Court Opinion

ID: 9883582
Source: CourtListenerOpinion
Date Created: 2023-10-06 01:51:06.57566+00
Date Added: 2024-06-11T07:48:25.348027
License: Public Domain

CURTIS, J.
I dissent. Reference to the plain language of the Bank and Corporation Franchise Tax Act of California (Stats. 1929, p. 19; Act 8488, 2 Deering’s Gen. Laws of California (1937), p. 3851) is sufficient to show that the operations of the State Building and Loan Commissioner in liquidating • a building and loan association are not within its purview. Thus, section 4 (1) of the Act imposes a tax upon “every financial corporation doing business within the . . . State . . . for the privilege of exercising its corporate franchises” therein; and section 5 of the Act defines “doing business” as “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit.” Contrariwise, liquidation proceedings under authority of the Building and Loan Association Act (Stats. 1931, p. 483; Act 986, 1 Deering’s Gen. Laws of California (1937), p. 538) contemplate not the exercise of the corporate franchise in pursuit of financial gain or profit for the corporation, but rather the administration of the assets of the insolvent association for the protection first of its creditors, and then its investors pursuant to its final dissolution.
The Building and Loan Commissioner derives his power entirely from the provisions of the Building and Loan Association Act. Thus, where it appears to the commissioner that “any [building and loan] association is in an unsafe condition or is conducting its business in an unsafe or injurious manner such as to render its further proceeding hazardous to the public or to any or all of its investors,” he “may forthwith demand and take possession of the property, business and assets of such association and retain such possession until such association shall with [his] consent . . . resume business, or until its affairs be liquidated.” (§13.11; italics added.) The italicized words clearly imply that the commissioner ’s possession of such association constitutes an ouster of corporate management and control, with the accompanying advantages and privileges; and that the association, as such, *163thereupon ceases to function under its corporate franchise as a building and loan company. Whatever acts the commissioner takes in liquidating the association’s affairs are in pursuance of legislative mandate and in the performance of his statutory duty (Richardson v. Superior Court, 138 Cal. App. 389, 392 [32 P.2d 405]), and not by virtue of the corporate franchise to do business as a building and loan association, a privilege which to all practical purposes and intent is suspended by the very act of the commissioner in assuming control of the association for the sole purpose of winding up its affairs, (cf. Mercantile Trust Co. v. Miller, 166 Cal. 563, 569 [137 P. 913].)
Illustrative of such situation is the present case where the plaintiff as the Building and Loan Commissioner “took possession” of the Marine Building and Loan Association, and thereafter, according to the stipulated facts, “Marine did no business in its own name and did no business through its directors or officers, or through any agents appointed by them or by the stockholders.” Rather, the plaintiff under statutory authority acted wholly upon his own initiative and independent of Marine’s officials, without the use or employment in any way of the corporate franchise, but in complete derogation thereof, and for the single purpose of reducing Marine’s assets to cash and distributing them to the persons who were beneficial participants therein as a trust fund—that is, the association’s creditors, and then its investors. (Evans v. Superior Court, 14 Cal.2d 563, 573-574 [96 P.2d 107].) Indisputably, the plaintiff did not undertake to manage an association for a brief interlude because it was confronted with immediate financial embarrassment which made advisable the assumption of temporary administrative control in the conservation of its assets and the adjustment of its affairs so that it might continue its business without complete liquidation, a distinguishable status which has been held a sufficient basis for the levy of the franchise tax (People v. Richardson, 37 Cal.App.2d 275, 279 [99 P.2d 366]), but rather he took charge of Marine as an insolvent association to wind up its affairs, and Ms restricted operations as required incident to such purpose would not reasonably come within the concept of “doing business” in the exercise of the corporate franchise as specified in the state Franchise Tax Act, as above quoted. Thus, in com-*164meriting’ upon analogous considerations with relation to operating as contrasted with liquidating receivers, it is said in Thompson on Corporations, third ed., vol. 8, § 6393, p. 554: "The receiver is liable for a franchise tax where he continues the business, but not where he was appointed to wind up the corporation in a proceeding instituted by the state, and the reason is that the state has intervened and prevented the corporation from further exercising its franchises.” (See annotations, 18 A.L.R. 704-705; 75 L.Ed. 1146-1148.)
The ease of Magruder v. Washington, B. & A. Realty Corp., 316 U.S. 69 [62 S.Ct. 922, 86 L.Ed. 1278], cited in the main opinion as illustrating that liquidation proceedings may establish that a corporation is “doing business” within the concept of franchise' tax implications, involves a wholly distinct factual situation. There the property of a railroad company consisting of “certain rights of way, easements, terminal properties and other real estate,” was purchased at foreclosure sale by certain persons constituting a committee of bondholders. This committee transferred the title to the properties so bought to a corporation which had been organized for the purpose of owning, holding and disposing of them. From time to time the corporation sold various portions of its properties as satisfactory offers were received, it rented unsold properties under short term leases, it paid all expenses incident to its activities and it distributed “all net income, except small reserves for contingencies,” to its own stockholders. For four years the corporation had paid the federal capital stock tax levied with respect to “carrying on or doing business.” At the end of that time the corporation, still continuing its activities and having about a quarter of its original properties left, sued for a refund of the tax payments. In reversing the decision of the lower courts that the corporation as a liquidating company was exempt from the levy in' question (35 F.Supp. 340; 120 F.2d 441), the Supreme Court of the United States held that the applicable federal regulation including within the concept of “doing business” the “orderly liquidation of property by negotiating sales from time to time as opportunity and judgment dictate and distributing the proceeds as liquidation is effected,” precisely described the corporation’s activities and sustained the imposition of the tax. Thus it is said by the Supreme Court (316 U.S. 73): “During *165the period in. question respondent [the corporation] did not fall into that state of quietude [an exception to “doing business”] ... in which it was merely owning and holding specific property and distributing the resulting proceeds, (citing cases.) On the contrary, respondent was actively engaged in fulfilling the purpose of its creation, the liquidation of its holdings for the best obtainable price.” The distinguishing feature of that holding is the purpose of the “liquidation”—for the benefit of the liquidating corporation and its stockholders. Such décision would not sustain a franchise tax, based on doing business, payable by the original corporation whose operative properties had been taken away by the foreclosure and its business possibilities terminated—a situation more factually similar to the present case. As above noted, liquidation under the Building and Loan Association Act of this state contemplates only such proceedings as are necessary and incidental to ascertain the amount of liabilities of an association and apportion the assets towards the discharge of its indebtedness; and it is not for the purpose of pecuniary profit or benefit to the association but for the protection of its creditors, looking to the ultimate dissolution of the association and the complete winding up of its affairs.
The recent decisions of this court that limited activities of solvent corporations in the exercise of their corporate, franchises may constitute “doing business” for state franchise tax purposes (Golden State T. & R. Corp. v. Johnson, 21 Cal.2d 493 [133 P.2d 395]; Carson Estate Co. v. McColgan, 21 Cal.2d 516 [133 P.2d 636]) have no application to the present case involving the liquidation of an insolvent corporation by an officer of the state acting under legislative mandate. Likewise distinguishable in the premise of its decision is the case of Fifth Street Building v. McColgan, 19 Cal.2d 143 [119 P.2d 729], holding that under an express amendment to the federal Bankruptcy Act [28 U.S.C.A. § 124a] a trustee in bankruptcy conducting the business of the corporation, and thereby having for tax purposes the status of the corporation, is not immune from payment of the state franchise tax. Such conclusion resting solely upon the applicable federal law does not affect the question of whether a state officer is liable for payment of the corporate fran*166chise tax by reason of his operations incident to the liquidation of an insolvent association. The plain terms of the state Franchise Tax Act, as above quoted, purport to exempt such proceedings as a basis for computation of the levy in question.
The 1943 amendment to section 5 of the Franchise Tax Act, quoted in the main opinion and expressly extending the scope of the law in its enlarged definition of the term “corporation” to “include . . . any ‘corporation’ operated by any . . . liquidator,” of course, cannot serve to resolve the point of dispute here as to the character of the plaintiff’s management of Marine during the period of liquidation in the year 1937. However, such material change in the expanse of the act is a legislative indication that a corporation in the process of liquidation by a public officer was not theretofore within its contemplation, and that the added language was necessary to effect the desired change. (23 Cal.Jur. p. 778; People v. Weitzel, 201 Cal. 116, 118-119 [255 P. 792, 52 A.L.R. 811]; Meyerfeld v. South San Joaquin Irr. Dist., 3 Cal.2d 409, 417 [45 P.2d 321]; Loew’s Inc. v. Byram, 11 Cal.2d 746, 750 [82 P.2d 1].) The Franchise Tax Commissioner’s explanation, as printed in the Assembly Journal for April 20, 1943, p. 2428, that the amendment “enlarges definition of . . . corporation in accordance with principle announced in Fifth Street Building v. McColgan, 19 Cal.2d 143 [119 P.2d 729], Restates existing law.” is by no means conclusive of the meaning of the prior • statutory language. While it has been held that if a certain class of taxpayers in resisting the payment of taxes pursuant to a claimed construction of the taxing statute, the Legislature in enacting an addition to the statute may very well be deemed to intend a clarification of its previous language rather than a change in the existing law (Union League Club v. Johnson, 18 Cal.2d 275, 279 [115 P.2d 425]; San Joaquin Ginning Co. v. McColgan, 20 Cal.2d 254, 264 [125 P.2d 36]), such circumstances do not appear of record to have motivated the Legislature’s adoption of the 1943 amendment here noted. It may be conceded, as appears from the Assembly Journal, that such additional enactment was prompted by the discussion of the express federal law in Fifth Street Building v. McColgan (1941), supra, as to the obligation of a trustee in bankruptcy to pay state and local taxes accruing in consequence of the *167carrying on of business and the resultant desire to place state officers in the conduct of liquidating proceedings on a parallel basis for tax purposes; but the materiality of the enlargement thereby effected in the act’s scope precludes agreement with the Franchise Tax Commissioner’s asseveration that the added provision was only a restatement or clarification of existing law rather than the engrafting of a new concept into the basis of imposition of the tax as theretofore declared. In 2 Sutherland, Statutory Construction, §5110, pp. 527-528, reference is made to the test employed by the New York courts as “highly satisfactory” in determining the import of an amendment: “The force which should be given to subsequent, as affecting prior legislation, depends largely upon the circumstances under which it takes place. If it follows immediately and after controversies upon the use of doubtful phraseology therein have arisen as to the true construction of the prior law it is entitled to great weight. ... If it takes place after a considerable lapse of time and the intervention of other sessions of the legislature, a radical change of phraseology would indicate an intention to supply some provisions not embraced in the former statute.” (Italics added.)
Without amplifying this discussion and having regard for the genesis of the legislation, it is plain that its purpose was to impose a tax upon a corporation actively engaged in any transaction for the purpose of financial or pecuniary gain or profit in the exercise of its corporate franchise within this state. In liquidating the business of Marine, an admittedly insolvent building and loan association, the plaintiff, even conceding he was “carrying on a business” as required to effectuate his purpose, was not a corporation but an individual, and under no conceivable theory could he be held to be a corporation “doing business,” prior to the express specification in the 1943 amendment above noted. He was liquidating the business of Marine under the terms and limitations of the Building and Loan Association Act, and not in the exercise of the corporate franchise of the association. With these plain and undisputed facts in the case, I think the conclusion is irresistible that the plaintiff’s operations incident to winding up the affairs of the Marine Building and Loan Association did not come within the purport of the Franchise Tax Act as here applicable. Accordingly, I am of the *168opinion that the judgment sustaining the plaintiff’s challenge of the propriety of the tax levy under the conditions here presented should be affirmed.
Edmonds, J., concurred.
Respondent’s petition for a rehearing was denied May 18, 1944. Curtis, J., and Edmonds, J., voted for a rehearing.