Case Title: Equitable Savings & Loan Ass'n v. STATE TAX COM'N

Citation: 444 P.2d 916

Docket Number: 

State: oregon

Court: Oregon Supreme Court

Date: 1968-09-05T00:00:00Z

Document:
444 P.2d 916 (1968)
EQUITABLE SAVINGS & LOAN ASSOCIATION, an Oregon Corporation, Respondent and Cross-Appellant,
v.
STATE TAX Commission, Appellant and Cross-Respondent.

Supreme Court of Oregon, In Banc.
Argued and Submitted April 1, 1968.
Decided September 5, 1968.
*917 Gerald F. Bartz, Asst. Atty. Gen., Salem, argued the cause for appellant and cross-respondent. With him on the briefs were Robert Y. Thornton, Atty. Gen., and Alfred B. Thomas, Asst. Atty. Gen., Salem.
William E. Love, Portland, argued the cause for respondent and cross-appellant. On the brief were John R. Faust, Jr., and Cake, Jaureguy, Hardy, Buttler & McEwen, Portland.
Before PERRY, C.J., and McALLISTER, SLOAN, O'CONNELL, GOODWIN, HOLMAN, and LANGTRY,[*] JJ.
McALLISTER, Justice.
This appeal by the State Tax Commission from a decree of the Oregon Tax Court involves the right of the plaintiff to apportion its income between Oregon and other states in which it is engaged in business or carries on activity. The following statement of the controlling facts is taken almost verbatim from the opinion of the tax court, 3 OTR Adv Sh 9 (1967).
The plaintiff is a savings and loan association specializing in making improved real estate loans and has its headquarters office in Portland. Plaintiff has twenty-two branch offices in Oregon, four in Washington and one in Idaho. Plaintiff's business activities are becoming increasingly centralized in Portland because of the necessity of maintaining control over an expanding operation. All loan applications are submitted to the loan committee in Portland for its approval. Payroll and employee records are maintained, auditing and advertising and central accounting conducted, and all of plaintiff's business control is centralized in the Portland headquarters.
Plaintiff has been doing business in Washington since 1899 and has branch offices in Seattle, Tacoma, Spokane and Yakima. These offices orginated and processed their own mortgage loans with final approval made by the loan committee in the Portland office. Plaintiff does not have an office in Vancouver, Washington, but does a substantial business in Clark county, of which Vancouver is the county seat. Until approximately six years ago plaintiff employed a solicitor who solicited and processed all Clark county loans. Thereafter the loans were solicited and processed by a chief appraiser who lives in Vancouver. Most of the loans are builder's loans which are solicited and processed on the job but occasionally the loan documents are executed in the Portland office. During the years involved plaintiff averaged approximately six million dollars in outstanding loans in the southwestern Washington area, which includes Clark county.
*918 Plaintiff has been qualified to do business in Idaho since 1906. The Idaho loans are made through approximately fifteen loan agents who are local men in the real estate and insurance business and receive a finder's fee from plaintiff for making the loans. They solicit the loans, prepare the applications and credit reports, make the appraisals and send all documents to the Portland office for approval. The loan documents are signed in Idaho and the funds are disbursed by the agent to the borrowers. Collections are also made by the agents. Plaintiff had approximately $450,000 to $500,000 in outstanding loans in Idaho.
Plaintiff's California loans originated almost entirely through brokers, mostly in the Los Angeles area. Plaintiff made two types of loans in California  straight loans and participation loans. In the former plaintiff was the direct lender and would receive a note and mortgage from the borrower. On these loans plaintiff would have the property appraised and the loan committee from Portland also inspected the property. Plaintiff had about five million dollars outstanding in straight loans in California. In the participation loans plaintiff would purchase a percentage of the loans that a mortgage broker or savings and loan association offered to sell. Plaintiff's officials would check over the credit reports and the appraisal, inspect the property and the area involved and, if satisfied, buy a percentage of the loan. The local association would service the loan, handle the collections, delinquencies and foreclosures, if any. Plaintiff had approximately six million dollars outstanding in California participation loans.
During the years 1961 to 1963 plaintiff held a loan on a cooperative apartment in Hawaii. Plaintiff was advised of the possibility of the loan through a Los Angeles broker. One of the members of plaintiff's loan committee made an on-site inspection, checked the location of the apartment, the sale of the units, met with the architect and contractor, and the committee approved the loan in the amount of $1,760,000. The loan was closed in Hawaii and a local organization made the collections and serviced the loan.
The final out-of-state loans involved are denominated Capehart loans. This loan program was established by the federal government to finance the construction of housing for the families of military personnel around large military bases. The loans made by plaintiff and other similar organizations were interim construction loans which were eventually taken over from the plaintiff by the Federal National Mortgage Association after the construction was completed. The loans originated and were closed in Washington, D.C. Plaintiff's officers made several inspection trips to observe the progress of the construction of the various projects in which it was interested. During the three years Equitable was participating in the program it had approximately one hundred million dollars involved in Capehart loans.
The plaintiff paid under protest corporate excise taxes imposed by ORS 317.060 for the years 1958 through 1962. It then sued in the tax court for a refund, claiming the right to apportion its income pursuant to ORS 314.280 between Oregon and the other states in which it was engaged in business. The tax court granted the refund, and the commission appeals.
The statute controlling the decision in this case is ORS 314.280, which prior to its amendment in 1965 (1965 c. 152 § 22) read in pertinent part as follows:
The above statute clearly entitles plaintiff to apportion its income if that income is derived in part from business done in other states. The first inquiry then is whether plaintiff is doing business outside of Oregon within the purview of ORS 314.280.
We held in Cal-Roof Wholesale, Inc. v. State Tax Com., 242 Or. 435, 410 P.2d 233 (1966), that nexus was sufficient to authorize apportionment under ORS 314.280, and that the out-of-state business need not qualify as "intrastate" business in order to entitle the taxpayer to apportion. The reasons for that holding are stated with clarity in the comprehensive opinion in Cal-Roof Wholesale, and need not be repeated here.
The question of the extent of activities necessary to constitute nexus also has been settled with finality by the definitive opinion in Amer. Refrig. Transit Co. v. State Tax Com., 238 Or. 340, 395 P.2d 127 (1964). We held in that case that:
When the tests prescribed in Cal-Roof Wholesale and Amer. Refrig. Transit are applied to the plaintiff's out-of-state business, it is clear that plaintiff is entitled under ORS 314.280 to apportion its income. There can be no doubt that the "economic milieu" of the other states in which plaintiff engaged in business was a substantial factor in producing plaintiff's income in those states. The tax court properly so held.
We turn next to the question of apportionment. The commission's Reg. 4.280 requires that the in-state and out-of-state income of a unitary business be apportioned "by giving equal weight to three factors, i.e., `property,' `wages,' and `sales.'" The regulation further provides that if substantially all of the income of a financial institution is in the form of interest, the factor of gross loans is substituted in the formula for the average value of real and tangible personal property, and the factor of gross interest collected is substituted in the formula for the factor of sales. The tax court held that plaintiff's income should be apportioned pursuant to those regulations by applying the three factors of wages, gross loans and gross interest collected. The tax court held that the gross loans made to residents of another state and secured by property in that state, together with interest paid on those loans, should be apportioned to the other state. We agree with the tax court's construction of the statute and the regulations, and approve the apportionment formula in the decree of the court below.
Although the commission questions whether nexus is sufficient to authorize apportionment, and whether nexus exists between plaintiff and the other states in which it has engaged in business, the commission *920 does not rest its case on those grounds. The commission's basic contention is (a) that plaintiff is a domestic corporation dealing in intangibles, (b) that the rule of mobilia sequuntur personam applies, and (c) that under that rule the commission can tax income from intangibles at the domicile of a domestic corporation. By this reasoning the commission attempts to avoid the consequences of apportionment by allocating all of the plaintiff's out-of-state income to Oregon.
Conceding that the maxim of mobilia sequuntur personam may be applicable under other circumstances, we think it is entirely irrelevant in this case. We are not concerned with how the legislature might tax the income from intangibles, but with how it has taxed corporate income from that source.
The controlling factors are that the legislature since 1929 has directed that unitary income of a corporation be apportioned between the states in which it is earned, and has directed the commission to adopt rules and regulations to fairly and equitably accomplish that apportionment. The legislature made no exception for income from intangibles. Pursuant to the command of the legislature, the commission promulgated regulations to accomplish the apportionment of the unitary income of a corporation. The regulations have provided since at least 1938 that as to financial institutions, their unitary income shall be apportioned by the three-factor formula of wages, loans and interest. There is no dispute in this case about the wage factor. It would be pure sophistry to now suggest that by gross loans the commission did not mean loans made in other states to residents thereof and secured by property in those states. The factor of "gross interest collected" obviously was intended to mean the interest paid on out-of-state loans.
We think the tax court properly apportioned plaintiff's unitary income in accordance with the statute and the plain meaning of the commission's own regulations. If there is to be special taxation of the income from intangibles of a domestic corporation, it should be provided by the legislature and not initiated either by the commission or by this court.
The next question raised by the commission is whether plaintiff is entitled to deduct as an ordinary and necessary business expense for the year 1962 certain premiums paid to the Federal Savings and Loan Insurance Corporation (FSLIC). We approve the holding of the tax court that plaintiff is entitled to deduct these additional premiums as a business expense, and we quote with approval the opinion of the tax court dealing with this issue:
The plaintiff has cross-appealed and contends that the tax court erred in holding that the plaintiff could not deduct, either as additions to a reserve for bad debts or as an ordinary and necessary business expense, sums which plaintiff is required by state or federal law to set aside as reserves for bad debts and real estate losses. We also concur in the holdings of the tax court on this issue, and quote with approval its opinion dealing with it:
The decree of the tax court is affirmed.
[*]  Langtry, J., did not participate in this decision.