CROWN FINANCE CORPORATION v. MCCOLGAN FRANCHISE TAX COMMISSIONER

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

CROWN FINANCE CORPORATION v. MCCOLGAN, FRANCHISE TAX COMMISSIONER.

WASHINGTON FINANCE CO. v. MCCOLGAN, FRANCHISE TAX COMMISSIONER.

Civ. 13915, 13916.

Decided: March 29, 1943

Earl Warren, Atty. Gen., H. H. Linney, Asst. Atty. Gen., and Valentine Brookes, Deputy Atty. Gen., for appellant. Benjamin, Lieberman & Elmore, of Los Angeles, for respondent.

The above entitled actions were consolidated for the purposes of trial. Judgment having been entered in each case in favor of the plaintiff, the appeals have been consolidated for the purpose of decision here. Inasmuch as there are only slight variances between the facts of each case we here present in outline the story of the Crown Finance Corporation hereafter referred to as “Crown,” as explanatory of the reasons which induce our decisions in both causes. The plaintiff Washington Finance Company will be referred to as “Washington.”

Plaintiff having been assessed at the rate of 4 per cent of its net income as its franchise tax for the years 1937, 1938, 1939, and 1940, defendant served notice at appropriate times to plaintiff advising that defendant deemed and designated plaintiff to be within the category of “national banking associations and other banks and corporations” and that pursuant to the Bank and Corporation Franchise Tax Act, (Statutes 1929, p. 19, as amended, section 1, Deering's Gen.Laws 1937, Act 8488) that he would require an additional 4 per cent of said net income, same being the difference between the tax on national banking associations and the tax on ordinary business corporations. Having protested such additional levies, plaintiff under protest paid the extra taxes levied for each of the four years named and thereafter instituted this action to recover the amounts so paid. The findings of the court were that plaintiff was not in substantial competition with national banking associations or banks and thereupon decided that plaintiff was not taxable as a financial corporation but as an ordinary business corporation and adjudged it to be entitled to the moneys paid by plaintiff under protest in settlement of the additional taxes so levied; that the business of Crown was solely and exclusively that of purchasing conditional sales contracts and accounts from neighborhood retail dealers; that its business was at all times limited to that one activity; that substantially all of such conditional sales contracts and accounts were for the sale of furniture, furnishings, and clothing by neighborhood retail dealers; that plaintiff is not now and never was a financial corporation or engaged in business in substantial competition with national banking associations or banks; that plaintiff was and is taxable only as an ordinary corporation at the rate of 4 per cent of its annual net income; that the amount paid under protest is in excess of such 4 per cent.

In view of the attacks made upon the judgment we are to determine (1) whether the evidence supports the findings, and (2) whether a corporation engaged in the business of purchasing conditional sales contracts from neighborhood retail stores dealing in furniture, furnishings and clothing is an ordinary business corporation and subject to a tax of only 4 per cent of its net income or is a “financial corporation” and subject to the rates levied upon national banks.

(1) Evidence in support of the findings was that the contracts purchased by Crown were from dealers who had sold to the consumers; that the acquisition of a contract was determined upon the financial responsibility of the purchasers of the merchandise; that Crown's policy had been progressively toward purchasing such contracts without recourse until 1941 when 100 per cent of its contracts were without recourse on the dealers in which event the title of the personalty described in the contract became the property of Crown and it suffered all losses from failures to collect; that the average term of the contracts was six months for clothing and 24 months on household furniture and beauty shop equipment. While the average amount of investments in such contracts was from $900,000 to $1,000,000 annually Crown's own capital was $500,000 and all sums invested in the business besides its capital was borrowed.

The facts with reference to the Washington Finance Company discloses two slight material variances in its methods from those followed by Crown, to–wit: it purchased contracts from household furniture dealers only and, instead of diminishing the number of its contracts purchased with recourse, it increased the percentage of its contracts with recourse, until the year 1941, at which time 85 per cent of the contracts acquired by it were with recourse. But it had no reserve as the bank has as hereinafter will appear. Washington's average annual investments in such contracts do not exceed $325,000.

To prove that Crown's business did not conflict with that of national banks, testimony was taken with reference to methods of the Bank of America National Trust and Savings Association, one of the leading national banks of this state. The evidence shows that in 1937 and 1938 this bank purchased no conditional sales contracts from dealers; that in 1939 it commenced to buy contracts on a discount basis but always with recourse on the seller. Moreover the bank maintained a reserve of from 20 to 40 per cent as an additional guaranty of performance by the dealer. The proof was that such transactions of the bank were in the nature of an advance to the dealer or a direct loan to the consumer and that the methods of doing business by the finance companies and the bank were not similar. The bank would make loans to its patrons to enable them to buy furniture but would take no furniture as security. From 10 to 20 per cent of its personal loans were loans on furniture or household goods. It makes personal loans in the amount of from three to five million dollars a month which is about one fifth of its installment business, the balance being on the purchase of conditional sales contracts on automobiles. As a further measure of safety the bank always maintains a reserve against the paper discounted. That is, it advances to the dealer from 60 per cent to 80 per cent of the face value of the contract, while the balance is held by the bank as a protection against the dealer. It buys no such paper without such reserve and the dealer's guaranty. The bank has nothing to say about the dealer's extension of credit to his patron but holds the dealer responsible for the payment of the contract. The bank never repossesses from a delinquent if the dealer is competent to fulfill his obligation. In short the bank merely conducts loans on such contracts as security in that department of the bank designated “Installment Credit Loan Department.” The percentage of loans on furniture contracts made by such department of the bank was less than 6 per cent of all types of loans on conditional sales contracts. The testimony of the bank official was that the business done by Crown and Washington was “not similar” to that done by the bank from which and from a comparison of the methods pursued by the bank and the plaintiffs the court justifiably found that there was no competition between plaintiffs and the national banks of the community of Los Angeles County.

In view of such evidentiary support the findings cannot be disturbed on appeal. Our only duty when affirmative findings are attacked as being unsupported by the evidence is to inquire whether there was evidence of a substantial nature to support the judgment. Webster v. Board of Dental Examiners, 17 Cal.2d 534, 539, 110 P.2d 992. Neither will an appellate court supplant the trial court's findings with its own conclusions. Ibid; Hamilton v. Pacific Electric Railway Co., 12 Cal.2d 598, 603, 86 P.2d 829. In view of the testimony it may reasonably be determined that the character of business done by plaintiffs would not be accepted by a national bank and that the plaintiffs are therefore not its competitors. They invest their own money in the paper purchased; the bank invests its deposits. They make no loans; the banks make many. They purchase the contracts with or without recourse; the bank retains the right of recourse against every dealer. Plaintiffs rely upon the credit rating of the consumer; the bank relies upon the credit ratings and financial statements of the dealers and are guided by their ability to pay. In event of default by the consumer, plaintiffs repossess; banks require the dealers to enforce payment of the contracts held by the banks.

Because the articles of incorporation of plaintiffs contain, in the language prescribing their powers, the power to lend money, to take securities of real or personal property, to discount paper and to extend credit, it is contended that the nature of their business is thereby established. Such is not a necessary sequitur from the phraseology of the expressed powers. It is a universal practice of lawyers in preparing articles of incorporation to include every conceivable activity in which the corporation might engage. The nature of the business transacted is reflected in its current activities evidenced by the records of its proceedings and by its books of accounts or by the testimony of its officers or employees.

The inclusion of the word “Finance” in the corporate names of the plaintiffs is likewise of no special significance in view of the disclosures by the evidence of the actual methods and practices of the two taxpayers as above recited.

(2) Notwithstanding the finality of the judgment by reason of the positive findings and proof which support it, appellant contends that plaintiffs are “financial corporations” in contemplation of section 5219, U. S.Revised Statutes, 12 U.S.C.A. § 548, because they show no activity “other than the use of money to make money”; because their money is used to acquire contracts by the discount method to gain profits; because when their “capital is exhausted in the purchase of contracts more capital is borrowed from banks more contracts are purchased and more profit is earned.” Therefore, says appellant, it is idle for them to contend that they are not financial corporations.

In order fairly to appraise appellant's contention it is necessary to remember the language of the federal statute and the purpose of its enactment. Under the early holdings of the United States Supreme Court (McCulloch v. Maryland, 4 Wheat. 316, 17 U.S. 316, 4 L.Ed. 579), neither a state nor its political subdivisions could levy a tax upon the personal property of national banks. In order to overcome the disadvantage to which the law, as then announced, subjected state banks and other financial persons or corporations, the Congress enacted section 5219. By that section a state is authorized to tax the shares of national banks located within its limits by any one of four methods. The fourth method is a tax according to or measured by their net incomes subject to the restriction, viz: 1(c) that the rate of the tax levied “shall 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.” The further condition is imposed in subsection 1(b) that such tax shall not be at a greater rate than is assessed upon “moneyed Capital” in the hands of individuals coming into competition with the business of National banks: provided that evidences of indebtedness in the hands of individuals not employed in banking 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. It is thus seen that the very statute itself specifically names a type of capital to be assessed in the hands of individuals but requires it to “come into competition” with the business of banks in order to make it subject to the same tax as banks. Also, it exempts from consideration as moneyed capital “evidences of indebtedness * * * not employed * * * in the banking * * * business * * * not made in competition with such business * * *.” The term “moneyed capital” as used in the statute means capital employed by its possessor in the business of making loans on collateral, discounting negotiable paper and dealing in securities after the fashion of banks in order to make profits, thereby competing with the moneyed capital invested in national banks. Talbott v. Board of Com'rs of Silver Bow County, 139 U.S. 438, 11 S.Ct. 594, 35 L.Ed. 210.

The purpose of the federal statute is “to prevent the fostering of unequal competition with the business of national banks by the aid of discriminatory taxation” in favor of other corporations or of persons making investments like those of national banks. First National Bank of Hartford v. City of Hartford, 273 U.S. 548, 550, 551, 47 S.Ct. 462, 465, 71 L.Ed. 767, 59 A.L.R. 1. Unless the moneyed capital invested by the domestic concern comes into substantial competition with the national banks in the same locality then there is no offending discrimination as forbidden by section 5219. The intention of the Congress so appears from the language of subsection 1(b). A fair construction of that clause indicates a legislative policy that other moneyed capital may be used by an ordinary business corporation in the purchase of conditional sales contracts although such investments are in competition with national banks. Certainly there can be no doubt that such investments by an ordinary corporation may be made without offending the federal statute where they are based upon the intrinsic value of the contracts of sale in a locality where national banks do not invest in the same type of contract or where they merely take such contracts as security in addition to the credit of the dealer against whom the bank retains the right of recourse. The inhibition against discriminating against national banks prescribed by section 5219 is not directed solely against capital invested in state banks or against competing capital employed in private banking but, also, it applies in all cases wherever capital substantial in amount compared with the capitalization of national banks, is employed in the same sort of transactions as those in which national banks engage and in the same locality in which they do business. First National Bank of Hartford v. City of Hartford, supra. Unless the money of the taxpayer be employed in competition with, and in the same manner as, that followed by the national banks, there is no transgression of section 5219 by the state's imposing a greater tax upon national banks than upon ordinary business corporations. National Bank of Commerce of Seattle v. King County, 153 Wash. 351, 280 P. 16. From such it must follow that where capital is not so employed as to come into genuine and substantial competition with the business of national banks, it is within the discretion of the State to tax it at a different rate from that levied upon the capital of banks. City of Richmond v. Merchants' National Bank of Richmond, 124 Va. 522, 98 S.E. 643; First National Bank of Abberdeen v. County of Chehalis, 166 U.S. 440, 17 S.Ct. 629, 41 L.Ed. 1069; City of Richmond v. Madison Nat. B. & T. Co., 215 Ky. 262, 284 S.W. 1089. The term “other moneyed capital” embraces only that which is so employed as to compete to a substantial extent with the business of national banks. First National Bank of Guthrie Center v. Anderson, 269 U.S. 341, 46 S.Ct. 135, 70 L.Ed. 295. It is brought into such competition where it is invested in securities such as are customarily dealt in by banks in making loans or by discounting commercial paper. Mercantile National Bank v. New York, 121 U.S. 138, 7 S.Ct. 826, 30 L.Ed. 895, 901. Where one claims that an unjust advantage has been granted to the moneyed capital of a domestic corporation, he must satisfactorily establish that during the tax year, moneys of national banks were in fact employed in substantial amount in the very business of such domestic corporation. 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.

Upon the reasoning of the cited cases we are impelled to hold that the conclusions of the trial court are well grounded. Plaintiffs do not compete substantially with national banks. They invest in contracts for the sale of personal property that is not acceptable as collateral by national banks. Crown buys the contract outright. Washington advances almost the full face value of those it acquires with recourse. Both make collections from the consumer while national banks lend to the dealer and rely upon him to enforce payment of the contracts. They purchase contracts of sale from the dealer in reliance upon the financial ability of the consumer. The bank lends upon the credit of the dealer. In order to bring them into competition with banks they must advance their standards further; they must engage in a struggle for the same business. 61 Cal.Jur. 291.

Plaintiffs perform a type of service which for generations has been scorned by banks. It is only since the advent of the automobile and such expensive chattels as mining and milling machinery that banks have found at hand an enormous reservoir of business transactions from which they might drain handsome profits. They have entered into competition with “financial” corporations throughout the union and already dominate the field with respect to those investments in expensive personal property by making purchase money loans to the investors therein. But in California as shown by the evidence in this case they have stopped short of competing with business concerns which purchase title to furniture, clothing, refrigerators, etc. They will not enforce collections due dealers to whom loans are made by the banks largely upon the credit of the dealer.

Since the enactment of the Corporate Franchise Act but few appeals have been reported. Two years after the enactment of the California Bank and Corporation Franchise Tax Act its validity was determined by the Supreme Court, in 1931, in Pacific Co. Ltd. v. Johnson, 212 Cal. 148, 298 P. 489. Such decisions as are cited by appellant are readily distinguishable. Morris Plan Co. v. Johnson, 37 Cal.App.2d 621, 100 P.2d 493, is not pertinent. That company was engaged in the business of making loans under the Industrial Loan Act. Upon the evidence the trial court found that the company was directly competing with the banks and thereupon adjudged it to be subject to the same rate of taxation.

Likewise, at the trial of H. A. S. Loan Service Inc. v. McColgan, 21 Cal.2d 518, 133 P.2d 391, upon the evidence it was found that the plaintiff was not a mere agent for borrowers, as it contended, but that it was itself “in active, substantial competition with national banks operating in the same locality.” Upon the trial of State v. National Credit Co., 236 Ala. 224, 181 So. 769, cited by appellant, it was established that the two national banks in Tuscaloosa discounted installment notes taken by dealers for the unpaid portion of the purchase price of automobiles. The defendant's business was to buy and discount such purchase money notes and condition sales contracts and it acquired 80 per cent of such contracts with recourse. It was therefore adjudged to be a “financial institution,” a competitor of national banks and subject to the excise tax for engaging in the business of banking in Alabama.

The findings here are amply supported by the evidence. The judgments are affirmed.

MOORE, Presiding Justice.

W. J. WOOD and McCOMB, JJ., concurred.