California State Auto. Assn. v. Franchise Tax Bd.

• Decision Date: 13 May 1987
• Citation: 191 Cal.App.3d 1253,237 Cal.Rptr. 44
• Court: California Court of Appeals Court of Appeals
• Parties: CALIFORNIA STATE AUTOMOBILE ASSOCIATION, Plaintiff and Respondent, v. FRANCHISE TAX BOARD, Defendant and Appellant. A032552.

Page 44

237 Cal.Rptr. 44

191 Cal.App.3d 1253

CALIFORNIA STATE AUTOMOBILE ASSOCIATION, Plaintiff and Respondent, v. FRANCHISE TAX BOARD, Defendant and Appellant.

A032552.

Court of Appeal, First District, Division 2, California.

May 13, 1987.

Review Denied July 29, 1987.

John K. Van de Kamp, Atty. Gen., Timothy G. Laddish, Supervising Deputy Atty. Gen., Calvin J. Abe, Office of the Atty. Gen., San Francisco, for defendant and appellant

Valentine Brookes, Brookes & Brookes, San Francisco, for plaintiff and respondent.

SMITH, Associate Justice.

In this case of first impression, we grapple with the meaning of the phrase "co-operative or a mutual basis" as it appears in section 24405 of the Revenue and Taxation Code.

In 1973 defendant and appellant Franchise Tax Board (hereinafter, "the Board") issued proposed additional assessments of taxes due from plaintiff-respondent California State Automobile Association (hereinafter "CSAA") based upon the Board's determination that for the years 1968 through 1971, CSAA improperly took a deduction pursuant to Revenue and Taxation section 24405 ¹ for income on business activities conducted with its members and income from nonmember business conducted on a nonprofit basis. The basis for the Board's determination was that CSAA was not eligible for the deduction because it was not "organized and operated in whole or in part on a co-operative or a mutual After the Board issued a ruling upholding the additional assessment, CSAA paid the disputed taxes and filed a complaint for a refund in superior court. The superior court granted CSAA's motion for summary judgment, finding that CSAA did indeed fall with the purview of section 24405. The Board appeals.

basis," within the meaning of section 24405.

BACKGROUND

The facts are not in dispute. CSAA was incorporated in 1907 under the nonprofit corporation laws of the State of California. The Articles of Incorporation provide that "said corporation is not organized for pecuniary profit and shall have no capital stock, nor shall any shares of stock be issued, but each member thereof shall have one vote only on all matters requiring the action or sanction of the membership." Among the stated purposes of the corporation as set forth in the articles are the promotion of the betterment and maintenance of roads and highways in the state, the advocacy of adoption of "just, rational and intelligent legislation in reference to roads, highways and waterways ...", the furnishing of advice and assistance to travelers and tourists in this state and elsewhere, the protection of the interests of its members in connection with the stated purposes and the affiliation with similar organizations in other states.

To be a member, one must pay a one-time enrollment fee, plus annual membership dues. In return, CSAA provides its members with a variety of services including emergency road and home garage service, free maps, travel information and hotel and motel reservations, a subscription to Motorland magazine, (a periodical published by CSAA which contains travel articles and updated travel information), and assistance with automobile financing, traffic citations and vehicle registration. CSAA also operates a travel agency and provides automobile and homeowners insurance through its Inter-Insurance Bureau. ² Because of the requirements of law, the latter two services are available to nonmembers under some circumstances, although patronage from nonmembers is not solicited.

Since its inception, CSAA has characterized itself as a cooperative enterprise. In accordance with its bylaws, CSAA's Board of Directors sets the annual membership dues. The dues are set pursuant to a policy to keep them as low as financially possible while enabling the organization to avoid a substantial deficit which would result from unexpectedly heavy usage of member services. As a result of this policy, annual membership fees did not increase at all during the years 1953 to 1968, and increased by only $3.00 in 1968. During the years in question membership dues totalled 86 percent of CSAA's total income. Total membership in CSAA has grown from only a handful in 1907 to more than one million by 1971.

In 1950 the legal staff of the Board ruled that CSAA was operated on a cooperative or mutual basis and therefore entitled to the exemption from taxation on income with its members under section 24121n, the predecessor to section 24405. In 1972, however, a Board auditor determined that CSAA was not a "mutual or cooperative association" and proposed disallowance of the deduction taken for business revenue done with CSAA members for the taxable years 1968, 1969, 1970 and 1971. The proposed additional assessments were upheld over CSAA's protest by the State Board of Equalization, which issued an opinion agreeing with the auditor.

On September 2, 1980, CSAA filed a complaint for refund of the additional taxes paid as the result of the Board's ruling. The Board filed an answer, admitting the essential facts set forth in the complaint, but denying that these facts entitled CSAA to the deduction. CSAA moved for summary The trial court initially treated the motion as one for summary adjudication and granted it to the extent of determining that, for the years in question, CSAA was "an association organized and operated in whole or in part on a cooperative or mutual basis within the meaning of section 24405 ..." but reserving judgment on the monetary issues. Eventually, both sides agreed on the amount of the refund assuming the court's partial adjudication were correct and judgment was ultimately entered in favor of CSAA for $579,828.21, plus interest as provided by law.

judgment based upon a stipulation of facts and the uncontroverted affidavit of one of its officers.

APPEAL

Section 24401 provides that "... there shall be allowed as deductions in computing taxable income the items specified in this article." Section 24405, which we are called upon to construe here, allows "associations organized and operated in whole or in part on a co-operative or a mutual basis " to deduct "all income resulting from or arising out of business activities for or with their members carried on by them or their agents; or when done on a nonprofit basis for or with nonmembers...." (Emphasis added.) ³

Section 24405 traces its roots back to 1929 when it was enacted in substantially the same language as section 8 subdivision (l ) of the Bank and Corporation Franchise Tax Act. (Stats.1929, ch. 13, p. 24.) Unfortunately, there has never been a statutory definition of "co-operative" or "mutual", nor are there any California cases addressing the meaning of these terms. While no case or statute defines the word "cooperative" we observe that, in the interpretation to tax measures, the common and ordinary meaning of words, is significant. (Sutherland, Statutory Construction (4th ed) § 66.03, p. 302) Webster's Third New International Dictionary (1970) defines "cooperative" as "an enterprise or organization owned by and operated for the benefit of those using its services." CSAA undisputedly comes within that definition.

Citing a number of federal tax decisions, the Board claims that mutual insurance companies and cooperative organizations must have at least four characteristics: "(1) common equitable ownership of the assets by the members; (2) the right of dues paying members to be members to the exclusion of others and to choose the management; (3) a sole business purpose of supplying goods, services or insurance at cost; and (4) the right of the members to a return of the premiums paid in excess of the amounts necessary to cover losses and expenses." (Emphasis added.) The Board concedes that CSAA meets the first three of these criteria, but fails to meet the fourth because, as a nonprofit corporation, CSAA is prohibited by law from distributing any profits or dividends to members except upon dissolution. ⁴ The There are several flaws in the Board's reasoning. First, the federal cases which the Board cites appearing to hold that the right of members to a return of premiums in excess of the amounts needed to cover loss and expenses is an essential characteristic of "mutuals", are based on the Revenue Act of 1942 which classified insurance companies into three distinct groups, roughly life, insurance companies other than life, and mutual. (Modern Life & Accident Insurance Company v. C.I.R. (1968) 49 T.C. 670, affd. (7th Cir.1969) 420 F.2d 36; Thompson v. White River Burial Ass'n. (8th Cir.1950) 178 F.2d 954; The Mutual Fire, Marine and Inland Ins. Co. (1947) 8 T.C. 1212; Holyoke Mutual Fire Ins. Co. (1957) 28 T.C. 112) The classification group into which the taxpayer fell determined its entire measure of taxation. On the other hand, section 24405 merely allows a special deduction for certain associations and is much broader in scope, covering virtually all associations operated wholly or even partly on a cooperative or mutual basis. The federal insurance statutes are therefore different in purpose and effect than the state statute considered here. Since there is no basis whatsoever for concluding that the Legislature intended to "pattern" or copy the deduction allowed under section 24405 after federal income tax statutes dealing with taxation of insurance companies, there is no reason to view the federal cases interpreting the latter laws as controlling. (Cf. Trimont Land Co. v. Truckee Sanitary Dist. (1983) 145 Cal.App.3d 330, 354, 193 Cal.Rptr. 568; Union Oil Associates v. Johnson (1935) 2 Cal.2d 727, 735, 43 P.2d 291.)

Board then argues that CSAA's inability to meet this fourth criterion is its own fault because it did not become a "cooperative corporation" under the Cooperative Corporations statutes first enacted in 1939 (Stats. 1939, ch. 808, p. 2359 § 1, now Corp. Code §§ 12200 et seq.), but instead chose to remain a nonprofit corporation.

Even the federal cases relied upon by the Board recognize...