BAY CITIES TRANSP CO v. JOHNSON (1936)

The two corporation plaintiffs each sued as a member of a separate group of California corporations to recover corporation franchise taxes claimed to have been illegally levied and collected. Each cause of action presents the identical question whether a consolidated return may be filed by a group of California corporations 95 per cent. of the stock of which is owned by a common parent corporation foreign to California, not licensed in this state, and not taxable herein.

The controversy involves an interpretation of section 14 of the Bank and Corporation Franchise Tax Act (Stats 1929, pp. 19, 26, as amended in Stats. 1931, p. 63). The material portions of this section read: “An affiliated group of banks or an affiliated group or corporations shall, subject to the provisions of this section, have the privilege of making a consolidated return for any taxable year in lieu of separate returns * * * as used in this section an affiliated group means two or more banks or two or more corporations connected through stock ownership, in the case of a bank, with a common parent bank or in the case of a corporation with a common parent corporation, if at least ninety–five per centum of the stock of each of the banks or corporations, except the common parent bank or corporation, is owned directly by one or more of the other banks or corporations, as the case may be, and the common parent bank or corporation owns directly at least ninety–five per centum of the stock of at least one of the other banks or corporations, as the case may be; or if at least ninety–five per centum of the stock of each of the banks in the banking group, or of each of the corporations in the corporate group is owned by the same interests or by the same stockholders.”

Each of the plaintiff corporations filed a consolidated return under the privilege of this section, each showing that 95 per cent. of the stock of the members of each group was owned by a parent corporation which, however, was not a California corporation and was not taxable in this state. By this means the losses of some of the members of the consolidated group materially offset the profits of others resulting in a substantial reduction in the total tax claimed to be due. The trial court gave judgment for each plaintiff on the pleadings.

There seems to be little ambiguity in the language of the section. The privilege is given to any affiliated group of corporations having a common parent corporation under certain conditions. Two settled rules govern the interpretation of the section: First, if there be any ambiguity in a taxing statute the interpretation most favorable to the taxpayer must be chosen. Whitmore v. Brown, 207 Cal. 473, 279 P. 447. Second, where conditions or exceptions are specified in a statute, judicial interpretation cannot add other or new ones. Here, if the Legislature had intended to limit the privileges of the section to corporations whose parent was a California corporation taxable under the laws of this state, it would have been a simple matter to have included that condition in the statute. We find nothing there which would justify an interpretation which would limit the privilege to California corporations. In a case presenting a point very similar to this, the United States Circuit Court, in Corner Broadway–Maiden Lane v. Commissioner (C.C.A.) 76 F.(2d) 106, held the same way.

The judgment is affirmed.

NOURSE, Presiding Justice.

We concur: STURTEVANT, J.; SPENCE, J.