Title Ins. & Trust Co. v. Franchise Tax Bd.

• Decision Date: 11 October 1956
• Citation: Title Ins. & Trust Co. v. Franchise Tax Bd., 302 P.2d 79, 145 Cal.App.2d 60 (Cal. App. 1956)
• Court: California Court of Appeals
• Parties: TITLE INSURANCE AND TRUST COMPANY, Plaintiff and Appellant, v. FRANCHISE TAX BOARD, State of California, Defendant and Respondent. Civ. 21726.

Page 79

302 P.2d 79

145 Cal.App.2d 60

TITLE INSURANCE AND TRUST COMPANY, Plaintiff and Appellant, v. FRANCHISE TAX BOARD, State of California, Defendant and Respondent.

Civ. 21726.

District Court of Appeal, Second District, Division 2, California.

Oct. 11, 1956.

Thompson, Royston, Wiener & Moss, Los Angeles, for appellant.

Edmund G. Brown, Atty. Gen., James E. Sabine, Asst. Atty. Gen., Dan Kaufmann, Deputy Atty. Gen., James C. Maupin, Deputy Atty. Gen., for respondent.

MOORE, Presiding Justice.

Appellant filed its action in two counts: One was to recover the franchise tax as to its trust business paid for the year 1943; Two was to recover interest on the franchise tax paid for 1942 but refunded by order of the Franchise Tax Board May 31, 1950. Both demands were rejected. Appellant brought the matter here, contending (1) that it was not, in 1943, subject to the tax imposed by the former Bank and Corporation Franchise Tax Act for the calendar year 1943 by reason of the contents of section 14 4/5 of Article XIII of the California Constitution; (2) that it is entitled to interest on the franchise tax paid for the taxable calendar year 1942 under section 27(c) of the former Bank and Corporation Franchise Tax Act ¹ as that section read in 1942 because the overpayment of the tax did not result from an error or mistake on the part of appellant. The Franchise Tax Act will hereafter be referred to as the Act.

The answer to the question as to whether appellant was obliged to pay a tax under the Act for the privilege of operating its trust business in the calendar year 1943 depends upon the interpretation of section 14 4/5 ² which was adopted November 3 1942 and is in part copied on the margin hereof.

Section 14 4/5 is by its own contents self-executing. Without legislative aid, it emphatically subjects the trust business of appellant to taxation for 1943. Its title insurance business had long been subjected to an annual tax under subdivision (b) of section 14 3/4 of Article XIII 'upon the * * * gross premiums, less return premiums, received upon its business done in this State, other than premiums received for reinsurance'. But that method of computing the tax imposed upon the insurance business of title companies in 1942 underwent a change by the adoption of section 14 4/5, and trust business was separately taxed. By subdivision (a) of that section, those provisions of section 14 3/4 relating to the taxation of insurance companies 'shall remain effective as to business done in this State prior to January 1, 1943, and as to the assessment, levy, collection and adjustment of taxes with respect to such business done prior to that date; but as to such business done subsequent to December 31, 1942, those provisions of Section 14 3/4 relating to taxation of insurance companies * * * shall not apply, and this section shall apply thereto.'

From the language just quoted, so far as appellant's insurance business is concerned, it was obliged to pay a tax for business done prior to January 1, 1943, based upon the amount of gross premiums received by it during the preceding twelve months. However, the adoption of section 14 4/5 brought on a definite change in the method of computing the annual tax on its title insurance business. While subdivision (d) retained the same basis of the annual tax as to all insurance companies except title companies, that is to say an annual tax based upon the amount of gross premiums, yet that subdivision changed the annual tax with respect to the insurance business of title companies to a tax based upon their income derived from business done in California. But if an insurance company in this state transacts title insurance and also 'does a trust business under the banking laws of this State, there shall be excluded from the basis of the annual tax imposed by this section, the income of, and from the assets of, such trust department and such trust business, if such income is taxed by this State or included in the measure of any tax imposed by this State.'

It was clearly the purpose of the new section that the trust portion of the business done by such companies as appellant was not to be considered as insurance business and therefore should not be taxed as insurance business. Therefore, while section 14 4/5 exempted the insurance companies and title companies from the great majority of taxes, it emphasized by subdivision (i) that the trust business done by title companies shall be taxed to the same extent and in the same manner as is that of any trust company or trust department of any bank operating in this state. From such reading of the new section, it is apparent that title companies are not engaged in the same type of insurance as that of other insurers and should be taxed on a different basis, to wit, on their incomes rather than on their gross premiums. Inasmuch as the trust business of title companies was not exactly a part of their insurance activities, the new section was so phrased that the trust business of title companies shall be required to pay the same type tax as trust companies and banks doing a trust business are required to pay.

From the foregoing, the conclusion is unavoidable that after December 31, 1942, all insurance sold by a title company must pay an annual tax based upon the company's income, but its income from its trust department must be excluded from the basis of such tax. As to the trust business done by a title company after December 31, 1942, it was subject to a franchise tax under the Bank and Corporation Franchise Tax Act, the same as that paid by other trust companies and trust departments of banks.

Appellant contends (1) that under section 14 3/4 by reason of the fact that its insurance tax is levied in lieu of all other state taxes, it was exempt from the payment of California bank and franchise tax; but (2) that under section 14 4/5 it is subject to such tax measured by its trust department's net income; (3) that the levy of a franchise tax for 1943 measured by its income for 1942 was the assessment and levy of a tax with respect to business done prior to January 1, 1943; (4) thus the judgment of the superior court approving the levy of a tax measured by appellant's trust department income for 1942 applies section 14 4/5 prematurely and contrary to the terms of the express, effective date provided by the section; namely, December 31, 1942.

Appellant's contention that the levy of a franchise tax on trust business for 1943 measured by the income of its trust business in 1942 is, in effect, a tax upon its 1942 trust business in violation of the effective date of section 14 4/5 is not justified by an analysis of that section. Section 14 4/5 expressly provided for taxation of 1943 trust business. The franchise tax here levied was for the privilege of doing business in 1943 regardless of the fact that a prior year's earnings constituted the measuring rod of the amount of the tax. A tax for the privilege of doing business within the state is no less a tax upon this year's privilege because measured by last year's income. Is not success in the recent past the best criterion for measuring the value of doing business now? Since the formula prescribed by the legislature for deriving the taxes due by a trust company furnishes an approximation of the amount accrued and since there appears no abuse of power by the legislation, it will not be disturbed. See Fullerton Oil Co. v. Johnson, 2 Cal.2d 162, 175, 39 P.2d 796.

We cannot agree that section 14 4/5 should be so construed as regards its effective date as to leave appellant not subject to tax for the privilege of conducting trust business in 1943. Should such construction prevail, the trust portion of appellant's business would be exempt for 1943 while its insurance business would be taxed for that year. Thus, would result a hiatus in the law as to the taxation of the trust business of title companies which could not reasonably have been intended by the authors of section 14 4/5 which contemplates that trust business would be taxed. Under appellant's construction of the amending section, the insurance business would be taxed for the year 1943 while its trust business would escape the drag of the tax gatherer. 'In substituting one form of taxation upon corporate franchises for another, we should not hold that the people intended to postpone all collections of such taxes for an entire year unless, the intention to provide such a tax hiatus was clearly and unmistakably expressed.' Spring Valley Co. v. Johnson, 7 Cal.App.2d 258, 261, 46 P.2d 294, 296; Carpenter v. Peoples Mutual Life Ins. Co., 10 Cal.2d 299, 303, 74 P.2d 508.

However, appellant argues that the task of this court of attempting to construe the effective date of section 14 4/5 has been pre-empted by the Legislature. The gist of the contention is that when the Legislature added sections 12253 and 12255 to the Revenue and Taxation Code by the Statutes of 1943, chapter 956, page 2832, and thereby codified the provisions of the constitutional section 14 4/5, section 21 of chapter 956 provided that the effective date of these statutory sections was to be December 31, 1943. Thereby the inference is sought to be drawn that the Legislature construed section 14 4/5 as not providing for franchise taxation of trust business carried on during 1943 as measured by 1942 receipts. This contention cannot prevail. In view of the fact that the provisions of section 14 4/5 are clearly self-executing without legislative implementation, it is unnecessary to inquire into the intent of the Legislature in enacting the various provisions of the Revenue and Taxation Code. In the second place, the effective date contained in section 21 of chapter 956 applied to numerous amendments to the code besides sections 12253 and 12255. It is therefore impossible to infer any legislative intent that these specific sections were to have the December 31, 1943, effective date...