Crown Finance Corp. v. McColgan

Plaintiffs were successful in the trial court in these actions to recover franchise taxes paid under protest. The actions were consolidated for trial.

The trial court found that each plaintiff, a corporation, was engaged solely in the business of purchasing conditional sales contracts and accounts from neighborhood retail dealers in personal property consisting chiefly of household furniture and furnishings, and with respect to plaintiff, Crown Finance Corporation, also clothing. The latter corporation

The trial court found that neither of the plaintiffs is a bank, national or otherwise, a financial corporation, or engaged in business in substantial competition with national banking associations. Defendant challenges that finding as being unsupported by the evidence with respect to competition. It contends that even if plaintiffs are not engaged in competition with national banks they are financial corporations ; and that under the Bank and Corporation Franchise Tax Act it need only appear that plaintiffs are financial corporations, that is, moneyed corporations or dealers in money, without regard to whether their business competes with national banks.

The classification “financial corporations” in the Bank and Corporation Franchise Tax Act was made for the purpose of complying with the federal statute ( 42 Stat. 1499 ; 12 U.S.C.A., see. 548) prohibiting discrimination in taxation between national banks and financial corporations, and the term was used in the same sense as in the federal statute. Section 1 of the Bank and Corporation Franchise Tax Act imposes a franchise tax on national banking associations according to or measured by their net income at the rate fixed by section 4a. Section 2 fixes a tax on other banks on the same basis and rate. Section 4 provides for a tax on “financial corporations” taxable under the provisions of article XIII, section 16, of the California Constitution, according to or measured by their net income at the rate specified in section 4a. (That section also imposes a tax of 4 per cent on corporations, with certain exceptions, other than financial corporations.) The rate set by section 4a is limited to 8 per cent; it is calculated with relation to the rates for other corporations and the taxes paid on personal property by such corporations. The taxes levied on banks are in lieu of all other taxes except real property taxes. (Sec. 3.) Financial corporations are permitted to offset against the franchise tax, other taxes paid, with certain exceptions as provided in the

The federal statute involved reads: “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: . . . (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 shall not be higher than the rate assessed upon other financial corporations nor

Neither the federal statute nor the state act defines the term “financial corporations.” However, in the federal act, in the ease of a tax on national bank shares as distinguished from a tax measured by or according to the income, it is provided that the tax may not be greater than upon moneyed capital coming into competition with the business of national banks. (12 U.S.C.A., sec. 548, clause 1(b).) That clause is interpreted to mean that: “The purpose of the restriction is to render it impossible for any State, in taxing the shares, to create and foster an unequal and unfriendly competition with national banks, by favoring shareholders in state banks or individuals interested in private banking or engaged in operations and investments normally common to the business of banking.” (First Nat. Bank v. Anderson, 269 U.S. 341 , 347 [ 46 S.Ct. 135 , 70 L.Ed. 295 ].) Inasmuch as the broad purpose of the restriction in the federal statute on state taxation of national banks is to prevent discrimination between national banks and financial corporations (see Tradesmens [Nat.] Bank v. Tax Comm’n, 309 U.S. 560 [ 60 S.Ct. 688 , 84 L.Ed. 947 ]), and there would not likely be any discrimination where the financial corporations were not competing with national banks, we believe that a corporation may not be classed as financial under the state act unless it is in substantial competition with the business of national banks. Moreover, financial corporations being placed, in a special class without definition, the other portions of the

The question then becomes one of whether the evidence was sufficient to support the finding that plaintiffs were not financial corporations and were not engaged in competition with national banks. Viewing the evidence most favorable to plaintiffs, the record shows the following: Plaintiffs were engaged exclusively in purchasing at a discount conditional sales contracts of household furnishings and other low price articles of personal property from small local retail sellers of those articles under such contracts. They never made loans. From 1937 to 1941 the percentage of such contracts purchased by Crown without recourse to the seller thereof increased from 60 per cent to 100 per cent, while Washington, took most of its contracts with recourse. The period of deferment of payment in the contracts ran from six months to two years. A carrying charge was added to the contract by the retail merchant before the sale of the contract. Plaintiffs required credit references and information from the buyers named in the contracts, which must meet their approval before they would purchase the contracts. Usually the dealer would require that approval before it would sell the merchandise on credit. The Crown’s business volume was $900,-000 to $1,100,000 a year since 1938; that of Washington was $300,000 to $325,000. No part of the payment to the dealer for the contracts was withheld as a reserve to protect plaintiffs if the credit buyer defaulted.

From the testimony of an officer of a national banking association doing business in the same area as plaintiffs, it

The only reasonable conclusion from that evidence is that plaintiffs were in substantial competition with national banks. Both national banks and plaintiffs are engaging in the same general investment business, that is, a business where the dealing is in moneyed capital as distinguished from other commodities, and purchasing at a discount conditional sales contracts from retail dealers in household furnishings and equipment. While in all phases of the business of each there is not a parallel, that is, plaintiffs do not loan money whereas national banks do, competition may exist although it does not extend to all aspects of the business of national banks. (See Boise City Nat. Bank v. Ada County, 48 F.2d 222 ; National Bank of Commerce v. King County, 153 Wash. 351 [ 280 P. 16 ]; Public Nat. Bank of New York v. Keating, 47 F.2d 561 , aff’d 284 U.S. 587 [ 52 S.Ct. 137 , 76 L.Ed. 507 ]; Minnesota v. First National Bank, 273 U.S. 561 [ 47 S.Ct. 468 , 71 L.Ed. 774 ]; First National Bank v. Hartford, 273 U.S. 548 [ 47 S.Ct. 462 , 71 L.Ed. 767 ]; First Nat. Bank v. Anderson, supra, p. 348 .) It is true that it was testified that the business of the national banks and plaintiffs was not similar, for the reason, however, that, contrary to plaintiffs’ course of business, the national banks looked only to the dealer’s credit, insisted upon recourse to the dealer, and required a reserve. The last-mentioned differences in the mode of transacting the business of investing in instruments calling for the payment of money by purchasing of conditional sales contracts, are not con

First National Bank of Shreveport v. Louisiana Tax Commission, 289 U.S. 60 [ 53 S.Ct. 511 , 77 L.Ed. 1030 , 87 A.L.R. 840 ], is not contrary to these views. The first part of the opinion was concerned with discrimination under the Fourteenth Amendment to the Constitution of the United States and merely held in that connection that there was a basis for a distinction between banks and other corporations loaning money, in that banks used deposited money and the others did not. In regard to small loan and finance companies, the court stated, in concluding that there was no .competition with national banks, at page 66: “ ‘And that [there is no competition with national banks] is true also of the so-called finance and securities companies, whose business is to lend money on long series of notes given for the price of automobiles, refrigerators, radios, etc., and secured by chattel mortgages. The national banks would never handle such business. They prefer to—and do in fact—lend to such companies.’ These findings are supported by the record.” The record in the instant case discloses that national banks do a substantial business in purchasing conditional sales contracts of the same character as those bought by plaintiffs. (See Morris Plan Co. v. Johnson, supra.) Other cases cited by plaintiffs involve situations in which national banks were not, as in the case at bar, engaged in the same class of small loan business based upon conditional sales contracts. The cases in this state hold that finance companies are financial corporations within the purview of the Bank and Corporation Franchise Tax Act when they engage in business in competition with national banks. (H.A.S. Loan Service, Inc. v. McColgan, supra; Mor

The judgments are reversed.

Gibson, C. J., Shenk, J., Curtis, J., Edmonds, J., and Schauer, J., concurred.

Traynor, J., did not participate.