John Deere Plow Co. of Moline v. Franchise Tax Bd. of California
| Decision Date | 19 December 1951 |
| Citation | 38 Cal.2d 214,238 P.2d 569 |
| Court | California Supreme Court |
| Parties | JOHN DEERE PLOW CO. OF MOLINE v. FRANCHISE TAX BOARD OF CALIFORNIA. Sac. 6153. |
Kent & Brookes, Arthur H. Kent, and Valentine Brookes, all of San Francisco, John S. Best, Milwaukee, Wis., Lewis D. Wilson, Chicago, Ill., of counsel, for appellant.
Fred N. Howser, Edmund G. Brown, Attys. Gen., James E. Sabine and Irving H. Perluss, Deputy Attys. Gen., for respondent.
Plaintiff brought this action to recover an additional franchise tax assessed against it for the taxable year 1938, based upon income for the year 1937, under authority of the Bank and Corporation Franchise Tax Act, Stats.1929, p. 19, as amended, 2 Deering's Gen.Laws 1937, Act 8488, p. 3851, and paid under protest. The trial court found in defendant's favor, and from the judgment accordingly entered, plaintiff appeals.
The sole point in controversy is the propriety of the Franchise Tax Commissioner's application of a three-factor formula in measure of plaintiff's net income from business done within this state for the year involved. Plaintiff maintains that such formula attributes to California income derived wholly from business done without this state, so that such allocation is not only contrary to the governing act but likewise is objectionable as violative of the due process and equal protection of the law clauses of the Fourteenth Amendment. But an examination of the record in the light of settled legal principles sustains the use of the challenged formula as a reasonable method of apportionment for determining plaintiff's franchise tax liability in this state, and accordingly the judgment must be affirmed.
At all times herein mentioned plaintiff was an Illinois corporation, authorized to do business within this state, which business consisted of the sale of a full line of agricultural machinery, implements, and tractors at wholesale to dealers. It maintained a jobbing house in San Francisco to serve the states of California, Arizona and part of Nevada, and in addition, it did a certain amount of exporting to the Orient. It also owned and operated four other jobbing houses, each serving trade in the surrounding territory and respectively located at Moline, Illinois; Omaha, Nebraska; Portland, Oregon; and Salt Lake City, Utah.
All of plaintiff's capital stock was owned by Deere & Company, an Illinois corporation, which was engaged in the business of manufacturing and selling farm equipment, with operations extending from the purchase of raw materials to the distribution of the finished products. Deere & Company also owned the capital stock of some 83 other corporations manufacturing plants, factories, jobbing houses, and retail outlets integrated into the general flow of business of Deere & Company in its production, handling and marketing of a full line of farm equipment. The various acquired companies functioned in the overall operations of Deere & Company in the following manner: different items were produced in the several manufacturing plants and factories, with the production process regulated so there would be no overlapping; the manufactured products were then transferred to Deere & Company, which in turn consigned them to the subsidiary jobbing corporations, and the latter thereupon disposed of the goods either through their own retail outlets or through independent retail dealers. In furtherance of the overall business, Deere & Company maintained at its offices a central purchasing department for quantity buying of the raw materials needed for the affiliated factories and manufacturing plants; a central financial department for negotiating bank loans, with Deere & Company advancing funds to the subsidiary companies as required; a central research laboratory for testing and improving the products of the factories; a central sales department for directing sales activities, fixing maximum terms and minimum prices to be observed by the jobbing houses, prescribing dealers' uniform contracts for said houses, and setting forth general policies on all sales matters; a central traffic department for arranging freight routing in response to orders from the jobbing houses as part of the marketing function; a central advertising department for publication of a trade magazine and circulars, as well as for placement of national advertising; and a central insurance department for supervision of all insurance coverage for the properties and personnel of the affiliated companies. These and other central administrative departments in the Deere & Company organization established general management policies and operating procedures. Among important matters of policy determined by Deere & Company were volume discounts to be allowed by each jobbing house to retail dealers, warranties, retail store operations, accounting procedure, and pension plans affecting all the employees in the organization. Many of these matters were covered in branch house bulletins regularly sent by Deere & Company to its affiliated companies; the latter in turn rendered monthly accounts to Deere & Company as to financial status and operating expenses; and the jobbing houses, in reporting sale transactions, remitted to Deere & Company excess funds to be applied against their respective net accounts. Considerable freedom of action was allowed the local managers of the various jobbing houses so long as they kept within the broad outline of policy established by the central management. By such unity in ownership and control of the affiliated companies, Deere & Company effected substantial savings in the organization's integrated activities.
In 1934 Deere & Company entered into a distribution arrangement with the Caterpillar Tractor Company to meet a competitive trade development. That year the International Harvester Company and Allis-Chalmers Manufacturing Company, both of which produced lines of farm machinery competitive with the Deere line, commenced to manufacture track-type tractors and so provided their distributors with a decided advantage in being able to offer customers a complete line of agricultural equipment tractors plus the implements to be used with them. While Deere & Company manufactured wheel-type tractors along with its line of farm machinery, it did not manufacture track-type tractors. On the other hand, Caterpillar did manufacture track-type tractors but not the farm equipment to be used with them. In recognition of their mutual business interest, the Deere organization and Caterpillar arranged to have their respective products handled together by the same dealers, thus offering a full line of tractor and complementary farm equipment on a competitive basis with International Harvester and Allis Chalmers. This connection with Caterpillar also enabled the Deere organization to develop its industrial as well as agricultural business so that it was not so completely dependent upon the farmer trade. Thus Caterpillar distributors throughout the country could handle the sale of Deere wheel-type tractors to industrial users so as to promote the use of such tractors with Caterpillar road machinery and other industrial equipment. The arrangement with Caterpillar was effected as a matter of policy by Deere & Company for general application to the entire organization.
The competitive situation was particularly acute on the West Coast in that differences in topographical, climatic and soil conditions as compared with other parts of the country caused track-type tractors to be much more widely used in that area than the wheel-type machines. This situation caused plaintiff to make some basic changes in its method of doing business pursuant to the arrangement between Deere & Company and Caterpillar to use common dealers, who would sell the combined products of both organizations to all classes of customers. In plaintiff's San Francisco trade territory the Caterpillar dealers were more strongly established, and accordingly plaintiff's San Francisco house discontinued doing business with practically all of its former dealers, numbering approximately 250, and began marketing its goods through Caterpillar distributors. Upon this basis plaintiff reduced its selling outlets to 44 retaining 25 of its old dealers as established in isolated communities and replacing its other dealer customers with 19 new Deere-Caterpillar distributors.
The use of former Caterpillar dealers for the distribution of the Deere line of products in the trade territory of plaintiff's San Francisco jobbing house necessitated plaintiff's undertaking an extensive program of education with regard to the selling and servicing of such goods; and additional salesmen were employed to visit the new dealers and acquaint them with the Deere output. Plaintiff's repair and service departments in the San Frandisco territory were revised and expanded, staffed with additional trained employees, and equipped with facilities to provide equivalent maintenance and care for both lines of goods. Upon the termination of its accounts with many of its former dealer customers, plaintiff's San Francisco house had to arrange for the goods in their hands either to be transferred to the new Deere-Caterpillar distributor who took over that part of the San Francisco trade territory or returned to plaintiff's San Francisco jobbing house. In some instances, after initial transfer to the new dealer, the old goods would subsequently be returned to plaintiff's San Francisco jobbing house for credit. The handling of all this merchandise by plaintiff's San Francisco jobbing house involved considerable checking and reconditioning of the goods, as well as the renting of additional storage space, with a resulting increase in warehouse and transfer expenses for plaintiff's San Francisco house.
The bulk of the goods sold by plaintiff's San Francisco house was purchased from Deere & Company for a price determined by applying...
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