Security-First Nat. Bank of Los Angeles v. Franchise Tax Bd.

• Decision Date: 23 February 1961
• Docket Number: SECURITY-FIRST
• Citation: 359 P.2d 625,11 Cal.Rptr. 289,55 Cal.2d 407
• Parties: , 359 P.2d 625 NATIONAL BANK OF LOS ANGELES (a National Banking Association), Appellant, v. FRANCHISE TAX BOARD of the State of California, Respondent (17 cases). BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (a National Banking Association), Appellant. v. FRANCHISE TAX BOARD of the State of California, Respondent (13 cases). FARMERS AND MERCHANTS NATIONAL BANK OF LOS ANGELES (a National Banking Association), Appellant, v. FRANCHISE TAX BOARD of the State of California, Respondent (15 cases). Sac. 6952-6968, 6969-6981, 6982-6996.
• Court: California Supreme Court

Page 289

11 Cal.Rptr. 289

55 Cal.2d 407, 359 P.2d 625

SECURITY-FIRST NATIONAL BANK OF LOS ANGELES (a National Banking Association), Appellant, v. FRANCHISE TAX BOARD of the State of California, Respondent (17 cases).

BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (a National Banking Association), Appellant. v. FRANCHISE TAX BOARD of the State of California, Respondent (13 cases).

FARMERS AND MERCHANTS NATIONAL BANK OF LOS ANGELES (a National Banking Association), Appellant, v. FRANCHISE TAX BOARD of the State of California, Respondent (15 cases).

Sac. 6952-6968, 6969-6981, 6982-6996.

Supreme Court of California, In Bank.

Feb. 23, 1961.

O'Melveny & Myers, Pierce Works, Howard J. Deards, Lawler, Felix & Hall, Brenton L. Metzler, Los Angeles, Samuel B. Stewart, Jr., San Francisco, and Hugo A. Steinmeyer, Los Angeles, for appellants.

Stanley Mosy, Atty. Gen., James E. Sabine and Irving H. Perluss, Asst. Attys. Gen., Ernest P. Goodman, Deputy Atty. Gen., and Felix S. Wahrhaftig, Sacramento, for respondent.

GIBSON, Chief Justice.

Plaintiffs, national banking associations, appeal from judgments denying recovery in actions for the refund of taxes imposed under the Bank and Corporation Franchise Tax Act during the years 1933 through 1949. Stats.1929, ch. 13, p. 19, as amended; Deering's Gen. Laws, 1944, Act 8488. ¹

From 1935 through 1949 subdivision 3 of section 4 of the act ^* imposed a franchise tax at the flat rate of 4 per cent of net income upon every corporation except financial corporations and those exempted by the Constitution or the act. The corporations taxable under this provision (hereafter referred to as nonfinancial corporations) were required to pay, in addition, other taxes including personal and real property taxes. Banks and other financial institutions were required to pay as a franchise tax a percentage of net income, not to exceed 8 per cent, made up of two parts: (1) A flat rate of 4 per cent, as paid by nonfinancial corporations, and (2) an additional percentage determined on the basis of the ratio between the total personal property taxes required to be paid by nonfinancial corporations and their total net incomes attributable to California. § 4a. ^** In 1933 and 1934 section 4a provided that the flat rate, like the one then applicable to nonfinancial corporations, was 2 per cent (rather than 4 per cent) and that the combination of the flat rate and additional percentage should not exceed 6 per cent. ² The act provides that the tax on the franchise of banks is in lieu of all other state, county, or municipal taxes or licenses except real property taxes. § 3. ^*** There is no such provision with respect to other corporations.

National banks, such as plaintiffs, may be taxed by a state only as expressly permitted by Congress. Iowa-Des Moines Nat. Bank v. Bennett, 284 U.S. 239, 244, 52 S.Ct. 133, 76 L.Ed. 265; First Nat. Bank of Guthrie Center v. Anderson, 269 U.S. 341, 347, 46 S.Ct. 135, 70 L.Ed. 295. Section 5219 of the Revised Statutes of the United States (12 U.S.C. § 548) Sets forth the four methods by which a state may tax those banks. The fourth method, which has been adopted by California, is to tax them 'according to or measured by their net income.' When this method is used, the 'entire net income received from all sources' may be included, but the rate shall not be higher than the rate assessed upon other financial corporations 'not higher than the highest of the rates assessed by the taxing state upon mercantile, manufacturing, an business corporations doing business within its limits.' It is settled that taxation of personal property, which is not a method of taxation permitted in section 5219, is improper. Owensboro National Bank v. City of Owensboro, 173 U.S. 664, 668 et seq., 19 S.Ct. 537, 43 L.Ed. 850; First National Bank of San Francisco v. City and County of San Francisco 129 Cal. 96, 97-98, 61 P. 778. Plaintiffs contend that the California act imposes a tax rate higher than is permitted by section 5219 and that it results in taxing their personal property.

Section 5219 is designed to allow the states considerable freedom in working out an equitable tax system, and the purpose of the limitation on the rate which may be imposed is only to prohibit discrimination in practical operation against national banks as a class. Tradesmens National Bank of Oklahoma City v. Oklahoma Tax Comm., 309 U.S. 560, 567-568, 60 S.Ct. 688, 84 L.Ed. 947. In determining whether a state tax on such banks according to or measured by net income violates the limitation, consideration must be given to the state tax structure as a whole, not merely to taxes of the kind imposed upon those banks. The state tax on them is valid so long as the resulting burden does not exceed the burden to which state banks, mercantile, business, manufacturing, and financial corporations are subject. Tradesmens National Bank of Oklahoma City v. Oklahoma Tax Comm., supra, 309 U.S. 560, 567-568, 60 S.Ct. 688, 84 L.Ed. 947; see Franchise Tax Board v. Superior Court, 36 Cal.2d 538, 551-552, 225, P.2d 905; H. A. S. Loan Service, Inc. v. McColgan, 21 Cal.2d 518, 520, 133 P.2d 391, 145 A.L.R. 349. In Tradesmens National Bank, the court, in upholding the validity of a bank franchise tax against a claim of discrimination, took into consideration not only franchise taxes imposed on nonfinancial corporations but also this income and ad valorem taxes.

Section 4a is designed to impose on banks a fair and equitable tax within the restrictions of section 5219, and the lack of any discrimination against banks is clear when the entire tax burden of other corporations is taken into consideration. See 22 Cal.L.Rev. 499, 503-504 (1934). As we have seen, nonfinancial corporations as well as banks pay a franchise tax of 4 per cent of their net incomes and real property taxes, and the nonfinancial corporations also pay personal property taxes. Banks are exempt from personal property taxes, and, while they pay as a franchise tax a percentage of net income in addition to the 4 per cent they pay in common with other corporations, the additional percentage is based on the ratio between the personal property taxes paid by the other corporations and the net incomes of those corporations. ³ The total percentage of net income paid by banks as franchise taxes is equal to the percentage paid by nonfinancial corporations as a group from their combined net incomes as franchise taxes and personal property taxes. Thus, if the banks are required to pay a higher percentage of their net income than some of those corporations, there are necessarily others corporations, there are necessarily others paying a greater portion of their net income than the banks pay. It is apparent that the tax burden of the banks is not 'higher than the highest of the rates' imposed upon nonfinancial corporations and is in accord with section 5219.

The personal property of national banks, which, as pointed out above, is exempt from taxation, is not taxed either directly or indirectly by the provisions of section 4a. The amount of taxes paid by the banks under that section does not depend upon or very in any way with the amount of personal property they own. The calculation of the tax rate does not take into account the personal property owned by banks as a class or that owned by particular banks, and the tax is measured by their income.

The fact that Congress has not permitted taxation of the personal property of banks does not mean that their tax burden should be less than that of other corporations but only that it may not be imposed in the form of a personal property tax. This is evident from section 5219 of the Revised Statutes, which permits taxation of banks at the 'highest' rate assessed against nonfinancial corporations. The Legislature, consistent with the federal statute, could have exempted from personal property taxes nonfinancial corporations as well as banks, imposed franchise taxes on both at the same rate, and thus denied national banks any monetary advantage from their personal property exemption. The legislative determination that the amount of taxes to be paid by nonfinancial corporations should be obtained partly be personal property taxes and partly by franchise taxes does not prevent the state from placing an equal tax burden on national banks solely in the form of franchise taxes.

It has been held in an analogous situation that, although a state may not tax the franchise of a foreign corporation whose activities in the state constitute exclusively interstate commerce, a special tax at a rate equivalent to the franchise tax may be imposed on the foreign corporation in the form of a net income tax from which corporations paying the franchise tax are exempt. West Publishing Co. v. McColgan, 27 Cal.2d 705, 707 et seq., 166 P.2d 861, affirmed 328 U.S. 823, 66 S.Ct. 1378, 90 L.Ed. 1603; cf. Northwestern States Portland Cement Co. v. State of Minnesota, 358 U.S. 450, 457 et seq., 79 S.Ct. 357, 3 L.Ed.2d 421 (citing with approval and quoting from the West Publishing Co. case); Gregg Dyeing Co. v. Query, 286 U.S. 472, 478 et seq., 79 S.Ct. 631, 76 L.Ed. 1232. Similarly, the fact that a state may not apply its sales tax to sales of property in interstate commerce or outside the state does not prevent it from imposing a use tax, at the same rate, on use or storage in the state and exempting from that tax all property which has been previously subjected to the sales tax. Southern Pacific Co. v. Gallagher, 306 U.S. 167, 171-172, 59 S.Ct. 389, 83 L.Ed. 586. It is apparent that these cases go much further than we are required to go here since the taxes there under consideration were upheld even though the taxpayer was required to pay the same amount as if the tax from which he was exempt had been applied. The amount of tax the banks are required to pay is not the same as the amount they would have paid had their personal property been taxed; there...