenues paid to the state by the banks under protest in 1926 and 1927, and revenues which would become due from them for 1928, 1929 and 1930, to the extent of $22,-050,000, would be jeopardized. (Special Report of the California Tax Commission, appearing in Final Report of the California Tax Commission, March 5, 1929, p. 243, particularly at pp. 247 and 250-264.) Before submission of the commission’s report in August, 1928, the banks generally had brought suit to recover taxes paid under protest in 1926 and 1927. Acting upon the plea of the commission that a grave fiscal emergency existed which demanded immediate corrective action, the Governor called a special session of the legislature which met on September 4 and 5, 1928, and voted to submit to the people the constitutional amendment recommended by the commission. (Report Tax Commission, p. 2.) The amendment was approved at the election of November 6, 1928, and in 1929 the legislature enacted the Bank and Corporation Franchise Tax Act to carry into effect the provisions thereof.

The state’s power to tax national banks depends entirely upon section 5219 of the United States Revised Statutes, in which the various methods for the state taxation of national banks consented to by Congress, and the prescribed conditions to which each is subject, are set forth. (People v. Weaver, 100 U. S. 539 [25 L. Ed. 705]; First National Bank v. Anderson, 269 U. S. 341, 347 [46 Sup. Ct. 135, 70 L. Ed. 295] ; Bank of California v. Richardson, 248 U. S. 476, 483 [39 Sup. Ct. 165, 63 L. Ed. 372].) In 1926 said section was amended to authorize the states to tax national banking associations “according to or measured by their net income”, provided “the rate shall not be higher than the rate assessed upon other financial corporations, nor higher than the highest of the rates assessed by the. taxing state upon mercantile, manufacturing, and business corporations doing business within its limits”. (Subd. 1 [c], sec. 5219, Revised Statutes of the United States.) The tax commission was of the view that of the methods of taxing national banks permitted by section 5219, this new fourth method offered the only practical legal solution which could be adjusted to other features of our tax system. (Final Report, California Tax Commission, March 5, 1929, p. 263.) It appears from the report of the tax commission that the banks had indicated that they would withdraw suits instituted by them to recover taxes paid under protest if provision were made for a satisfactory tax according to or measured by net income. This solution, however, required a recasting of the existing corporation taxes to comply with the requirement as to national bank taxation according to or measured by net income that the rate upon banks “not be higher than the rate assessed upon other financial corporations nor higher than the highest of the rates assessed by the taxing state upon mercantile, manufacturing, and business corporations doing business within its limits”. The commission was further of the view that aside from using a corporate income tax to validate a tax on banks “according to or measured by their net income”, such a tax would be more equitable as a business tax than the existing corporate excess method of taxing such corporations. (Report Tax Commission, March 5, 1929, p. 268; for discussion of corporate excess method of taxation, see Miller & Lux v. Richardson, 182 Cal. 115 [187 Pac. 411].) Accordingly, the constitutional amendment approved by the people on November 6, 1928, provided for a tax according to or measured by net income to be paid by banks and by certain corporations doing business within this state.

Both the constitutional provision and the Bank and Corporation Franchise Tax Act provide that “financial, mercantile, manufacturing and business” corporations “doing business within the limits of this state” shall pay the tax. (Italics supplied.) Thus our state constitutional provision and legislation adopt the language of that portion of section 5219, Revised Statutes, by which the validity of a tax upon national banking associations according to or measured by net income is made to depend upon the rate being not “higher than the rate assessed on other financial corporations, nor higher than the highest of the rates assessed by the taxing state upon mercantile, manufacturing, and business corporations doing business within its limits. ...” Not only in enumerating the classes of corporations subject to the tax did the legislature adopt the language of section 5219, but in defining the term “corporation” it expressly refers to said section 5219 in the following manner: “See. 5. The term ‘corporation’, as herein used, shall include every financial corporation, other than a bank or banking association, and every mercantile, manufacturing and business corporation of the classes referred to in subdivision one (c) of section 5219 of the Revised Statutes of the United States.” The “classes referred to in subdivision one (c) of section 5219”, are “financial corporations” and “mercantile, manufacturing and business corporations doing business within its [the state’s] limits”. Hence, plaintiff argues, it was the intent of the people and the legislature that the interpretation placed upon the phrases “business corporation” and “doing business” by the federal courts should govern our state provisions, with the result that a holding company is not a “business corporation”. We are in accord with this contention.

The cases to which respondent has cited us to establish the federal definition of “business corporation” and “doing business” did not interpret those terms as used in subdivision 1 (c) of section 5219, adopted in 1926, but, rather, involved the federal excise tax acts of 1909. and of 1916 and subsequent years. The Corporation Tax Act of 1909 (36 U. Stats, at Large, chap. 6, pp. 112-117) provided for an excise tax to be paid by corporations “organized for profit” and “engaged in business in any state . . . with respect to the carrying on or doing business by such corporation . . . equivalent” to a stated percentage upon net income. The act of 1916 (39 Stats, at Large, chap. 463, p. 789) provided for a tax upon domestic corporations organized for profit “with respect to carrying on or doing business” at certain rates for a fair value of their capital stock, and exempted corporations “not engaged in business” during the preceding taxable,year. Through decisions interpreting these excise tax acts it became settled that corporations which were mere holding companies were not subject to the tax. (Flint v. Stone Tracy Co., 220 U. S. 107 [31 Sup. Ct. 342, 55 L. Ed. 389, Ann. Cas. 1912B, 1312] ; United States v. Emery, Bird, Thayer Realty Co., 237 U. S. 28 [35 Sup. Ct. 499, 59 L. Ed. 825]; Zonne v. Minneapolis Syndicate, 220 U. S. 187 [31 Sup. Ct. 361, 55 L. Ed. 428]; McCoach v. Minehill & S. H. Ry. Co., 228 U. S. 295 [33 Sup. Ct. 419, 57 L. Ed. 842]; Von Baumbach v. Sargent Land Co., 242 U. S. 503 [37 Sup. Ct. 201, 61 L. Ed. 460] ; United States v. Hotchkiss Redwood Co., 25 Fed. (2d) 958; Rose v. Nunnally Inv. Co., 22 Fed. (2d) 102; Challam Lbr. Co. v. United States, 34 Fed. (2d) 944; Argonaut Consol. Min. Co. v. Anderson, 42 Fed. (2d) 219.)

There can be little doubt that the Supreme Court of the United States in construing the meaning of the terms “doing business” and “business corporations” in subdivision 1 (c) of section 5219, Revised Statutes, which authorizes a state excise tax upon national banking associations, would follow the definition given by it to those terms as used in the Tax Acts of 1909, 1916 and subsequent years establishing federal excise taxes. It is a cardinal principle of statutory construction that where legislation is framed in the language of an earlier enactment on the same or an analogous subject, which has been judicially construed, there is a very strong, presumption of intent to adopt the construction as well as the language of the prior enactment. (In re Nowak, 184 Cal. 701 [195 Pac. 402] ; Dalton v. Lelande, 22 Cal. App. 481, 486 [135 Pac. 54] ; 59 C. J. 1061; 23 Cal. Jur. 794; Hecht v. Malley, 265 U. S. 144 [44 Sup. Ct. 462, 68 L. Ed. 949] ; Latimer v. United States, 223 U. S. 501 [32 Sup. Ct. 242, 56 L. Ed. 526].) A similar principle applies where a statute is patterned after legislation of another state, or of the federal government, or, indeed of a foreign country, which has been judicially construed in the jurisdiction of its enactment. (Ocean Accident etc. Co. v. Industrial Acc. Com., 173 Cal. 313, 317 [159 Pac. 1041]; Estate of Potter, 188 Cal. 55, 68 [204 Pac. 826] ; Charles Nelson Co. v. Morton, 106 Cal. App. 144 [288 Pac. 845]; People v. Norcross, 71 Cal. App. 2 [234 Pac. 438]; 23 Cal. Jur. 794; 59 C. J. 1065.)

In the instant case our constitutional amendment and legislation were enacted to establish a mode of taxation which would comply with the federal permissive statute. The presumption that the adoption of the words of the federal enactment evinces an intent to adopt the federal construction thereof is even stronger than in the ordinary case where legislation of one jurisdiction is merely modeled after that of another. It is true that subdivision 1 (c) of section 5219 is not a restriction upon the classes of corporations which the state may tax, and does not proscribe a tax upon holding companies measured by net income. It simply provides that if a tax according to or measured by net income is levied on banks, the rate must not be higher than the rate on other financial corporations, nor higher than the highest of the rates assessed on mercantile, manufacturing and business corporations. Consistently with this restriction the state might have provided that holding companies should be subject to the tax along with other corporations, but the constitutional and legislative provisions are not subject to such construction. The proposed constitutional amendment submitted to the legislature by the tax commission provided that “corporations doing business in this state, of the class covered by subdivision (d) of section 14”, article XIII, should pay the tax, and omitted the modifying adjectives “financial, mercantile, manufacturing and business”.. The legislature rejected this inclusive language and instead appropriated the exact words of section 5219 before submission of the amendment to the people. (Report of the California Tax Commission, March 5, 1929, p. 290.) The legislature further evidenced the intent to adopt the federal construction by expressly defining “corporation” to include “every financial corporation, other than a bank or banking association, and every mercantile, manufacturing and business corporation of the classes referred to in subdivision one (c) of section 5219 of the Revised Statutes of the United States”. (Italics supplied.)

In the light of this analysis the purpose of the legislature in adopting the 1933 amendment to sections 4 and 5 of the act, quoted earlier herein, and providing that such a hold-' ing company as plaintiff shall not be considered a “business corporation”, was to clarify the legislative intent by expressly declaring the meaning of the words used in the act. (Diethelm v. Rainey, 1 Cal. (2d) 245 [33 Pac. (2d) 1026]; 59 C. J. 1097; 2 Sutherland, Statutory Construction, p. 777.) By the same amendment, holding companies, although not “business corporations”, were made subject to an annual tax of $25. Section 16 of article XIII was also amended in that year, and the authorization therein for corporate taxation does not limit the corporations to be taxed thereunder to financial, mercantile, manufacturing and business corporations. In an “Analysis of the Bank and Corporation Franchise Tax Act” submitted to the California Tax Research Bureau in the office of the state board of equalization in January, 1933, the authors point out that to tax holding companies under the act according to net income would drive them out of the state. (Traynor and Keesling, Analysis of the Bank and Corporation Franchise Tax Act, p. 46; see, also, 21 Cal. Law Rev., p. 545.)

The federal courts have declared that it is impossible in the nature of the case to prescribe fixed rules which may be applied in all cases to determine whether a corporation is a mere passive holding company, or a business corporation, and that each case must be decided on its particular facts. The judgment for plaintiff in the case herein was entered upon defendant’s demurrer to the complaint. By the allegations of said complaint plaintiff brings itself clearly within the federal definition of a holding company. By the complaint it is made to appear that plaintiff was organized for the purpose of consolidating and maintaining in one holding or pool shares of the capital stock of the Union Oil Company of California. In return for shares of stock of the Union Oil Company it issued an equal or like number of its own shares. Its stockholders received all dividends paid on Union Oil Company shares minus such sums as were necessary to be deducted in order to pay the corporate expenses of plaintiff. Further, it is alleged that the only assets possessed by plaintiff, other than capital stock of the Union Oil Company, was its office furniture and equipment, and from time to time small amounts of cash for defraying current corporate expenses. Its only income is from shares of stock of the Union Oil Company, none of which stock, it is alleged, has ever been sold, mortgaged or hypothecated. The corporations expressly declared not to be “business corporations” in the amendment of 1933 to the Bank and Corporation Franchise Tax Act likewise would not be “business corporations” under the federal decisions, but holding companies. We have heretofore held that this state has adopted the federal definition, and that the amendment of 1933 is a clarification and legislative expression of the meaning , of existing legislation. Plaintiff, upon the basis of the allegations of its complaint, is not a business corporation according to said amendment. It is organized to hold the stock of the Union Oil Company, and does not trade in such stock, and engages in no other activities than the receipt and disbursement of dividends.

The judgment is affirmed.

Curtis, J., Waste, C. J., and Langdon, J., concurred.

Preston, J., deeming himself disqualified, did not participate herein.