Welch Holding Co. v. Galloway

• Decision Date: 18 April 1939
• Parties: WELCH HOLDING COMPANY <I>v.</I> GALLOWAY ET AL.
• Court: Oregon Supreme Court

161 Or. 515

89 P.2d 559

WELCH HOLDING COMPANY

v. GALLOWAY ET AL.

Supreme Court of Oregon.

Argued March 21, 1939.

Affirmed April 18, 1939.

Rehearing denied May 23, 1939.

Trusts — Implied by law

1. A trusteeship was implied by law where trustee had property of his associates, in the form of corporate stock in operating companies, in his own name.

Taxation — Excise tax law

2. To subject corporation to taxation under corporation excise tax law imposing tax on privilege of doing business in state, measured by net income, the corporation must have been doing business in taxable years and it must have had income during taxable years.

Taxation — Excise tax — Corporations

3. Provision of corporation excise tax law imposing tax on privilege of doing business in state that term "doing business" means any "transaction or transactions in the course of its business" by corporation created under laws of state, means that any incidental or casual transaction not in the course of business of the corporation would not be "doing business".

Taxation — Corporations — Excise tax

4. A corporation which does not carry on activities for gain is not "doing business" within the meaning of Oregon corporation excise tax law.

Taxation — Holding companies

5. The holding of securities of other corporations and the distribution of dividends paid thereon do not constitute "doing business" within meaning of Oregon corporation excise tax law.

Taxation — Excise tax — Corporations

6. In absence of a clearly expressed intention to do so, the Oregon legislature would not be held to have meant by use of common expression "doing business" in corporation excise tax law imposing tax on privilege of doing business in state, something different from the usual meaning of the words, and in their ordinary sense the words "doing business" mean the engaging in activities in pursuit of gain.

Taxation — Holding companies

7. Where the sole purpose of formation of holding company was to make and preserve a record of the beneficial ownership of stock in operating companies to avoid the assertion of federal income taxes upon trustee individually because of receipt of dividends from stock held by him as trustee and where its ultimate object was not

profit and it never commenced or engaged in business but merely received and distributed the avails of operating companies, the holding company was not "doing business" within corporation excise tax law.

Taxation — Excise tax — Corporations

8. Liquidation of a capital asset is not "doing business" within corporation excise tax law in absence of a course of purchases and sales.

Taxation — Holding companies

9. Where holding company sold all of stock of one operating company, advanced proceeds of sale to another operating company without interest and on repayment of loan distributed fund to holders of stock of holding company, the transaction was not an "activity in pursuit of gain" so as to render the holding company subject to corporation excise tax law.

Taxation — Holding companies

10. Where corporation was merely holder of legal title to land as trustee for its president and payment of taxes from corporation funds was a distribution for president's benefit, fact that title was held and conveyed in name of corporation and taxes paid thereon from corporate funds did not show that corporation had engaged in "activity in pursuit of gain" or was "doing business" so as to render it subject to corporation excise tax law.

Corporations — Taxation

11. Where a corporation is the mere agency or instrumentality of its stockholders, the corporate entity will be disregarded for tax purposes.

Taxation — Taxable income

12. A corporation which is a mere conduit or trustee through which income passes has no "taxable income".

Taxation — Holding companies

13. Where holding company was a mere conduit or intermediary through which dividends of operating companies passed to real stockholders of those companies, and dividends of operating companies were not treated as income of holding company but were treated as belonging to stockholders of operating companies and were distributed to them currently as received without any declaration of dividends, the holding company had no "income" and was not subject to imposition of intangibles income tax.

Set-off and counterclaim — Recoupment

14. The doctrine of recoupment is recognized in Oregon.

Set-off and counterclaim — Recoupment

15. Taxpayer's right to recover back corporate excise taxes paid under protest for years 1929 and 1930 could not be defeated on

ground that intangibles income taxes in a greater amount were due for 1930, since right, if any, of state to collect an intangibles tax for year 1930 did not arise out of and was not in any way related to taxpayer's cause of action and, therefore, doctrine of recoupment could not be applied.

Taxation — Excise tax

16. In determining whether a corporation is liable for an excise tax, each case must depend upon its own particular facts.

                  Ownership or control by foreign corporation of stock of other
                corporation as constituting doing business within state, note, 75
                A.L.R. 1242. See, also, 12 R.C.L. 68 (4 Perm. Supp., 3076)
                  61 C.J. Taxation, § 246
                

In Banc.

Appeal from Circuit Court, Multnomah County.

LOUIS P. HEWITT, Judge.

Proceeding by the Welch Holding Company, a corporation, against Charles V. Galloway and others, constituting the State Tax Commission of the State of Oregon, to review an order of the State Tax Commission rejecting plaintiff's claims for refund of corporation excise taxes. From a decree setting aside an order of the State Tax Commission, defendants appeal.

AFFIRMED. REHEARING DENIED.

Ralph R. Bailey, Assistant Attorney General (I.H. Van Winkle, Attorney General, on the brief), for appellants.

Carl E. Davidson, of Portland (Ivan F. Phipps and Charles E. McCulloch, both of Portland, on the brief), for respondent.

BEAN, J.

This is an appeal from a decree of the circuit court for Multnomah county, setting aside an order of the State Tax Commission rejecting the plaintiff's claims for refund of corporation excise taxes paid for the years 1929 and 1930. The necessary statutory steps were taken to bring the question before this court.

During July, 1930, the plaintiff filed an excise return for 1929, accompanied by an affidavit stating that the corporation owed no excise tax for that year. On or about April 1, 1931, the plaintiff filed an excise return for 1930, which also indicated that the corporation owed no excise tax for that year. Throughout the years 1930 and 1931, a series of conferences was held between representatives of the taxpayer and the State Tax Commission in reference to the question of plaintiff's tax liability for the years 1929 and 1930. As a result thereof the plaintiff, under protest, paid excise taxes to the State of Oregon and claims for refund of these taxes were filed on May 7, 1932. Subsequently a formal hearing was held before the State Tax Commission, which resulted in a denial of the plaintiff's claims for refund, on January 22, 1934. An appeal for review of the commission's determination was taken to the circuit court for Multnomah county on March 22, 1934. By stipulation between counsel for the parties, the time for filing defendants' answer was extended to May 18, 1937, on which date the plaintiff served notice on the defendants requesting that an appearance be made on or before June 10, 1937. The defendants' original answer was filed on August 2, 1937, and an amended answer was filed thereafter. The cause was set for trial on June 29, 1938. A decree was entered in the trial court in favor of the plaintiff on September 20, 1938, and thereafter the defendants perfected an appeal to this court.

Ernest M. Welch has for many years been engaged in the retail mortuary business and also in the business of cremation and vault entombment. Each unit of such business has been operated as a separate corporation with 75 or 80 per cent of the capital stock owned by Ernest M. Welch and his associates, the balance of the stock of each corporation being owned by employees or the manager of the corporation. Prior to March 24, 1926, all of that part of the capital stock of these corporations, which was owned by Ernest M. Welch and his associates, was held in the name of Ernest M. Welch. He was the active manager of these various enterprises. His management was highly successful and he was given a free hand, any funds required being supplied by his associates without question.

1. Upon receipt of dividends from the operating companies, Mr. Welch would immediately distribute them proportionately among his associates and himself in accordance with their interests in the capital stock of the operating companies. Mr. Welch's position with regard to the stock of the operating companies was that of trustee, in fact as well as in name. There was, however, no writing evidencing this trust nor any express oral agreement of trust. The trusteeship of Ernest M. Welch was one which the law implies from his having the property of his associates, in the form of corporate stock in the operating companies, in his own name.

Shortly before March 24, 1926, the United States Treasury Department, Bureau of Internal Revenue, proposed to assess against Ernest M. Welch personally, income taxes for the years 1920 to 1923, inclusive, based upon the entire amount of dividends received by him from the operating companies. The amount of the proposed assessment was in excess of $40,000 of income taxes, plus fraud penalties of more than $20,000.

Mr. Welch was not legally liable for these taxes and penalties, as the dividends received by him from the operating companies had been distributed to the beneficial owners of the stock. However, the proof of his trusteeship was not in such form as to be acceptable to the federal taxing authorities, and it was only after a long series of conferences in Washington,...