American Inv. Corp. v. State Tax Commission , 101 Utah 189 ( 1941 )

This is a proceeding to review a decision of the State Tax Commission of Utah, hereinafter called the commission, directing plaintiff to pay a deficiency upon its corporation franchise tax for the year 1937. There is no dispute as to the facts. The plaintiff is a Nevada corporation, authorized to do business in Utah. Most of its stock was owned, and it was dominated and controlled by men residing at Ogden, Utah. During 1937 the books of the plaintiff company were kept at Ogden; directors meetings were held there; its bank account was kept there, and such disbursements as it had were made at Ogden. It owned the controlling stock in the Idaho Bank and Trust Company, an Idaho corporation engaged in the banking business at Pocatello, Idaho, and also in the Commercial Security Bank of Ogden, a Utah banking corporation. It also held some stock in the Ohio Oil Company, an Ohio corporation having its principal place of business at Findlay, Ohio; and some stock in the Socony-Vacuum Oil Company, a New York corporation, with its principal office at New York City. The stock in the last two corporations was purchased on the New York Stock Exchange, New York City, through J.A. Hogle Company, a member of the Exchange. This stock was sold in 1937 on the New York Exchange through the same member of the exchange.

In its tax return to the commission, filed for the purpose of fixing the amount, if any, of its franchise tax to the state, the plaintiff deducted from its income for 1937 the following sums: $125 received as dividends on the Socony-Vacuum Oil stock; $200 received as dividends from the Ohio Oil stock, and $6,016.60 dividends on the stock in the Idaho Bank Trust Co. It also deducted $4,424.30 received from the sale of the Socony-Vacuum stock, and $299.40 received from the sale of the Ohio Oil stock. The commission disallowed all these deductions and ordered payment of a franchise tax computed thereon. The plaintiff brings certiorari contending: (1) That it is a "holding company" and therefore exempt under the provisions of subdivision (16) of Section 80-13-5, R.S.U. 1933. (2) That even though plaintiff were not exempt, the dividends received from the Idaho Bank were not receipts from business done in Utah and are therefore deductible. (3) The money received from the sale of the stock was the result of business done in New York, and therefore should not be included in receipts on which the tax is to be computed. We note them in order.

(1) The statute, Section 80-13-3, R.S.U. 1933, provides that every bank or corporation, other than a national bank or corporation exempted in Section 80-13-5, shall annually pay to the State for the privilege of exercising its corporate franchise or doing business in the state, a tax based 1 upon its net income allocated to the state, CaliforniaPacking Corporation v. State Tax Commission, 97 Utah 367,93 P.2d 463. The tax imposed by this section is not a property tax, nor an organization tax, but a tax on the privilege of exercising the corporate franchise. People v. Miller, 177 N.Y. 51,69 N.E. 124, reversing 85 A.D. 211, 83 N.Y.S. 185; People v.Knight, 174 N.Y. 475, 67 N.E. 65, 63 L.R.A. 87, reversing67 A.D. 333, 73 N.Y.S. 745; People v. Roberts, 116 A.D. 30,101 N.Y.S. 184. The exemption section, 80-13-5, reads:

"The following corporations are exempt from the provisions of this chapter, to wit:"

Then follows 16 subdivisions defining the various types of corporations exempt, number (16) reading:

"Corporations whose sole business consists of holding the stock of other corporations for the purpose of controlling the management of affairs of such other corporations, if such other corporations make return under this chapter."

We held in the case of First Security Corporation v. TaxCommission, 91 Utah 101, 63 P.2d 1062, that the requirement that the "other corporations" make return under the chapter, applied only to such corporations as did business in the State of Utah, and therefore a holding company was not taxable on its receipts from stock it held in companies which did no business in the State of Utah.

That plaintiff was a holding corporation engaged in the business of holding stock in other corporations for the purpose of controlling the management of affairs of such other corporations is expressly found as a fact by the commission. But that body also found that because 2-7 plaintiff had purchased, and in 1937 sold the stock in the Socony-Vacuum, and in the Ohio Oil companies, its sole business was not that of a holding company, and it therefore was not exempt. This brings us to the consideration of the meaning and significance of the expression "corporations whose sole business consists of" in the exemption provision quoted above. Is that matter to be determined by the articles of incorporation, by the purposes for which it was organized, by the things it is authorized to do by the law of its creation and charter, by the business it is authorized to do in this state by the very franchise for which the commission seeks to collect a fee, or is it to be determined by what the company actually does in the state? If a holding corporation wrongfully and unlawfully does business in the state, does business it is not licensed or franchised to do, does that take it out of the exemption clause? It is evident that the question must be determined by the articles of incorporation, by the business it is licensed or permitted by its franchise to do. This is a franchise tax, a tax on the right or privilege of doing business in the state. What business? Why, lawful business; business it may do without violating the law; the business it may do under the franchise for which it pays the tax. The state cannot collect a franchise tax unless it gives a franchise therefor. And it cannot be said that the state intended to collect franchise taxes for the right to do business unlawfully. A franchise for engaging in a certain business makes the doing or carrying on of that business lawful, and engaging in the business without a franchise is unlawful. See Sections 18-8-1 and 18-8-4, R.S.U. 1933, providing a penalty up to $5,000. The exemption section of the Franchise Tax Law lists 16 groups or types of corporations that are exempt. The gist of the section is to exempt corporations which may be characterized by these features: They are organized and operated not for profit but for the benefits of their members, and they cannot under their articles engage in the trade, commerce or business in the state. Since the tax is upon the franchise or the privilege of doing business in the state it matters not as to the extent to which the franchise is exercised. It is still taxable if not exercised, or if only partially exercised. The privilege of exercising corporate franchise is that for which the state requires this annual tax. The tax law does not make the payment of a tax for these franchises dependent upon their exercise. The mere right or privilege of exercising them, possessed by the corporation, subjects it to the tax. Cayuga,etc., R. Co. v. Delaware, etc., R. Co., 215 A.D. 429,213 N.Y.S. 586. The amount of the tax is computed according to the extent to which the franchise is exercised, as measured by the net income derived from such use. The test therefore as to whether a corporation is exempt is what business it may engage in under its franchise. If under its franchise, which is coextensive with its articles, it may not engage in trade and commerce, and business for a profit in the state, it is exempt from the tax. If on the other hand under its franchise it may engage in trade, commerce, and business in the state for a profit, it is subject to the tax for that privilege. It follows therefore that a corporation which holds stock in other corporations for the purpose of managing their affairs, and which under its franchise from the state may for profit lawfully engage in business in the state, other than the business incident to its "holding" business is subject to the tax, but such a corporation, limited by its franchise to doing in the state the business incidental to its "holding business" is exempt from the franchise tax provided that its Utah subsidiaries make tax returns under the chapter. Peopleex rel. Butterick Co. v. Gilchrist, 213 A.D. 533,211 N.Y.S. 75; People v. Kelsey, 101 A.D. 205, 91 N.Y.S. 709; People v. Roberts, supra; Adjustmnt Bureau v.Conley, 44 Idaho 148, 255 P. 414. The record before us is not clear as to whether the plaintiff was authorized under its franchise to engage in any business in Utah other than that incident to its holding company business. The tax return filed by plaintiff lists its business as "Bank Holding Co."; it lists all its assets as "stocks of domestic (U.S.) corporations"; its liabilities consist of $12,000 in notes payable; $5,275.76 as undivided profits; and $254,989.82 in stocks. On the questionnaire prepared by the commission and filled out by the plaintiff is the following:

"Purpose for which organized: To hold the stock of other corporations for the purpose of controlling the management of the affairs of such corporations, if such other corporations make return under this chapter. * * * The income consists of dividends on corporation stock. * * * The objects and purposes for which this corporation is formed are: To acquire and hold shares, stocks, debentures, Debenture stock, bonds, obligations, and securities issued by any company. To take part in the management, supervision, or control of the business or operations of such company. Generally to carry on business as financiers, and to undertake and carry out all such operations and transactions as an individual capitalist may lawfully undertake and do."

The articles of incorporation are not in evidence but the foregoing quotation is plaintiff's own declaration of what it is legally authorized to do. Clearly many powers and privileges therein mentioned are not within "the sole business of holding stock for purpose of control and management, etc." People exrel. Goodwin Sand Gravel Co. v. Law et al., 207 A.D. 567,202 N.Y.S. 558. Plaintiff is not within the exemption and is therefore subject to paying a franchise tax.

If it be contended that what the company actually does in the state, rather than what its articles and franchise authorize it to do, determines whether or not it is within the exemption then plaintiff would be exempt from the tax. The commission having found the company was a holding company, the incidental transaction in these oil stocks does not on the record before us show the company did any other business in Utah so as to take it out of the exemption extended to holding companies. Such isolated transactions do not constitute doing business in the state. A good statement of a holding company is found in Kenny v.Allerton Corp., 17 Del. Ch. 219, page 221, 151 A. 257; Stateex rel. City of St. Louis v. Public Service Commission,335 Mo. 448, 73 S.W.2d 393; Cannon Mfg. Co. v. Cudahy Pkg. Co., 267 U.S. 333,45 S. Ct. 250, 69 L. Ed. 634.

"The condition of doing business in this state, within Tax Law implies that the foreign corporation is accomplishing acts and activities within the state which the state might reasonably and with ordinary interstate comity interdict or prevent, and the doing of which was a privilege which required governmental consent, supervision, and control, and which necessitated or sought governmental opportunity and protection, to be compensated or balanced by contributions, through taxation, to the burden of government. Where foreign corporation had no property in the state other than bonds and note deposited with trust company as trustee and balance on bank account, and confined its operations in the state to collection and distribution to its stockholders of income from stock and obligations of other foreign corporations, it was not required to pay license fee under Tax Law, § 181, or franchise tax under section 182, since its activities in the state were confined to management of internal affairs as distinguished from maintenance of organization for profit and gain, and could as effectively been done in other state, for which reason it did not do ``business in this state' or ``employ capital in this state' within the Tax Law. People exrel. Manila Electric R. Lighting Corporation v. Knapp,229 N.Y. 502, 128 N.E. 892, 894." 5 Words and Phrases, Perm. Ed.,

"Where corporation was organized for no other purpose than to effectually carry out by agreement and by stock ownership the control of companies whose stock it held, the corporation's temporary investment of money in miscellaneous marketable securities pending time when money would be required to carry out obligations of contract for purchase of additional stock of another company did not constitute ``doing business' and did not render corporation subject to franchise tax as an ``investment company' rather than as a ``holding company.' * * * People exrel. General Alliance Corporation v. State Tax Commission,253 A.D. 413, 2 N.Y.S.2d 994, 998, 999." 13 Words and Phrases, Perm. Ed., page 162.

"Incidental activities of holding company, such as paying taxes and voting capital stock, held not ``doing business.' * * *Argonaut Consol. Mining Co. v. Anderson, D.C.N.Y., 42 F.2d 219, 221." 13 Words and Phrases, Perm. Ed., page 161.

"A finding of the State Tax Commission that for the taxable years 1906-1916 a domestic corporation was liable for a franchise tax under this section, which at that time included the prerequisite to taxation of doing business in this state, on the ground that such corporation was doing business within the state was held to be improper where it appeared that, though it was organized to manufacture and sell, its [sole] assets consisted of stocks and bonds of subsidiary corporations and that its [sole] income was from dividends on the securities so held. Nor did the indorsement of notes by the corporation for its subsidiaries constitute doing business within the meaning of the statute. People ex rel.Butterick Co. v. Gilchrist (1925) 213 A.D. 533,211 N.Y.S. 75." McKinney's Consolidated Laws of New York Annotated, c. 60, Book 59, Tax Law, § 182, note page 382.

And from page 386 of the same volume we quote:

"A foreign corporation whose assets are all invested in the stock of a domestic corporation cannot be considered as doing business in this state where it is engaged in no independent business. People v. Kelsey (1905) 101 A.D. 205,91 N.Y.S. 709.

"A foreign corporation having an office within this state where its dividends are disbursed, all of whose capital is invested in the stock of a foreign corporation doing no business in this state, and the only money within the state being profits from such investment, is not taxable as it employs no capital within the state. People v. Roberts (1897) 154 N.Y. 1,47 N.E. 974."

For a good discussion of this question see People ex rel.General Alliance Corporation v. State Tax Commission, supra [253 A.D. 413, 2 N.Y.S.2d 998], from which we quote:

"The reports of the relator to the tax commission showed that the relator had sold holdings of its company, the preferred stock in Sterling Securities Corporation, its holding of stock in the United Corporation; and had purchased stock of the Atlantic Coast Line Company, the Chatham Phenix Allied Corporation, the Chatham Phenix National Bank Trust Company, the Protective Indemnity Corporation, and the United Biscuit Company of America, and additional shares of the Consolidated Gas Company of New York, the National Dairy Products Corporation, and the United British Insurance Company.

"So far as the record shows, market conditions may have been responsible for this. There is nothing in the record to indicate that these stocks were sold for the purpose of doing business, but were stocks that were held as temporary investments pending the time when the money would be required to carry out the obligations of the contract entered into."

In another case the New York Court used language very apropos the situation here. In People ex rel. Goodwin Sand Gravel Co. v. Law, supra [207 A.D. 567, 202 N.Y.S. 560], it said:

"There is no definition in the statute of a holding corporation, and while it may be true that the respondents are correct in the claim that in common parlance such a corporation is regarded as one which is organized and conducted for the purpose of controlling the activities of other corporations, in the absence of any statutory definition, we must rely for our interpretation upon the language of the statute itself and from the other sections of the Tax Law. In so construing it, we believe that this relator is exempt from taxation. * * * The determination of the state tax commission should be annulled, and the proceeding should be remitted, for revision of the assessment, in accordance with the views above expressed. * * *"

2. Were the dividends received from the subsidiary Idaho corporation and the New York and the Ohio Oil Companies deductible before computation of the tax? The Idaho corporation did no business in Utah. (Finding IV by the 8, 9 commission.) These dividends were received by virtue of stock held in the Idaho corporation from earnings by that company on business done in Idaho. The statute provides in Section 80-13-21, R.S.U. 1933:

"(1) Rents, interest and dividends derived from business done outside this state less related expenses shall be allocated to this state. * * *

"(3) Rents, interest and dividends derived from business done in this state less related expenses shall be allocated to this state."

It is clear therefrom that if the business which produces the dividend is done outside of this state it is not allocable as income received from business, or the right to do business in this state. California Packing Corporation v. State TaxCommission, supra; First Security Corporation of Ogden v.State Tax Commission, supra; Corporation of America v.Johnson, 7 Cal. 2d 295, 60 P.2d 417. And under the rule in those cases the dividends from the Idaho corporation and the Socony-Vacuum and Ohio Oil Company are deductible before computation of the tax.

3. Do the proceeds from the sale of the oil stocks represent receipts from business done in Utah? It does not appear that anything with respect to the sale of this stock was done in Utah. These stocks were sold on the New York Stock Exchange by a member of that exchange, in New York. They were 10-14 not sold in Utah nor under any right of the plaintiff to do business in Utah. A sale made within the state is business done within the state. A sale is made without the state to another person without the state and by an agent chiefly engaged in out of state business is not business done within the state. In the California Packing case, supra, [97 Utah 367,93 P.2d 467], we said:

"The language of the statute throughout evidences an intent only to determine the franchise tax from income from business done under the franchise from the state, that is business done within the state. The various methods of allocation are designed to restrict the tax to business done within the state and to assign to the state for taxation that portion of the business reasonably attributable to the state. There is also apparent a purpose to avoid double taxation. * * *

"Our statute, as quoted above, seems to manifest a clear intent on the part of the legislature that so called ``financial income' not derived from business done in Utah should not be included in gross receipts for tax computation purposes by the state. It first segregates rents, interest, dividends and gains from sale or exchange of capital assets from that part of the net income attributed to business carried on within the state and subject to the allocation fraction, and provides a specific rule for allocation of such income."

The legislature adopted a method of taxation which was meant to reach only the profits earned within this state. The general criterion for determining the place of sale in cases of executed contracts of sale is the place where the title to the property passes to the buyer as between himself and the seller. 23 R.C.L. p. 1253 and cases there cited. Income derived from sales made by a company operating within the state, of goods purchased outside the state and sold to buyers outside the state, either from its factory within the state or from branches outside the state, is not income from business transacted within the state and so is not taxable.United States Glue Co. v. Town of Oak Creek, 161 Wis. 211,153 N.W. 241, Ann. Cas. 1918A, 421, affirmed 247 U.S. 321,38 S. Ct. 499, 62 L. Ed. 1135, Ann. Cas. 1918E, 748.

"Income of a nonresident, having an office within the state, derived from purchases and sales of merchandise outside the state, is not taxable under a statute imposing a tax upon the income of nonresidents to the extent it is derived from business carried on within the state." 61 C.J. p. 1575 (note): People exrel Stafford v. Travis, 231 N.Y. 339, 132 N.E. 109, 15 A.L.R. 1319.

We quote with approval from United States Glue Co. v. Townof Oak Creek, supra [161 Wis. 211, 153 N.W. 244]:

"The income derived from goods which were produced and purchased outside of the state and shipped, either directly or by way of plaintiff's factory at Carrollville, to plaintiff's branch houses, and thence sold and delivered to customers without the state, is clearly a separable class of plaintiff's business.Such business is transacted and located without the state,excepting incidental management from and accounting for theresult thereof to plaintiff's principal office at Carrollville. The carrying on of this part of the trade according to the findings of fact produced an income, which issued out of the business and properly located without the state. Under the facts and circumstances showing the manner of conducting this part of the plaintiff's business, it must be held that the income derived therefrom is attributable to the business conducted without the state, and hence not taxable under the law." (Italics added.)

It may be argued that since the Investment Company officials were in Utah when it was decided to sell the oil stock and from here contact the broker to sell the stock on the New York Exchange, that makes it business done in Utah. The rule announced by the authorities is to the contrary. The Missouri Court inClaiborne Commission Co. v. Stirlen, Mo. App., 262 S.W. 387,389, said:

"Of course, the contract of agency was a Missouri contract, but the matter is not to be tested by that contract, but is to be governed by the law of the state where the agent actually conducted the purchases and sales for his principal's account."

The following cases while appealed from a different angle are enlightening and persuasive. Atwater v. A.G. Edwards SonsBrokerage, 147 Mo. App. 436, 126 S.W. 823; Hoyt v. Wickham, 8 Cir., 25 F.2d 777; Portland Cattle Loan Co. v. HansenLivestock Feeding Co., 43 Idaho 343, 251 P. 1051; Fletcher, 9 Cyc. Corp. p. 9987, § 5929; Mullinix v. Hubbard, 8 Cir.,6 F.2d 109.

It seems clear therefore that the proceeds from the sale of oil stock were not income from business done in Utah, but in New York, and are not allocable in business done in Utah.

The order of the Tax Commission is annulled and set aside.

MOFFAT, C.J., and PRATT, J., concur.