WESTERN STATES BANKCARD ASSOCIATION v. CITY AND COUNTY OF SAN FRANCISCO (1976)

Defendants City and County of San Francisco and Thad Brown, Tax Collector, appeal from the trial court's judgment ordering refund of taxes paid under protest and rendering declaratory relief in favor of respondent. The stipulated facts pertaining to the essence of the controversy may be stated as follows:

Respondent Western States Bankcard Association (‘WSBA’) is a nonprofit, nonstock California corporation. Its members are all national or state banks. The primary purpose of WSBA is the establishment and operation of the Master Charge bank credit card system. The principal function performed for its members is to act as a clearinghouse for the sales slips resulting from Master Charge transactions.

The impetus leading to the creation of the Master Charge system was to provide the consumer an alternative to BankAmericard. In order to make this alternative competitive, it was necessary to implement the system on a nationwide basis and to join together numerous small banks which individually would not have been able to compete with BankAmericard. In addition to efficient competition, the placement of these operations in a separate entity resulted in the sharing of costs among the member banks.

The stipulated facts further reveal that WSBA was established by funds provided by the member banks, was, and still is, controlled entirely by its member banks, and performs services primarily for its members. It is also undisputed that WSBA is operated with the intention that it not make a profit; and, in the furtherance of this goal, the rate structure is adjusted from time to time to equate costs and revenues (WSBA Operating Rules, § 13(B)(6)¹ ); that the net income accrued in 1971, 1972 and 1973 was the result of a rapidly expanding operation which made it extremely difficult to match the revenues and expenses with precision; and that any profit which exists by virtue of WSBA's activities is reflected not in the net income of WSBA, but rather in the net incomes of the member banks. Finally, while it is admittedly not a bank, WSBA was established by the approval of the Comptroller of the Currency, the Federal Reserve Bank, and the California State Banking Department.

In accordance with City Payroll Expense Tax and Business Tax Ordinances (Nos. 275–70 and 245–68, respectively), appellants imposed gross receipts and payroll taxes in the amount of $83,446.19 upon WSBA's net income earned in the fiscal years ending June 30, 1971, 1972 and 1973. WSBA paid the taxes under protest and subsequently filed a claim with the tax collector for refund of taxes.

After its claim for refund was denied, WSBA brought this action against appellants for declaratory relief and refund of taxes erroneously collected. After consideration of the stipulated facts and legal arguments of the parties, the trial court in effect disregarded the separate corporate entity of WSBA; took into account instead the nature of business activities carried on by respondent, and upon the latter basis concluded that the imposition of local taxes upon WSBA would result in double taxation in violation of the provisions of the California Constitution and state statute which explicitly exempt banks from local taxes.

Accordingly, the trial court held that the San Francisco Payroll Expense Tax and and municipal, upon the said banks except extent that they purport to impose a local tax on the business activities of the California member banks which are subject to the ‘in lieu’ franchise tax, and ordered the refund of taxes paid by respondent under said ordinances.²

Appellants contend on appeal that the judgment of the trial court is erroneous for the reason that the constitutional and statutory provisions grant immunity from local taxation only for banks (Cal.Const., art. XIII, § 16 (now art. XIII, § 27); Rev. & Tax.Code, §§ 23181, 23182).³ Since WSBA is concededly not a bank, continue appellants, it is precluded from the claimed exemption as a matter of law. Respondent, in turn, maintains that in determining whether the ‘in lieu’ provisions of the aforecited sections apply we should consider not the legal form in which the entity is organized, but rather the nature of activities which it performs. The credit card program involved in this case, argues respondent, is in reality an extension of credit to the individual, a traditional banking function which calls for the claimed tax exemption pursuant to the spirit, if not the letter, of the statute. Although the issue raised on appeal is a novel one, we believe analogous cases and legal principles compel the result that in the factual context here present respondent must be held exempt from local taxation for two major reasons.

First, we are of the opinion that the record provides ample basis for disregarding the corporate entity and considering respondent as a mere extension of the member banks for the purposes of the tax liability in question. It is fundamental that the conditions under which the corporate entity may be disregarded or the corporation be regarded as an alter ego of the stockholders necessarily vary according to the circumstances, and only general rules may be laid down for guidance (H.A.S. Loan Service, Inc. v. McColgan (1943) 21 Cal.2d 518, 523, 133 P.2d 391; Stark v. Coker (1942) 20 Cal.2d 839, 846, 129 P.2d 390). According to these general rules, in order to disregard the corporate entity two requirements must be met: (1) there must be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist; and (2) if the acts are treated as those of the corporation alone, an inequitable result will follow (Automotriz etc. De California v. Resnick (1957) 47 Cal.2d 792, 796, 306 P.2d 1; Stark v. Coker, supra). The cases also hold that the determination of disregarding the corporate entity is a factual matter within the province of the trier of fact, and its resolution will not be disturbed on appeal if supported by substantial evidence (H.A.S. Loan Service, Inc. v. McColgan, supra, 21 Cal.2d at p. 524, 133 P.2d 39; Kazutoff v. Wahlstrom (1961) 196 Cal.App.2d 65, 69, 16 Cal.Rptr. 207).

The record convincingly demonstrates that both criteria have been met in the present case. The stipulated facts irrefutably reveal that from its inception WSBA was controlled by its member banks in its entirety, and that the member banks at no time viewed WSBA as a separate and independent corporation. Thus, it appears that the member banks cooperated in providing personnel to define the functions and policies under which WSBA operated. The basic policies which were recommended to the board of directors were developed by a series of committees, the membership of which was made up entirely of officers of member banks. These committees continue to operate today. During all relevant times the chief executive officer was required to be, and in fact was, a full-time senior executive officer of a member bank. All members of the board of directors were also officers of member banks and were required to be so by the by-laws. In addition, as noted earlier, WSBA did not possess any funds. On the contrary, it is undisputed that WSBA was established by unsecured loans provided by the founding banks at a highly favorable rate of interest. It is likewise clear that it was not contemplated that WSBA would acquire any income. Finally, by the explicit provisions of its by-laws, any assets incidentally obtained by WSBA were to be distributed to the member banks upon the dissolution of the corporation. All this leads to the inevitable conclusion that WSBA should not be considered a separate entity for the purposes of the financial transactions between it and its member banks.

At the same time it is manifest that under the particular circumstances of the instant case the adherence to the fiction of the separate existence of WSBA would thwart, rather than promote, equity and justice. The record set out before makes it abundantly clear that WSBA is a nonprofit corporation operating on a cost basis. As a consequence, the fee system established between WSBA and its member banks is structured so that any increase in the operating cost, of necessity, is passed to the members by way of higher charges. Since taxes are one of the ingredients of the operating cost, it is readily discernible that in the ultimate analysis local taxes are to be borne not by WSBA, but by the member banks themselves. It requires no further elaboration that taxation of this kind flies directly in the fact of the constitutional and statutory provisions erecting an absolute bar to the imposition of local taxes upon the banks. We conclude, therefore, that both elements of disregarding WSBA's corporate existence find ample evidentiary support in the record and as a consequence the ruling of the trial court may not be disturbed on appeal.

Second, even aside from the foregoing considerations, the judgment of the trial court ought to be upheld on the independent ground that the credit card activity of WSBA by itself qualifies for exemption from local taxation regardless of the form of the corporation. It is firmly established that in interpreting tax statutes and in resolving a particular tax exemption, primary attention must be paid to the quality and nature of the business activity and that form must give way to substance. This fundamental principle is exemplified by a variety of cases.

In interpreting analogous constitutional provisions which levied a tax upon the gross premiums of insurance companies ‘in lieu of all other taxes and licenses, state, county, and municipal’ (Cal.Const., former art. XIII, § 14 4/5, subd. (f)), our Supreme Court has held that the ‘in lieu’ provisions of the Constitution prevented the City of Los Angeles from imposing gross receipts tax on an insurance agent (Hughes v. Los Angeles (1914) 168 Cal. 764, 145 P. 94), and a license tax on the business operation of a bail bond broker (Groves v. City of Los Angeles (1953) 40 Cal.2d 751, 256 P.2d 309). Although both cases were decided upon an agency theory, it is apparent that the court looked through the form and prohibited the separate taxation of the agents because it felt that ‘in a direct and immediate sense a tax upon such agents for the right to do business is a tax upon the corporation's right to do business.’ (Hughes v. Los Angeles, supra, 168 Cal. at p. 765, 145 P. at p. 95).

Another example is Ford Dealers Advertising Fund, Inc. v. Commissioner of Internal Revenue, 55 T.C. 761, affirmed 5 Cir., 456 F.2d 255. In that case independent Ford dealers established a nonprofit corporation. The funds to establish the corporation were contributed by the dealers and were to be utilized for advertising and promoting automotive products. Although the corporation constituted a separate legal entity, the court held that it should not be taxed on the funds received for the reason that the corporation could not profit or gain from the services it provided and was to receive no compensation for handling the funds.

Also, in delineating property tax exemption granted to charitable, religious and educational organizations, in California and elsewhere emphasize that where the functions themselves qualify for exemption it does not matter that they are performed by a separate organization rather than by the respective member institutions. Whether or not the property falls within the the exemption, the integrated activities as a whole must be examined, and the crucial test of granting exemption is whether the use of property is incidental to and reasonably necessary for the accomplishment of religious or charitable purposes (Cedars of Lebanon Hosp. v. County of L.A. (1950) 35 Cal.2d 729, 221 P.2d 31; House of Rest v. County of Los Angeles (1957) 151 Cal.App.2d 523, 532–533, 312 P.2d 392; Association of American Medical Colleges v. Lorenz (1959) 17 Ill.2d 125, 160 N.E.2d 763, 766).

It is widely recognized that the credit card operation is both incidental and reasonably necessary to modern banking (cf. 12 U.S.C.A., § 24; Comptroller of Currency, Nat'l Bank Rev. Vol. 3, No. 2, Dec. 1965, Vol. 4, No. 2, Dec. 1966). In reality it is a new form of loan which takes advantage of modern technology (Colorado Springs National Bank v. United States (10 Cir. 1974) 505 F.2d 1185, 1190). As the California State Board of Equalization pointed out in Appeals of the Diners' Club, Inc. (Sept. 1, 1967), ‘The all-purpose credit card is a device designed to facilitate the purchase of goods and services and to stimulate ‘buying now and paying later.’ In substance credit card programs involve the extension of credit to the individual, which is a traditional banking function. As such, credit card programs must be viewed as but one methiod of arranging credit rather than as a unique departure from normal banking activities.' (Emphasis added.) Considering the fact that respondent is a nonprofit corporation and also that the credit card activity conducted by it is a banking function, it must—in light of the foregoing authorities—be held exempt from local taxation to the same extent as if it had been organized and incorporated as a bank.

We are satisfied that the cases referred to by appellants either support our conclusion or are distinguishable from the case at bench. In Arizona State Tax Com'n v. First Bank Building Corp. (1967), 5 Ariz. App. 594, 429 P.2d 481, the building corporation, a subsidiary of a national bank, was engaged in renting office and storage space. In First Nat. Bank of Santa Fe v. Commissioner of Rev. (1969), 80 N.M. 699, 460 P.2d 64, the bank whose tax exemption from gross receipts tax was at issue provided electronic data processing services for other banks. In both cases the rejection of the claimed tax exemption in the final analysis turned on the circumstance that neither the office rental nor the electronic data processing service was regarded as an activity reasonably necessary or incidental to the banking business. As the court put it in First Nat. Bank of Santa Fe v. Commissioner of Rev., supra at page 67, ‘the tax exemption granted by Congress to national banks is to be determined note alone by its existence as such a bank, but, at least in part, by the nature of the activities, or services it has performed upon which a tax is imposed.

‘We are of the opinion that the question of the propritey of the imposition of a tax on an activity or service performed by a national bank should be determined on the basis of whether the activity or service is reasonably related or incidental to the accomplishment of its bank functions.’ (Emphasis of its bank functions.' (Emphasis

We finally note that appellants' reliance on Diners' Club is similarly misplaced. In that case the question for decision was whether the club was properly classified as a financial corporation within the meaning of section 23183 of the Revenue and Taxation Code. By contrast, the primary issue addressed and decided in the case at bench is whether, based on its business activities, respondent is entitled to the same tax exemption as accorded to banks pursuant to Revenue and Taxation Code, sections 23181 and 23182. Since the issues raised and resolved in the two cases are different, the conclusion arrived at in Diners' Club has no essential bearing on the instant case.

The judgment is affirmed.

FOOTNOTES

1.  Section 13(B)(6) of the Operating Rules provides that ‘It is anticipated that the collection assessments and cardholder accounting activity assessments will be adjusted from time to time to the end that monies collected through such assessments will be sufficient to meet all expenses of the Association, including slip discount payments and cash advance slip transaction charge payments made to members, to the end that such expenses are allocated as nearly as practicable on a cost basis.’ (Emphasis added.)

2.  As the trial judge aptly noted in his helpful memorandum opinion this holding would have no rational application to non-California member banks who are not subjected to the higher franchise tax rate.

3.  During the period here pertinent California Constitution, article XIII, section 16, subdivision 1(a), provided that ‘Banks, including national banking associations, located within the limits of this State, shall annually pay to the State a tax, at the rate to be provided by law according to or measured by their net income, which shall be in lieu of all other taxes and licenses, state, county and municipal, upon such banks, or the shares thereof, except taxes upon their real property and, when permitted by the Congress of the United States with respect to national banking associations, motor vehicle and other vehicle registration license fees and any other tax or license fee imposed by the State upon vehicles, motor vehicles or the operation thereof.’The Revenue and Taxation Code likewise sets out that ‘An annual tax is hereby imposed upon every bank located within the limits of this State according to or measured by its net income, upon the basis of its net income for the next preceding income year at the rate provided under Section 23186. With respect to the taxation of national banking associations, the State adopts the method numbered (4) authorized by the act of March 25, 1926, amending Section 5219 of the Revised Statutes of the United States, Title 12, Section 548, United States Code.’ (§ 23181.)Section 23182 provides, in turn, that ‘The tax imposed under Section 23181 upon banks is in lieu of all other taxes and licenses, state, county and municipal, upon the said banks except taxes upon their real property.’ (Emphases added.)

KANE, Associate Justice.

TAYLOR, P. J., and ROUSE, J., concur.