Court Opinion

ID: 4710777
Source: CourtListenerOpinion
Date Created: 2021-08-12 00:17:39.38407+00
Date Added: 2024-06-11T08:07:05.154290
License: Public Domain

Alexander, J.
(dissenting) — The Simpson Investment Company (Simpson) was not, at any time material to this appeal, engaged in “banking, loan, security, or other financial businesses” within the meaning of RCW 82.04.4281 (emphasis added). I would, therefore, affirm the Court of Appeals, which properly concluded that Simpson could deduct any amounts it derived from investments when it computed its Business and Occupation (B&O) tax liability because Simpson’s primary objective and purpose was to provide services to its subsidiaries in the timber, forest products, and plastic pipe businesses, not to earn income from its investments. Because the majority concludes otherwise, “finding that Simpson is a ‘financial business,’ ” I dissent. Majority op. at 146.
This court has looked at the term “financial business” on two prior occasions. Rainier Bancorporation v. Department of Revenue, 96 Wn.2d 669, 638 P.2d 575 (1982); John H. Sellen Constr. Co. v. Department of Revenue, 87 Wn.2d 878, 558 P.2d 1342 (1976). On both occasions, we held that the term “must be given its ordinary and common meaning,” which “ ‘contemplates a business whose primary purpose and objective is to earn income through the utilization of significant cash outlays.’ ” Rainier, 96 Wn.2d at 672, 673 *165(quoting Sellen, 87 Wn.2d at 882). If we continue to accord the term “financial business” the common meaning we ascribed to it in those prior cases, Simpson cannot be said to be a “financial business” any more than were the taxpayers in Sellen.
In Sellen, the taxpayers16 each invested a portion of their gross income in short-term investments that yielded income. The Department of Revenue took the position that these taxpayers owed B&O tax on the investment income. The taxpayers disagreed with the Department’s position, contending that any investment income they earned was deductible from their gross income for purposes of computing the B&O tax. This court agreed with the taxpayers, concluding that they were not “financial businesses” and that, as a consequence, the investment income earned by them, which represented only a small percentage of their gross revenues, was not subject to the B&O tax. We said:
If we adopt appellant’s interpretation of RCW 82.04.430(1),[17] then few taxpayers, if any, making incidental investments of surplus funds could receive the deduction. Appellant equates investing any income with being a financial business and, in effect, this renders the statute a nullity. By interpretation we should not nullify any portion of the statute.
Sellen, 87 Wn.2d at 883 (citations omitted).
The record reflects that, like the taxpayers in Sellen, Simpson’s primary purpose and objective was not to earn income through the utilization of significant cash outlays. Rather, it was to engage in a trade or business apart from its investment activities, activities which realized only a small percentage (less than five percent) of its gross revenues. More specifically, the record shows that Simpson was formed in 1985 as the parent holding company of Simpson Timber Company, Simpson Paper Company, Simpson Extruded Plastics Company, and Simpson Foreign *166Sales Company. Through the efforts of its 172 employees, Simpson provided various services to these subsidiaries, including “accounting/finance; credit; human resources; legal; management information services; public affairs; risk; tax; treasury; cash management; property management/ real estate; land and timber; and corporate administration.” Majority op. at 143. It did not charge the subsidiaries for any of these services.
The Department of Revenue contends that “Simpson earns 100 percent of its income from investment services.” Pet. for Review at 3. This is simply not correct. Although Simpson did realize some funds from commodity futures trading, dividends from relatively small holdings of stock (approximately 100 shares) in competing forest products companies,18 and interest on moneys that its subsidiaries paid into a concentration account, the vast majority of its income was from dividends it received from its stockholdings in the subsidiaries to which it provided services.19 If the dividends from subsidiaries are excluded from the equation, as they should be since Simpson was providing services to those subsidiaries, it is clear that the income Simpson made from investments is merely incidental and the receipt of it does not transform Simpson into a financial business.
While Simpson’s management of its concentration account may appear on the surface as sophisticated high finance, it really is nothing more than adept cash management that enabled it to earn interest on liquid funds that it had on deposit each day. As the Court of Appeals aptly noted, “Simpson is not in competition with financial businesses .... [I]ts receipt of interest from overnight bank *167account deposit of surplus funds is an ‘incidental’ activity that is not essentially in competition with financial businesses. Simpson is merely a bank customer, receiving, not performing, normal banking services.” Simpson Inv. Co. v. Department of Revenue, 92 Wn. App. 905, 922, 965 P.2d 654 (1998), review granted, 137 Wn.2d 1032, 980 P.2d 1284 (1999) .
The majority determines that Simpson is a financial business because, in its opinion, Simpson is providing services to its subsidiaries in order to increase the value of its investment in its subsidiaries. From this determination the majority goes on to hold that “Simpson’s primary purpose and objective is to earn income through the utilization of significant cash outlays,” the cash outlay being the ownership investment in the subsidiaries. Majority op. at 155. This conclusion simply does not hold up because the plain fact is that Simpson is not making significant cash outlays. Rather, it is providing managerial and support services to its subsidiaries. The majority, while recognizing that Simpson’s purpose is to provide these services, sweeps this fact aside, content to observe that the relevant question “is not what Simpson does, but why it does it.” Majority op. at 153. This is unsatisfactory.
In reality, Simpson is simply a classic holding company that owns the stock of its subsidiaries for the purpose of influencing the policies and the management of those wholly owned companies. It is not, despite its name, an investment company. If it is, it is hard to conceive of any holding company that would not be deemed a “financial business.” To hold, as the majority does, that Simpson is making significant cash outlays when it provides those services conflicts with the policy of excluding dividends from subsidiaries as taxable income for B&O tax purposes. RCW 82.04.4281.
The majority acknowledges that some of the various services Simpson furnishes to its subsidiaries are nonfinancial. It also concedes that if these “services were provided in-house by a corporation that was manufacturing *168a product or selling a retail service, the rendering of these services would not in and of itself make it a ‘financial business.’ ” Majority op. at 154. Although Simpson does not charge a fee to its subsidiaries for these services, it renders the services in order to influence the management of these companies. The fact that its skillful management of the subsidiaries may result in receipt of increased dividends, which are not subject to the B&O tax, does not convert Simpson into a financial business.
The weakest link in the majority’s decision is its holding that Simpson is comparable to a bank, loan company, or security business. While the majority acknowledges that under Sellen only businesses that can be said to be “comparable” to banking, loan, and security businesses may be deemed a financial business, it concludes that there is comparability because “Simpson makes money through its ownership of subsidiary and competitor stock, earns interest income from the overnight investment of subsidiary funds, and engages in price hedging and futures trading.” Majority op. at 157. Simpson, in fact, makes a relatively small amount of money from interest income, dividends on small holdings of competitors’ stocks, and futures trading. That it earns this investment income hardly makes it comparable to a bank, loan company, or security business. The majority essentially concedes that point, noting that under Sellen the receipt of such a small percentage of investment income would not support a finding that the company receiving the income was a financial business. Not to be deterred, the majority goes on to say that the dividends Simpson receives or the stock it holds in its subsidiaries are investment income, indicating that “we find that the Legislature intended that subsidiary dividends be taken into account in determining if a business is a ‘financial business.’ ” Majority op. at 159 (citing Group Health Coop. of Puget Sound, Inc. v. State Tax Comm’n, 72 Wn.2d 422, 429, 433 P.2d 201 (1967)). Although the majority goes through a rather elaborate analysis to divine the intent of the Legislature in this regard, its construction of the *169statute defies a commonsense reading and leads to an absurd result that would effectively eliminate the investment income deductions for any holding company. Such a result flies in the face of our decision in Sellen 20
In sum, the majority’s determination is akin to an attempt to pound a square peg into a round hole. Simpson is not a financial business. While it makes a small amount of money from skillful management of its cash and from futures trading and dividends on stock in competing companies, this amount is relatively small and does not make Simpson a financial business. Furthermore, Simpson is simply not comparable to a bank, loan company, or security company. It has none of the earmarks of such a business. It is, in reality, a holding company that provides services to its subsidiaries. As such, its investment income is not subject to the B&O tax. If the Legislature should someday conclude that this income should be subject to the reach of that tax, it can easily amend the statute. In the meantime, this court should resist the temptation to amend it. We should affirm the Court of Appeals. Because we do not, I dissent.
Johnson and Sanders, JJ., concur with Alexander, J.
Reconsideration denied October 18, 2000.

 The taxpayers were John H. Sellen Construction Company, Acacia Memorial Park, Acacia Memorial Park Permanent Care Fund, Ring County Medical Blue Shield, Olympia Brewing Company, and Blue Cross Washington-Alaska, Inc.

 Former RCW 82.04.430(1) (1979) was recodified as RCW 82.04.4281.

 The stock it owns in competing corporations is apparently held for the purpose of allowing Simpson to keep abreast of its competitors’ activities, rather than for investment purposes. As the majority points out, on two occasions Simpson held large amounts of stock in two competing corporations, Longview Fibre Company and Palmer G. Lewis. It concedes that its holdings in these two corporations were for investment purposes.

 The B&O tax does not apply to dividends received by a parent company from its subsidiary. RCW 82.04.4281.

 In Rainier, we concluded that Rainier was comparable to a bank, loan company, or security business. That holding is entirely understandable since, as the Court of Appeals noted, Rainier did make loans to its subsidiaries, for which it charged interest.