Household Finance Corp. v. Director of Division of Taxation

• Decision Date: 22 January 1962
• Docket Number: No. A--47,A--47
• Parties: HOUSEHOLD FINANCE CORPORATION, a Delaware Corporation, Appellant, v. DIRECTOR OF the DIVISION OF TAXATION, Respondent.
• Court: New Jersey Supreme Court

Page 353

36 N.J. 353

177 A.2d 738

HOUSEHOLD FINANCE CORPORATION, a Delaware Corporation, Appellant, v. DIRECTOR OF the DIVISION OF TAXATION, Respondent.

No. A--47.

Supreme Court of New Jersey.

Argued Nov. 20 and 21, 1961.

Decided Jan. 22, 1962.

Roger C. Ward, Newark, for appellant (Pitney, Hardin & Ward, Newark, attorneys; Floyd E. Britton, Chicago, Ill., of counsel).

Alan B. Handler, Deputy Atty. Gen., for respondent (David D. Furman, Atty. Gen., attorney).

The opinion of the court was delivered by

WEINTRAUB, C.J.

This case involves assessments against Household Finance Corporation (herein 'Household') under the New Jersey Financial Business Tax Law (1946), N.J.S.A. 54:10B--1 et seq., for the years 1954 to 1957, inclusive. The Division of Tax Appeals sustained the assessments and we certified Household's appeals before the Appellate Division acted upon them.

The history of the Financial Business Tax Law (1946) appears in Morris & Essex Investment Co. v. Director of Division of Taxation, 33 N.J. 24, 161 A.2d 491 (1960). As there pointed out, the statute was devised against the backdrop of the federal statute, 42 Stat. 1499, 12 U.S.C.A. § 548(1)(b), which provides that the tax imposed by states upon the shares of national banks 'shall not be at a greater rate than is assessed upon other moneyed capital in the hands of individual citizens of such State coming into competition with the business of national banks.' The ultimate criterion under the federal act is whether moneyed capital employed in competition with the business of national banks receives favored tax treatment (33 N.J., at p. 30, 161 A.2d 491). Our taxing statute seeks to achieve equality despite differences in the underlying economics of enterprises which thus compete with national banks.

To that end the statute imposes 'an annual excise tax' at the rate of 3/4 of 1% Upon 'net worth' less certain deductions, which tax is 'in lieu of any State franchise tax or of any State or local taxation of, upon or measured by personal property entering into the determination of net worth.' N.J.S.A. 54:10B--3. With respect to a taxpayer doing business in more than one state, the act provides for an allocation to this State of a portion of its total net worth, 'according to the proportion of its gross business in this State to its gross business everywhere during the tax year.' N.J.S.A. 54:10B--8.

Household is engaged in the small-loan business. It operates extensively in the United States and also in Canada. In the years in question it maintained between 417 and 445 branch offices in the United States, of which 17 were in New Jersey. It also owned subsidiary corporations which in the United States totaled 24 as of the end of 1953 and numbered 155 by the end of 1956. With one exception, not here significant, the subsidiaries were wholly owned by Household. There were no subsidiaries in New Jersey in 1954; there were two in 1955; seven in 1956; and ten in 1957. Of these, one was active in 1956 and four in 1957. The Canadian business was conducted through subsidiaries. The subsidiaries operating in New Jersey are herein called 'New Jersey subsidiaries' although they are foreign corporations, a fact which is of no moment.

The business conducted directly by Household at its many branch offices was the same as that conducted at the local offices owned by the subsidiaries. So also the operating relationship between Household and the local offices was the same whether they were branches or were individually incorporated. The principal headquarters were in Chicago, and regional offices were maintained in New York, Philadelphia, Detroit, and Los Angeles. Policy decisions were made in Chicago. Supervisory and administrative services, including the training and assignment of local supervisory personnel, were handled there. Services were thus centrally furnished in purchasing, leasehold management, research, advertising, and public relations. Each branch office maintained its own books but reported daily to Chicago where duplicate records were maintained. Headquarters supplied the funds needed by local offices, whether branch or incorporated, to meet the business opportunities as they appeared, and the several offices remitted regularly such funds as headquarters decided to recall.

Household concedes its entire operation was unitary in character.

In its returns for the years in question Household sought in effect to separate its direct operations through branch offices from the operations of the subsidiaries. To that end if first excluded from net worth its equity investment in the subsidiaries. It then applied an allocation fraction in which the numerator was the gross receipts of the New Jersey Branch offices and the denominator was the gross receipts from all Branches. Thus Household did not include in the denominator the gross receipts of the subsidiaries or Household's receipts from its subsidiaries.

The Director made a redetermination. He included in net worth the equity investment in subsidiaries. He added to the denominator of the allocation fraction the sums received by Household from the subsidiaries, i.e., interest dividends and service fees charged for the sundry services Household furnished the subsidiaries. The Director agreed with Household that with respect to the subsidiaries operating in New Jersey (they filed separate returns), the net worth of Household should be reduced by its investment in them in accordance with N.J.S.A. 54:10B--6(a)(3). Household's receipts from the New Jersey subsidiaries were not included in the numerator of the allocation fraction.

The redetermination thus followed the corporate lines established by Household. Household then complained that the Director, by taking in the shares in subsidiaries at their book value, in effect 'consolidated' the enterprise in fixing net worth, and hence should use a 'consolidated' approach in fixing the denominator of the allocation fraction by including therein the gross receipts Of the subsidiaries, rather than only so much as reached Household From the subsidiaries by way of interest, dividends and service fees. The sums so paid to Household were less than the gross receipts of the subsidiaries. Hence, if a 'consolidated' approach were used, the denominator of the allocation fraction would be enlarged, thereby reducing the portion of total net worth allocable to New Jersey. As we will later develop, Household did not, however, seek a fully consolidated result.

Household also advanced the further claim that its so-called 'headquarter assets' were situate in Chicago, and should be deducted from net worth. This contention in fact departed from Household's returns, since therein it had not sought to deduct headquarter assets from net worth.

The Division of Tax Appeals sustained the redetermination. The issues before us are the ones described in the two preceding paragraphs. We will treat first with the claim that headquarter assets should be excluded from net worth and then consider the attack upon the allocation fraction.

I.

In the years in question the headquarter assets ranged from $21,000,000 to $24,000,000. They included accounts receivable, government securities, office equipment, and deferred charges, but the great bulk consisted of cash on hand, in banks and in transit. For example, at the beginning of 1954, cash amounted to $22,511,984 of total headquarter assets of $24,098,252. The cash items constituted the revolving fund from which Household dispatched moneys to the various local offices to meet the business opportunities there.

As indicated above, Household argues that these assets have their situs in Chicago and that unless they are excluded from net worth, New Jersey would tax extraterritorial values in violation of the due process provision of the Federal Constitution.

The statute does not tax assets beyond the State. Rather, it imposes an excise tax upon the doing of financial business in New Jersey. N.J.S.A. 54:10B--3. That the tax is assessed upon a portion of net worth does not mean that it is an Ad valorem assessment upon any of the underlying properties. Werner Machine Co. v. Director of Division of Taxation, 17 N.J. 121, 110 A.2d 89 (1954), affirmed, 350 U.S. 492, 76 S.Ct. 534, 100 L.Ed. 634 (1956). Net worth simply sums up the relationship between assets and liabilities and thus expresses the experience of an enterprise. It is not 'property' and of course is not an 'asset' in a balance sheet. It is merely a concept, without tangible situs in any specific asset.

In a sense, the excise tax may gather the hue of a property tax, but if so viewed, it is the franchise to do local business that is being valued rather than any specific piece of property devoted to it. In thus appraising the worth of a franchise, it is fitting to refer to 'net worth,' for the franchise ultimately contributes to that balance-sheet result. And in dealing with a multistate business, unitary in nature, it is reasonable to assume the franchise to do business in this State contributes to the net worth in the proportion that the business done here bears to the total business of the taxpayer.

Hence in assaying the value of the business privilege in this State, the important thing is the business done here. In this frame of reference, the location of headquarters was of no moment. Headquarter assets were part of an operating whole, and were employed wherever the taxpayer did business. They were directly employed in New Jersey to the extent that cash was sent here as needed, and the tangible property stationary at Chicago was devoted to New Jersey activities with the same immediate effect as if the equipment were within our borders. Indeed, in terms of the smallloan business to which Household's enterprise was devoted and from which its net worth emerged, the headquarter assets were wholly unproductive within the walls of the home office; they generated results only by meaningful...