Marble Mortg. Co. v. Franchise Tax Bd.

• Decision Date: 22 March 1966
• Court: California Court of Appeals Court of Appeals
• Parties: MARBLE MORTGAGE COMPANY, Plaintiff and Respondent, v. FRANCHISE TAX BOARD of the State of California, Defendant and Appellant. Civ. 22880.

Page 345

50 Cal.Rptr. 345

241 Cal.App.2d 26

MARBLE MORTGAGE COMPANY, Plaintiff and Respondent, v. FRANCHISE TAX BOARD of the State of California, Defendant and Appellant.

Civ. 22880.

District Court of Appeal, First District,

Division 2, California.

March 22, 1966.

Rehearing Denied April 20, 1966.

Thomas C. Lynch, Atty. Gen., Ernest P. Goodman, Asst. Atty. Gen., Neal J. Gobar, Deputy Atty. Gen., San Francisco, for appellant.

Edward D. Landels, Landels, Ripley, Gregory & Diamond, San Francisco, for respondent.

TAYLOR, Justice.

Respondent, Marble Mortgage Company, (hereinafter referred to as Marble), was successful in the trial court in this action for a refund of a portion of the California franchise tax paid under protest for its fiscal years ending September 30, 1956, September 30, 1957, and September 30, 1958. On this appeal by the State Franchise Tax Board (hereafter referred to as the state), the sole question is one of law, i.e., whether Marble was a 'financial corporation' within the meaning of that term as used in section 23183 of the Revenue and Taxation Code, and therefore taxable at the rate imposed on banks, as the state contends, or whether Marble was a general corporation taxable at the rate imposed pursuant to section 23151 of the Revenue and Taxation Code. The propriety of taxing Marble at the bank rate turns on the question of whether the activities of Marble were in substantial competition with national banks (Crown Finance Corp. v. McColgan, 23 Cal.2d 280, 144 P.2d 331; The Morris Plan Co. of San Francisco v. Johnson, 37 Cal.App.2d 621, 100 P.2d 493).

The matter was tried on the following uncontroverted facts: During the period of time here involved, Marble was engaged in the business of initiating loans secured by first trust deeds on real property in southern California with the intention of assigning them to various institutional investors, a business commonly referred to as 'mortgage bankers' or 'loan correspondents.' The loans made by Marble were primarily on single family homes of the same nature as real estate loans made by banks, although a few loans were made on multiple dwellings or commercial buildings. Marble's terms were somewhat more liberal than those of banks on conventional (non-federally insured) loans.

Marble solicited loans from builders, realtors and the public. On receiving loan requests, Marble advised the borrowers of its lending terms, based on its knowledge of the requirement of its institutional investors and general market conditions. Marble set its own charges or 'points' for initiating and servicing loans. Marble usually obtained a commitment before making the loan. At other times, Marble proceeded to make the loan, knowing it was of the type that one or more of its institutional investors or 'purchasers' would buy. Marble established lines of credit with banks and generally financed its lending by borrowing from banks or by use of its own funds. On construction loans, Marble normally held the loan until construction was completed and the homes sold. Where the development of a large tract was involved, Marble often obtained a letter of intent from the institutional investor, indicating the investor's intent to purchase on completion. Marble would then finance the construction of the development and, as with other construction loans, the loan was not assigned to the purchaser until after the houses had been completed and sold.

Marble received and retained the income accruing during the period in which it held the loans prior to assignment. During the period of time here involved, between 51 and 60 per cent of Marble's gross income was obtained from this source and amounted to approximately $290,000 in 1955, $272,000 in 1956, and $435,000 in 1957.

After assignment of the loans, Marble collected the principal and interest due and protected the interests of the 'purchaser' by seeing to it that taxes and insurance were paid, and the property properly maintained until the loan was paid off, etc. The portion of the interest retained by Marble after assignment of the trust deeds, constituted between 34 and 42 per cent of its gross income during the three years here in question. Marble's rights and responsibilities were set forth in the contractual agreements with the institutions to whom Marble assigned deeds of trust. ¹ Under these agreements, Marble retained as its so-called 'servicing fee' a portion of the interest payments on the loans (normally 1/2 per cent) that had been assigned, as well as any late charges collected from the mortgagor. The 'purchaser' could not terminate Marble's rights except by specified payments and had the right to return the trust deeds to Marble for periods of time ranging up to six months and for a variety of reasons. The contractual agreements indicated that Marble was acting as an independent contractor rather than an agent of the 'purchaser.'

In 1957, Marble entered into arrangements with pension funds desirous of purchasing a given dollar value of federally insured loans (F.H.A. and/or V.A.). Marble made these federally insured loans without any prior commitment or letters of intent. If the F.H.A. and V.A. loans made by Marble did not meet the requirements of Marble's 'purchasers,' Marble sometimes sold these loans without commitment to the Federal National Mortgage Association. During a nine-month period in 1957, Marble assigned 33 deeds of trust to F.N.M.A.

The trial court found that Marble was engaged in the business of originating and servicing real estate loans for various institutional investors and that the principal and primary source of its income consisted of fees received for servicing these loans. The court concluded that Marble was not engaged in a business in substantial competition with national banks and therefore was not a 'financial corporation' within the meaning of that term as used in section 23183 of the Revenue and Taxation Code.

The classification 'financial corporation' in the Bank and Corporation Franchise Tax Act (Rev. & Tax.Code, § 23183 et seq.) was made for the purpose of complying with the federal statute (12 U.S.C.A. § 548) prohibiting discrimination in taxation between national banks and other financial corporations (The Morris Plan Co. v. Johnson, 37 Cal.App.2d 621, 624, 100 P.2d 493). The term 'financial corporation' in the Revenue and Taxation Code is interpreted to mean a corporation dealing in 'other moneyed capital' as that term is used in paragraph 1(b) of the federal statute (Traynor & Keesling, Recent Changes in Franchise Tax Act, 22 Cal.L.Rev., 499, 510--511).

National banks are not merely private businesses, but rather are agencies of the United States, created by it to promote its fiscal policies, and financed by private capital. Hence, the national banks and their shares are taxable by the states only with the consent of Congress, and then only in accordance with such restrictions and in the manner Congress has authorized (First Nat. Bank of Guthrie Center v. Anderson, 269 U.S. 341, 46 S.Ct. 135, 70 L.Ed. 295).

The federal statute limiting state taxation, 12 U.S.C.A. § 548 (Rev.Stat. § 5219) provides, so far as pertinent: 'The legislature of each State may determine and direct, subject to the provisions of this section, the manner and place of taxing all the shares of national banking associations located within its limits. The several States may (1) tax said shares, or (2) include dividends derived therefrom in the taxable income of an owner or holder thereof, or (3) tax such associations on their net income, or (4) according to or measured by their net income, provided the following conditions are complied with:

'1. (a) The imposition by any State of any one of the above four forms of taxation shall be in lieu of the others, except as hereinafter provided in subdivision (c) of this clause.

'(b) In the case of a tax on said shares the tax imposed 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: Provided, That bonds, notes, or other evidences of indebtedness in the hands of individual citizens not employed or engaged in the banking or investment business and representing merely personal investments not made in competition with such business, shall not be deemed moneyed capital within the meaning of this section.

'(c) In case of a tax on or according to or measured by the net income of an association, the taxing State may, except in case of a tax on net income, include the entire net income received from all sources, but the rate shal not be higher than the rate assessed upon other financial corporations nor higher than the highest of the rates assessed by the taxing State upon mercantile, manufacturing, and business corporations doing business within its limits: Provided, however, That a State which imposes a tax on or according to or measured by the net income of, or a franchise or excise tax on, financial, mercantile, manufacturing, and business corporations organized under its own laws or laws of other States and also imposes a tax upon the income of individuals, may include in such individual income dividends from national banking associations located within the State on condition that it also includes dividends from domestic corporations and may likewise include dividends from national banking associations located without the State on condition that it also includes dividends from foreign corporations, but at no higher rate than is imposed on dividends from such other corporations.'

This state has chosen to use the so-called 'fourth method' of taxation approved by the federal statute, namely, taxing national banks according to, or measured by, their net income. Thus, under the California Bank and Corporation Franchise Tax Act, corporations other than banks and financial corporations are taxed at a flat rate of 4 per cent...