Household Finance Corp. v. Franchise Tax Bd.

• Decision Date: 30 November 1964
• Citation: 230 Cal.App.2d 926,41 Cal.Rptr. 565
• Court: California Court of Appeals Court of Appeals
• Parties: HOUSEHOLD FINANCE CORPORATION, Plaintiff and Respondent, v. FRANCHISE TAX BOARD, Defendant and Appellant. Civ. 21335.

Page 565

41 Cal.Rptr. 565

230 Cal.App.2d 926

HOUSEHOLD FINANCE CORPORATION, Plaintiff and Respondent, v. FRANCHISE TAX BOARD, Defendant and Appellant.

Civ. 21335.

District Court of Appeal, First District, Division 3, California.

Nov. 30, 1964.

Hearing Denied Jan. 27, 1965.

Stanley Mosk, Atty. Gen., James E. Sabine, Asst. Atty. Gen., Ernest P. Goodman, Deputy Atty. Gen., San Francisco, for appellant.

Edward J. Ruff, Thelen, Marrin, Johnson & Bridges, San Francisco, Lloyd R. Mowery, Hubachek & Kelly, Chicago, Ill., Floyd E. Britton, Chicago Ill., of counsel, for respondent.

DRAPER, Presiding Justice.

Defendant board appeals from judgment directing refund of franchise taxes paid under protest for the years 1951 and 1952.

Plaintiff is engaged in the 'small loan' or 'consumer loan' business. In 1951 it had 423 branch offices, and in 1952 427 branches, operating in 28 states and Canada. In each year it had 33 offices in California.

Plaintiff's general administrative offices are located in Chicago. That office prepares and revised operating manuals setting out detailed procedures which the branch offices follow. Within these limits, each branch may make loans. Regional and district supervisors regularly visit branch offices, review their operations, and report thereon to the general office. On the opening of a branch, funds are furnished by the general office. Although each branch has its own bank account, it must forward excess funds to central headquarters, upon which it may draw for further needs. Each branch keeps accounting records, but a central accounting sustem is maintained in Chicago. Some 60% of the sums loaned are from money borrowed in turn by plaintiff. The Chicago office borrows these funds and redistributes them to the branches as needed. All leases of real estate are made by Chicago headquarters, which also maintains central purchasing, public relations, and personnel departments. Although most advertising is negotiated by branch managers, it is contracted for only after approval by the central advertising director's office, which prepares all copy and is directly billed by the media. Expense of central administration, national advertising (a small part of the total advertising budget) and interest on plaintiff's borrowings, is apportioned among the branch offices.

It is apparent that each branch is accorded a degree of autonomy, but that a strong central management prevails. The more than 400 branches ultimately operate as an integrated unit.

Plaintiff's franchise tax returns for the years in question showed net income based upon interest received by the 33 California branches, less expenses incurred by them, including amounts charged by the Chicago headquarters. Upon this separate accounting basis, plaintiff paid a tax of $34,731 for the income year 1951, and $53,416.33 for 1952. Defendant board applied a formula to determine the share of total income applicable to California, and proposed additional assessments of $30,123.88 for the earlier year, and $40,294.74 for the later. The formula is based upon three factors--the monthly average of loans outstanding, interest collected, and payroll. The ratio of these three factors for California business to the overall total of plaintiff's business was determined, and this percentage of total net income was taken to be the net income attributable to California. Plaintiff paid the added amounts under protest, and brought this action to recover them (Rev. & Tax.Code, § 26102).

Plaintiff asserts that the California business is readily separable from that done elsewhere, and that thus there is no basis for resort to a formula for determination of the California net income.

Implicit in plaintiff's argument is the view that an allocation formula may be resorted to only when separate accounting is impossible or not reasonably feasible. But that view has been flatly rejected (Superior Oil v. Franchise Tax Bd., 60 Cal.2d 406, 416, 34 Cal.Rptr. 545, 386 P.2d 33; Honolulu Oil Corp. v. Franchise Tax Bd., 60 Cal.2d 417, 425, 34 Cal.Rptr. 552, 386 P.2d 40). ¹

Rather, if plaintiff's income is 'derived from or attributable to sources both within and without the State' (Rev. & Tax.Code, § 24301, now § 25101) 'then an allocation of total net income would naturally follow from the mandatory language of (this statute) and a separate accounting * * * could not be approved' (Superior Oil Co. v. Franchise Tax Bd., supra, 60 Cal.2d p. 411, 34 Cal.Rptr. p. 548, 386 P.2d p. 36). 'If the operation of the portion of the business done within the state is dependent upon or contributes to the operation of the business without the state, the operations are unitary' (Edison California Stores, Inc. v. McColgan, 30 Cal.2d 472, 481, 183 P.2d 16, 21) and use of an allocation formula is required (Superior Oil Co. v. Franchise Tax Bd., supra, 60 Cal.2d pp. 416-417, 34 Cal.Rptr. p. 552, 386 P.2d p. 40).

The 'unitary nature' of a business, which establishes the need for allocation, is established by '(1) unity of ownership; (2) unity of operation is evidenced by central purchasing, advertising, accounting and management divisions; and (3) unity of use in its centralized...