Franchise Tax Bd. v. Superior Court in and for Sacramento County

• Decision Date: 22 December 1950
• Citation: 36 Cal.2d 538,225 P.2d 905
• Court: California Supreme Court
• Parties: . Sac. 6078-6080. Supreme Court of California, in Bank

Page 905

225 P.2d 905

36 Cal.2d 538

FRANCHISE TAX BOARD v. SUPERIOR COURT IN AND FOR SACRAMENTO COUNTY.

Sac. 6078-6080.

Supreme Court of California, in Bank.

Dec. 22, 1950.

Rehearing Denied Jan. 18, 1951.

Fred N. Howser, Atty. Gen., James E. Sabine, Irving H. Perluss, Edward Sumner and Ernest P. Goodman, Deputy Attys. Gen., for petitioner.

Sigvald Nielson, Albert J. Shults and Pillsbury, Madison & Sutro, all of San Francisco, Mitchell, Silberberg & Knupp, Los Angeles, as amicus curiae on behalf of petitioner.

O'Melveny & Myers, Louis W. Myers, Sidney H. Wall, Howard J. Deards, Pierce Works, Lawler, Felix & Hall and Brenton L. Metzler, all of Los Angeles, for respondent and real parties in interest.

EDMONDS, Justice.

The Bank and Corporation Franchise Tax Act, Stats. 1929, ch. 13, p. 19, as amended; Deering's Gen.Laws, Act 8488, provides that, with certain exceptions, it shall be unlawful for the Franchise Tax Commissioner to divulge any information concerning a tax return filed in accordance with the statute. In litigation challenging the validity of certain assessments made by the commissioner, the superior court ordered him to make available for inspection and copying the returns and related data filed by approximately 25,000 corporations. By this proceeding in prohibition, the Franchise Tax Board, as the statutory successor of the commissioner, is endeavoring to prevent the enforcement of those orders.

The Security-First National Bank of Los Angeles, Bank of America National Trust and Savings Association, and The Farmers and Merchants National Bank of Los Angeles brought separate actions for the refund of taxes paid by each of them under the Franchise Tax Act for the taxable year of 1943. The general theory upon which these actions are based is that the California plan of taxing banks and other financial corporations either is unconstitutional as enacted by the Legislature, or as applied to their respective operations by the Franchise Tax Board.

Under the authority of § 5219 of the Revised Statutes, 12 U.S.C.A. § 548, a state may tax a national bank according to, or measured by, its income from all sources, including that from tax exempt securities. California adopted this method of taxation in 1928. Cal.Const. Art. XIII, § 16.

The Franchise Tax Act, supra, lays upon nonfinancial corporations a tax at a flat rate of 4 per cent of their respective net incomes. § 4, subd. 3. National banks and other financial corporations are taxed at the same flat rate of 4 per cent of net income plus an additional percentage (not to exceed 8 per cent in all) derived from a ratio between the totaled personal property taxes paid by all nonfinancial corporations and their totaled net income for a given tax year. § 4a.

Under this formula, although its personal property is not taxed, a bank may be required to pay a franchise tax at a rate proportionate to the personal property tax assessed against a nonfinancial corporation. The tax upon the bank's franchise, however, is in lieu of all other taxes and licenses, whether state, county or municipal, except taxes assessed upon its real property. There is no such provision for nonfinancial corporations; they may be required to pay personal property, sales and use taxes, and motor vehicle transportation and local licenses in addition to franchise and real property taxes.

In 1943, for the purpose of fixing the rate at which banks and financial corporations should be assessed for the taxable year of 1943, the commissioner conducted a hearing, and considered as evidence certain data compiled from the tax returns filed by nonfinancial corporations for the purpose of showing the amount of taxes paid by them upon their personal property. Thereafter, he determined that the banks and financial corporations should be taxed at the rate of 6.9 per cent of net income, which was an increase of .18 per cent over the rate fixed for the previous year.

The banks attack the evidence upon which the commissioner fixed the 1943 tax rate. By affidavits filed in support of their motions for leave to inspect, Code Civ.Proc. § 1000, they assert that substantially all of the evidence and information utilized by the commissioner as the basis for his determination consisted of franchise tax returns, claims for abatement and refund of taxes, unverified replies to demands for supplementary data and affidavits and evidence of diminution in net income through war contract renegotiations. More specifically, the banks charge that the returns of the nonfinancial corporations include haphazard approximations in reporting allocations of net income, amounts accounted for as taxes upon real property which in fact were taxes upon personalty, payments of satisfy assessments upon personal property which later were held by the courts to be subject to refund, and other erroneous data.

In the actions for refund, the banks' attack upon the evidence received by the commissioner is essentially the same as that pressed at the hearing held for the purpose of fixing the tax rate. The banks then asserted that they had a right to examine and copy the reports and data of all nonfinancial corporations for the purpose of proving their contentions of inaccuracy. The commissioner refused the demand upon the ground that the Franchise Tax Act prohibits the disclosure of the information included in the tax returns. However, he agreed to receive any evidence which the banks might offer tending to prove that nonfinancial corporations had reported as taxes upon personal property amounts which had not been paid for that purpose. He permitted the banks to examine the various compilations upon which the rate was computed, and submitted data prepared by his office which purported to show for each of the 25,000 nonfinancial corporations the net income allocated to California, the amount of franchise tax, and the amount of taxes on personal property assessed against each corporation. In this list the corporations were identified only by serial number, not by name. Tabulations showing similar information regarding industries were made available to the banks. The commissioner also brought returns and other related documents into the hearing room and, when requested to do so by the banks, verified each item by reading it aloud from the returns and other documents. However, the identity of the particular taxpayer from whose return the commissioner read was uniformly withheld.

The orders of the superior court here under attack require the Franchise Tax Board to make the tax returns and related documents available to the banks for inspection and copying, subject only to the limitation that the board shall not be required to '* * * disclose or permit inspection of or the taking of copies of any figures or amounts expressed in terms of money and representing income gross or net (but not including deductions claimed from gross income) and returned or reported by individual and identifiable * * *' nonfinancial corporations. The position of the board is that the superior court has exceeded its jurisdiction by issuing inspection orders contrary to the mandate of the Franchise Tax Act, which makes the disclosure of information included in a tax return a misdemeanor. As justifying the procedure invoked, it is argued that a writ of prohibition is the proper remedy because judicial action is threatened by the banks, and § 1000 of the Code of Civil Procedure specifies that one who refuses to comply with an order for the inspection of documents may be cited for contempt. There is no other plain, speedy and adequate remedy, says the board, because it must risk prosecution for contempt of court if it does not comply or be charged with having committed a misdemeanor if it complies with the orders. These orders, it declares, are nonappealable and the disclosure of confidential information cannot be rectified by subsequent judicial action.

Upon the question of the banks' right to inspect the tax returns, the board insists that the orders issued by the superior court are invalid under both the tax statute and § 1881(5) of the Code of Civil Procedure, which forbids the examination of a public officer as to communications made to him in official confidence, when the public interest would suffer by the disclosure. The function of the commissioner in determining the tax rate is quasi-legislative and need not meet all of the requirements of procedural due process. In the case of a hearing afforded by legislative grace, procedural due process does not require an examination of all the evidence, particularly where, as here, disclosure of tax returns is expressly forbidden. In any event, an adequate hearing was granted in that the banks were supplied with every item of information requested by them at the hearing with the exception of the individual taxpayers' identity. No question of discrimination against national banks is involved because the tax levied upon them need only approximate the overall tax upon nonfinancial corporations. Finally, it is argued, the practical aspects of compliance with the orders are overwhelming. It would require the services of the entire auditing and clerical staff of the board for a period of 50 or more days merely to furnish the material ordered produced by the superior court. According to the board, many returns are in field offices, and the file for each corporation contains returns for many years. It is claimed that all other work of the board would have to cease pending the production of the approximately 25,000 returns.

The briefs of amici curiae in support of the board reiterate and further develop many of these contentions. The element of reliance by taxpayers upon the confidential treatment of their returns is stressed, and it is said that failure to recognize the full effect of the statutory requirement of nondisclosure would prompt taxpayers to withhold information which they believed readily could be obtained by...