Motion to Dismiss Appeal — Security-First National Bank of Los Angeles v. Franchise Tax Board

AS ee Se ce

upreme Court, U.S.

rie o

URT. U &, JUL 19 1961

JAMES R BRUWNING Ciert

In the Supreme Courtofthe- Se

| United States

October ‘TERM, 1961

No. 122

LIBRaRV

SuPR-.

Security-First NATIONAL BaNxk or Los ANGELES,

Appellant,

Vs.

FRANCHISE Tax Boarb oF THE STATE OF CALIFORNIA,

Appellee.

(17 Cases)

Bank OF AMERICA NATIONAL TRUST AND

SAVINGS ASSOCIATION,

Appellant,

vs.

FRANCHISE TAX BoarD OF THE STATE OF CALIFORNIA,

Appellee.

(13 Cases)

THE FARMERS AND MERCHANTS NATIONAL BANK OF

Los ANGELEs,

Appellant,

vs.

FRANCHISE TAX BoAkD OF THE STATE OF CALIFORNIA,

Appellee.

(15 Cases)

On Appeal from the Supreme Court of the State of Californie

Motion to Dismiss or Affirm

STANLEY Mosk

Attorney General of California

James EK. SaBINe

Assistant Attorney General

Ernest P. GoopMAN

Deputy Attorney General

600 State Building

San Franciseo 2, California

Attorneys for Appellee.

Feuix S. WAHRHAFTIG

Of Counsel

SORG PRINTING COMPANY OF CALIFORNIA (FORMERLY PARKER PRINTING COMPANY)

160 FIRST STREET. SAN FRANCISCO S&S, CALIFORNIA

SXUBIECT INDEX

Statutes Involved |

Statement |.

Argument in Support of Motion

The Questions Are Not Substantial

1. It Is Settled By Prior Deeisions of This Court That

There Has Been No Violation of Due Process of Law

A.

>

Bb.

Although the Funetion of Computing the Bank

Tax Rate Was Quasi-Legislative, Information and

Hearing Sufficient Even to Satisfy the Require-

ments of a Quasi-dndicial Proceeding Were Avail-

able te Appellants

This Case Does Not Involve the Imposition of Tas

Liability, Predicated Upon Ineontrovertible As-

RIND OE FINN inv vrkechces hinders

li. The Calitornia Taxing Statute Contortis With Rev ised

Statutes, Seetion 5219

Conclusion

Appendix

Paue

e

TABLE OF AUTHILORITIES CITED

Cases Pages

Amoskeag Savings Bank v. Purdy, 231 U.S. 3732000000000... 16

Bi-Metallie Investment Co. vo State Board of Equalization,

a cick ee rs ps Ba ae Si aati Oe 0», 6, 7,9, 14

Covington v. First National Bank, 198 U.S. 100 0... 16

Crown Finance Corp. v. MeColgan, 23 Cal. 2d 280.0000... a7

Franchise Tax Board v. Superior Court, 36 Cal, 2d 538.000... 10

HAS. Loan Serviee, Inc. v. MeColgan, 21 Cal. 2d 518.0... my at

Hannah v. Larehe, 363 U.S. 420............................. cA re CeaK Rea 4

International Harvester Co. vo Evatt, 329 U.S. 416000000... 5

Interstate Commerce Commission v. Louisville & Nashville R.

OR - eo PRD UES By Ti anias SO Ee CA oe s

Londoner v. Denver, 210 ULS. 373... 7

Michigan Central Railroad Co. v. Powers, 201 U.S. 245.0005, 8, 15

Michigan National Bank v. Michigan, 365 U.S, 467... Asse. 16

Morgan v.Enited States, 298 US. 468.0000. Bee NOD s

Ohio Beli Telephone Co. v. Publie Utilities Commission, 301

Seog CRU sa eee hs ph tig tena SR ve rte Pon ge anes 8,9)

St. Joseph Stockvards Co. v. United States, 298 US. 38... s

Securitv-First Nat. Bk. vo Franchise Tax Board, 55 Adv, Cal.

ick ge ee a ee Notes Mette as eet gO 10

Tradesmens National Bank v. Oklahoma Tax Commission, 309

a a ies cidade eed ee

United States v. Revnolds, 345 ULS. boo... eter co 11

RULES

United States Supreme Court Revised Rules. Rule 16.000... l

TABLE OF AU TIIORITIES CireD il

STATUTES Piewes

California Bank and Corporation Franchise Tax Net:

Section 23

Section | : ie

Section 2 2, 3,5, App. I

Section 3 ; 2, App. 1

Section 4a yee,

Section 451 2.3.3, App. 1

Section 4:2) a Ae

Section 455 Fa Ma ae.

»

vi ee ee snes a foe

California Revenue and Taxation Code Section 28001, et. ser. rs

California Statutes of E28 Ch. 15 =

California Statutes of 1833, p S71 a

Deering’s General Laws, 1944. Act 545s reat pe

United States Code. Title P22. Seetton 545 a

United States Revised Statutes. Seetion 9219 aa, a

MiIsceLLAN BOL >

Traynor, National Bank Taxation in California, 1 Calin. bL.

Rev, 83, 252, 456 = ENE ai *

Traynor and Keesling, Reeent Changes in the Bank and Cor

poration Tax Ae,

21 Calif. L. Rev. 545 :

22 Calif. L. Rev. 499 2. 1619

23 Calif. L. Rev. 1 ~

In the Supreme Court of the

United States

Ocroben Term, 196]

No. £22

Security-First NatioNalt BANK OF Los ANGELES,

Appellant,

Vs.

FRANCHISE TAX Bovkb OF THE STATE OF CALIFORNIA,

Appellee.

17 Cases}

Bank op AMERICA NATIONAL TRUST AND

SAVINGS ASSOCIATION,

Appellant,

Vs.

FRANCHISE TAX Boakp or THE STATE OF CALIFORNIA,

Appellee.

(13 Cases)

Tur FARMERS AND MekcHANTS NaTioNaL BANK OF

Los ANGELES,

Appellant,

Vs,

FRANCHISE TAX Boarbp OF THE STATE OF CALIFORNIA,

Appellee.

(15 Cases }

On Appeal! from the Supreme Court of the State of Californie

Motion to Dismiss or Affirm

Appellee, pursuant to Rule 16 of the Revised Rules of

the Supreme Court of the United States, moves the Court

to dismiss these appeals or te affirm the judgments of the

Supreme Court of the State of California for the following

reason :

There is no substantial federai question presented as a

hasis of jurisdiction in this Court masmuch as the questions

presented have been foreclosed by previous decisions of this

Court.

STATUTES INVOLVED

Section 5219 of the Revised Statutes of the United States

(12 United States Code, Section 548) and Sections 1, 4a,

23 and 55 of the California Bank and Corporation Fran-

chise Tax Act (Cal. Stats. 1929, Ch. 13, as amended) are

set forth in the appendix to Appellants’ Jurisdictional

Statement. In addition, Sections 2,3 and 4(1), (2) and (3)

of that Act are set forth in the appendix hereto.

STATEMENT

Appellants, national banking associations, appeal from

judgments denying recovery in actions for the refund of

taxes imposed under the California Bank and Corporation

Franchise Tax Act’ during the vears 1933 through 1949, ,

The present method of taxing national banks in Cali-

fornia, carefully drafted to avoid discrimination? was en-

acted in 19338 and has been in operation throughout the

past 2S vears. The method is prescribed by Sections 1 and

da of the Bank and Corporation Franchise Tax Act.4

1. Stats. 1929, ch. 13, p. 19, as amended; Deering’s Gen. Laws,

1944, Act S488. The Act has been codified in the Revenue and Taxa-

tion Code as Section 23001, et seq., effective July 1. 1951. These

cases relate to a period prior io the codification, and references wil!

be made to sections of the Act rather than to the Code.

2. Traynor and Keesling, Reeent Changes in the Bank and Cor-

poration Franchise Tax Act, 21 Calif. L. Rev. 543, 22 Calif. L. Rev.

499, 23 Calif. L. Rev. 51. Trayner, National Bank Taxation in Cali-

fornia, 17 Calif. L. Rev. 83, 232, 456.

3. Cal. Stats. 1933, p. 871.

4. The tax imposed on national banks under the Bank and Cor-

poration Franchise Tax Act was “in lien of all other taxes and

licenses, state, county and municipal * * * except taxes upon * * *

real property.” (Seetion 3)

From 1935 through 1949, subdivision 3 of Section 4 of

the Act inmposed a franchise tax at the flat rate of 4 per

cent of net income upon every corporation except financial

corporations and those exempted by the Constitution or

the Act. The corporations taxable under this provision

(therearter referred to as ponfinancial corporations) were

required te pay. in addition, other taxes including personal

and real property taxes. Banks and other fiaancial insti-

tutions” were required to pay a tax measured by net in-

come" at a rate not to exceed S per cent, made up of two

parts: (1) A flat rate of 4 per cent, as paid by nonfinancial

corporations, and (2) an additional percentage determined

on the basis of the ratio between the total California

personal property taxes required to be paid = by non-

financial corporations and = their total net incomes

attributable to Califormia.’ (Section 4a) This rate was

determined annually by the Franchise Tax Commissioner

after affording the banks and financial corporations a

public hearing and an opportunity to examine the data on

which his determination was to be based. (Section 4a)

The Commissioner each vear compiled information as to

the net incomes and personal property taxes of nonfinancial

corporations from their verified franchise tax returns, from

audit adjustments dealing with additional assessments and

abatements, and from other materials obtained from: the

corporations. The information was tabulated in statistical

form, and transcripts of the returns were made which con-

+. Sections 1,2 and 4/1) of the Aet.

6. Revised Statutes, Seetion 5219) authorizes state taxation of

national banks “according to or measured by their net income.”

7. In 1932 and 1984, Seetion 4a provided that the flat rate, like

the one then appleable to nonfinaneial corporations, was 2 per cent

rather than 4 per cent: and that the combination of the flat rate

and additional percentage should not exceed 6 per cent.

i

4

tained the property tax and net income figures with serial

nuinbers instead of names being used to designate the cor-

porations. Two reports containing a proposed tax rate were

prepared, one showing an over-all computation and the

other a computation by industrial groupings. At the hear-

ings held by the Commissioner the banks were permitted

to inspect the transeripts and the statistical material, and

members of the Commissioner's staff, having possession of

the original returns, answered questions as to their con-

tents so that the lists furnished plaintiffs could be checked

for accuracy so far as this could be done without dis-

closing the names of the corporations.

Additional information and methods of verification were

made available to appellanis at the trial, specific reference

to which will be made in the argument that follows.

Appellants contended they should be allowed unrestricted

examination of the tax returns of the nonfinancial corpora-

tions despite the provisions of Seetion 35 of the Act con-

cerning nondisclosure of the amount of income or the basi-

ness affairs of the corporate taxpayers appearing in their

tax returns.*

ARGUMENT IN SUPPORT OF MOTION

The Questions Are Not Substantial.

1. IT IS SETTLED BY PRIOR DECISIONS OF THIS COURT THAT THERE HAS

BEEN NO VIOLATION OF DUE PROCESS OF LAW.

A. Altheegh the Fuaction of Computing the Bank Tax Rete Wes Quasi-Legisic-

tive, Infermetion and Hearing Sufficient Even to Satisfy the Requirements of

@ Quasi-Jedicial Proceeding Were Available to Appellants.

This Court in numerous instances has observed that the

nature of the function involved is significant when due

process concepts are to be considered. In Hannah v. Larche.

—

8. The purpose of the nondisclosure provisions of Section 25. is

to facilitate tax enforcement by encouraging taxpayers to make

full and truthful declarations in their tax returns.

”?

O05 U.S. 420, 440, it was noted that the requirements of

due process frequently vary with the tyvoe of proceeding

involved. What is due process in procedure varies with the

governinental purpose to be accomplished and with the

nature of the interests affected.

The governmental power here involved is the state tax-

ing power. It is settled law that practical considerations

must obtain in tax matters. BreMetallic Investment Co. v.

State Board of Equalization, 239 US. 4412 lnternational

Harvester Co. ve. Evatt, 329 U.S. 416, 422. The validity of

computing a tax rate on the basis of taxes paid by others is

well established. Michigan Central Railroad Co. v. Powers.

YOL ULS. 245. Tt also has been recognized that complexities

may be such that as a matter of practical tax adiministra-

tion “rough approximation rather than precision” is suf-

ficient. International Harvester Co. v. Evatt, 329 US. 416,

422.

The California statute required the Commissioner to make

a statistical survey as to the California net income and

California personal property taxes of thousands of non-

financial corporations for the purpose of computing a tax

rate applicable to a large and indefinite group of tax-

pavers, including national banks, state banks ana all cor-

porations classed as financial corporations,” such as savings

and loan associations. (Sections 1, 2 and 4)

We are concerned, therefore, with general or legislative

facts, not with individual facts—-with quasi-legislative ac-

tien, not with quasi-judicial action. Bi-Metallic Investment

Co. v. State Board of Equalization, 239 U.S. 441.

% Corporations classed as finaneial corporations ere those tha,

are in substantial competition with national banks. MALS. Loan

Nerrice-trrat McColgan, 21 Cai, 2d 518; Crown Finance Corp.

VieColgaan, wv ‘al. a | 2s0)

6

The Supreme Court of California referred to the deei-

sion of this Court in the Bi-Metallic Investment Co. case

in pointing to the differences between quasi-legislative and

quasi-judicial action. In that case this Court said:

“Where a rule of conduct applies to more than a

few people it is impracticable that every one shouid

have a direct voice in its adoption. The Constitution

does not require all public acts to be done in town

meeting or an assembly of the whole. General statutes

within the state power are passed that affect the per-

son or property of individuals, sometimes to the point

of ruin, without giving them a chance to be heard.

Their rights are protected in the only way that they

can be in a complex society, by their power, inimediate

or remote, over those who make the rule. If the result

in this case had been reached as it might have been

by the State’s doubling the rate of taxation, no one

would suggest that the Fourteenth Amendment was

violated unless every person affected had been allowed

an opportunity to raise his voice against it before the

body entrusted by the state constitution with the

power .’ (page 445)

Appellants in attempting to avoid the impact of the

Bi-Metallic case,” state that in that case the taxpayers

had already had, at the local level, the hearing as to com-

paretive valuations to which they were constitutionally

entitled under ad valorem procedures. Appellants, however,

completely miss the point of the Bi-Metallic case. The hear-

ing which the taxpayer had in the Bi-Meitallic case was as

to the valuation of its individual property in relation to

the valuation of other property in the county and is com-

parable to the hearing available to each appellant here as

to the amount of its net income. Each bank had the op-

portunity to explore fully into any adjustinent of the net

10. Jurisdic’ .onal Statement, page 17, footnote 22.

‘

income of that bank *oade by the Commissioner. On the

other hand, raising the level of valuation of all property

ina county, for purposes of a statewide tax, as to which the

taxpayer in Bi-Metallic sought and was denied a hearing,

is comparable to the rate computation here, General facts,

rather than individual facts relating to a partieular tax-

payer, vere involved in beth the valuation increase order

of the Bi-Metallic case and the bank tax rate determination

of the present cases.

Bi-Vetallic establishes that the same due process stand-

ards do not apply to general facts as apply to individual

facts. Londoner v. Denver, 210 U.S. 373, 386, cited by ap-

pellants, shows that even when individual facts are con-

cerned, procedural due process standards in tax cases may

be far less stringent than those in other cases."

Under these authorities, procedural due process cer-

taiuly does not require in the determination of a tax rate

based on the amount of net income and the amount required

to be paid as personal property taxes by several thousand

corporations’? that the banks be permitted to scrutinize

and cross-examine in meticulous detail as to every. indi-

vidual corporation as they contend.

The Comimissioner’s action in making an annual com-

putation of the bank tax rate was characterized as a quasi-

11. In the Bi-Metallic case, this Court observed (page 446)

that the property owners in the Londoner ease “* © * were excep-

tionally affected, in cach case upon tndividual grounds * * * ( Em-

phasis added.) The state statute in Londoner denied a landowner

the right to object in the eourts to the speeial assessment made

igainst his property. This Court nevertheless indicated that the

requirements of due process would have been satisfied if the tax-

paver had been accorded the opportunity before the taxing agency

“to support his allegations by argument however brief, and. if need

he. by proof, however informal.” (page 386)

1200 As mentioned by appellants, the Commissioner in 1949) for

example, had the task of ascertaining the total California net in-

come and total California personal property taxes of 36,000. cor-

porations.

8

legislative function by the California Supreme Court and

appellants recognize,“ that we are here concerned with a

quasi-legislative function. They attempt, nevertheless, to

apply standards of due process which are appropriate in

quasi-judicial proceedings. Appellants rely on Ohio Bell

Telephone Co. v. Public Utilities Commission, 301 US.

292; St. Joseph Stockyards Co. v. United States, 298 U.S.

38; Morgan v. United States, 298 U.S. 468; and Interstate

Commerce Com. v. Louisville & Nashville R. Co., 227 U.S.

88. These cases relate to the establishment or the validity

of rates of public utilities. In public utility matters, affected

parties are entitled to a hearing on the question of whether

the rates are confiscatory and, also, on whether there is

evidence in the record to support the order. As indicated

by this Court in Interstate Commerce Com. v. Louisville €

Nashville R. Co., 227 U.S. 88, and Morgan v. United States,

298 U.S. 468, hearings relating to the confiscatory or non-

confiseatory character of public utility rates constitute

quasi-judicial action.

The contrast between the establishment of public utility

rates on the one hand and tax rates on the other is well

illustrated by the St. Joseph Stockyards Co. case where

the Court pointed out that if the utility rates had been set

by the legislature itself, they would have been subject to

judicial serutiny on the issue of confiscation, 298 U.S. 38, 51.

On the other hand, it is readily apparent that a state legis-

lature may establish tax rates and that due process does

not require that a taxpayer be granted a judicial review of

those rates. Cf. Michigan Central Railroad Co. v. Powers,

201 U.S, 245, 294-295.

If the Legislaturc ‘iad set the tax rate, appellants would

not have any procedural due process right to inquire into

how the rate was determined. For example, if the Cali-

13. Jurisdictional Statement, page 15.

9

fornia Legislature had enacted a flat rate, say of 7%,

for a particular vear, appellants could question in court

whether they were subjected to a higher tax burden than

other corporations, but they would have no opportunity to

inquire how the 7% rate was arrived at by the Legislature.

Instead of enacting a flat rate, the Legislature provided

for an annual computation by the Commissioner under a

prescribed formula so that the rate weuld more nearly

follow the fluctuation in the personal property tax burden

of nonfinancial corporations, The statute also provided a

maximum bevond which the rate could not go. Few indeed

are the instances in which as much opportunity has been

afforded to taxpayers for obtaining information as to

how a tax rate is arrived at as is afforded with respect

to the Section 4a tax rate.

It is to be observed that although the Comunissioner in

computing the bank tax rate was engaged in a quasi-legis-

lative function, the hearing afforded the banks with respect

to the tax rates here involved satisfied the requireinents of

a quasi-judicial proceeding as laid down in the Ohio Bell

Telephone Co, case, 301 US, 292. In discussing that case,

the California Supreme Court first pointed out that Ohio

Bell involved regulation of the rates of a single utility in

contrast to the instant case and the Bi-Metallic case which

involved action applicable to many persons. The Court

went on to point out that in the Ohio Bell case a rate order

was mnade at the administrative level without knowledge on

the part of the utility as to the statistical information and

trade journals relied on by the Commission in setting the

rates and without any right of judicial review of the rate

order, On the other hand, as stated by the California

Supreme Court," * * * In the present cases plaintiffs were

informed of the material relied upon by the ¢gomimissioner

10

as discussed above, and thereafter they were given op-

portunities for reasonable verification of that material and

for attacking the rates by introducing any relevant, non-

privileged evidence.”"*

Voluminous details as to how the bank tax rate was com-

puted were provided appellants at the bank tax rate hear-

ings,’ and these details were included in the record of

this trial by way of stipulated testimony.’’ Thus, tran-

scripts of hank tax rate hearings extending over some 2,200

pages of the reporter’s transcript of the trial in these cases,

were placed in the record. In addition, various officials and

employees of the appellee were called by appellants and

examined as witnesses during the course of the trial.

Through these witnesses and the stipulated testimony pre-

viously mentioned, appellants were in a position to explore

in detail the various steps of the Commissioner's practice

in determining the bank tax rate.

With respect to the net income factor, appellee provided

appellants with a list utilized by the Commissioner in the

bank tax rate computations setting forth for each corpora-

tion the serial number of its franchise tax return™ and the

amount of its net income. Ajpellants had the opportunity

to check the returns and other documents, with the serial

number but not the name of the corporation disclosed, to

ascertain whether the net income figures appearing on such

returns and other documents corresponded with those ap-

iz. 55 Adv. Cal. 409, 423; Appendix to Jurisdictional State-

ment, page 17. z

15. Some of the methods of checking made available to the banks

at the annual bank tax rate hearings are summarized in Franchise

Tax Board v. Superior Court, 36 Cal. 2d 538, 542.

16. 11 Rep. Tr. 2896.

17. Serial numbers were stamped on returns consecutively as

they were received by the Commissioner.

11

pearing opposite the same serial number in the list utilized

by the Commissioner in the bank tax rate computations.

As mentioned by the California Supreme Court,’* appel-

lants failed to take advantage of the opportunity afforded

them to check against the local property tax rolls the per-

sonal property tax figures (of identified corporations) used

by the Commissioner, In this regard, appellee offered to

make available, with certain minor exceptions, the name of

each nonfinancial corporation and the personal property

tax figure utilized by the Commissioner for each such cor-

poration.”® In providing this information, appellee in effect

would be saying to appellants: “This is the personal prop-

erty tax figure used for this corporation in computing the

bank tax rate.” With such information, appellants could

have gone directly to the local property tax rolls, which

are public records, to ascertain if the personal property

tax figures utilized by the Commissioner corresponded with

those shown by the local property tax records. Appellants

could have made such an investigation without resorting

to the franchise tax returns of the nonfirancial corpora:

tions.” Appellants, however, did not choose to do so, either

through the application of aeceptable sampling techniques

or otherwise. In view of the*availability of this and other

information herein mentioned, appellants’ contention they

could not obtain information lacks substance.

in addition to the opportunities for verification previ

ously discussed, numerous other methods of verification

ws. 55 Adv. Cal. 469, 421, Appendix to Jurisdietional State

ment, page 12.

19. 23 Rep. Tr. 6200-6203.

0. In United States vo Regnolds, 345 US. 1. VL this Court indi

cated that even where individual rather than legislative facts were

invelved a litigant who sought disclosure of certain confidential

documents should have accepted the Government's offer of infortne

tion from an alternative noncontidential source.

~

12

were made available to appellants during the trial.7! The

State, throughout the trial, repeatedly offered to provide

information to appellants, repeatedly proposed useful and

substantial methods of testing the rate computations, and

repeatedly offered to comply with any-other reasonable

and legal methods of verification that might be proposed

by appellants.”

Reference to the opportunities for checking available to

appellants was made by Chief Justice Gibson in speaking

for the Supreme Court of California in this case as follows:

“** *Much material helpful to plaintiffs in determin-

ing the accuracy of the rate was made available to

them at both the administrative hearings and the trial,

and the only information withheld was such that it

would have revealed to them, contrary to section 35,

the amount of income or the business activities re-

ported by named nonfinancial corporations. We are

satisfied that plaintiffs received all the information

they reasonably needed.” (55 Adv. Cal. 409, 422, Ap-

pendix to Jurisdictional Statement, page 15)

Irrespective of whether appellants were entitled to a

hearing as a matter of due process, the fact is that they

had a hearing both at the administrative level and at the

trial. As the California Supreme Court observed:

“* * * Plaintiffs in the present cases obtained an

independent judicial determination as to the validity

of the tax rates after a fair opportunity to present

evidence in support of their position. ** *" (55 Adv.

Cal. 409, 423, Appendix to Jurisdictional Statement,

page 16)

21. For example, 17 Rep. Tr. 4536-4541, 4569-4571; 19 Rep. Tr.

5244-5245.

» For example, 20 Rep. Tr. 5503; 21 Rep. Tr. 5677; 23 Rep.

Tr. 6235.

13

Appellants’ statement® that “The undisputed testimony

was that the Commissioner's ‘determinations’ could not have

been verified by any of the methods suggested by appellee”

is misleading. The testimony to which appellants refer was

given before some of the most significant offers by appellee

were made, As pointed out in the opinion of the California

Supreme Court, for example, “With respect to the personal

property tax data used by the commissioner, an offer was

made to provide, with certain exceptions, the names of the

corporations together with the amount of tax each had paid.

This offer was rejected by plaintiffs * * *.°"* This offer

was made and rejected subsequent to the testimony referred

to by appellants.

Appellants assert” there was no possible way of proving

or disproving whether any of the figures included by the

Commissioner in his rate computations were those of net

income corporations. Contrary to appellants) assertions

means were available for verifying that figures utilized by

the Commissioner were those of net’ income corporations.

Kach tax return filed by a corporation contained the cor-

porate number assigned to that corporation by the Secre-

tary of State. Each tax return siso was stamped with a

serial number when it was received in the Commissioner's

office.

Appellee offered to arrange the net income returns of

corporations Whose personal property taxes were utilized

in the rate computations in corporate number sequence

and to allow appellants to see the name and corporate

number on each return as well as the affidavit and signa-

ture to verify that it was a genuine return, Appellee, upen

23. Jurisdictional Statement, page TS.

24. 55 Adv. Cal. 409, 421. Appendix to Jurisdictional State-

ment. page 12.

» Jurisdictional Statement, page Ts.

l+

completion of this step, would rearrange the same returns

in serial number sequence and allow appellants to check

each return (without disclosing the identity of the cor-

poration) to ascertain whether the corporation was a net

income corporation. This would enable appellants to ascer-

tain that the corporations whose personal property taxes

were included in the rate computation were net income

corporations.

Appellants’ assertion® that the State of California has

done everything in its power to prevent any judicial review

as to the correctness of the rate computation is not well

founded. It is in sharp contrast with the statements of the

California Supreme Court that much materia! helpful to

appellants in deterinining the accuracy of the rate was

made available to them at both the administrative hearings

and the trial, that appellants received all the information

they reasonably needed and that they obtained an inde-

pendent judicial determination as to the validity of the tax

rates after a fair opportunity to present evidence in sup-

port of their position.”7

In view of the information furnished to appellants, the

offers to them of additional information and the oppor-

tunities available to them for verifying the Commissioner's

computations and for presenting evidence, appellants’ con-

tentions concerning lack of procedural due process are not

meritorious. ‘

Certainly no substantial federal question of procedural

due process is presented in view of Bi-Metallic Investment

Co. v. State Board of Equalization, 239 U.S. 441, and the

other precedents of this Court to which we have referred.

26. Jurisdictional Statement, page 19. .

27. 55 Adv. Cal. 409, 422-423, Appendix to Jurisdictional State-

ment, pages 15-16.

i)

B. This Case Does Not Involve the Imposition of Tax Liability Predicated Upon

Incontrovertible Assumptions of Fact.

Appellants’ discussion to the effect that tax liability was

predicated upon incontrovertible assumptions of fact. is

Without merit. The California statute has been construed

by the California Supreme Court as meaning that the

amount assessed by the local assessing authorities and paid

as personal property taxes is the figure to be used in com-

.

puting the bank tax rate?’ Appellants were free to con-

trovert whether the nonfinancial taxpayers had paid the

amounts of personal property taxes used by the Comunis-

sioner in the rate computation. Appellants contend they

were entitled as a matter of due process to inquire into

whether the local assessing authorities assessed the cor

rect amount as personal property taxes. A similar argu-

ment Was rejected by this Court in Vichigan Central Rail-

road Co, ¢, Powers, 20) U.S. 245. This Court there held

that the applicable state law construed as providing for a

tax rate on railroad property computed on the basis of

actual assessed valuations and actual taxes paid on the

property of others was valid,

The California Supreme Court agreed that the taxing

statute authorized the Commissioner to take the amount of

personal property taxes assessedeby the local authorities

and paid as the amount required to be paid as personal

property taxes ip computing the bank tax rate. It was then

the burden of appellants under Revised Statutes Section

9219 (12 ULS.C. § 548) to show, if such were the fact, that

under the state statute as so construed a higher burden was

imposed on appellants than the highest burden imposed-en

mercantile, manufacturing and business corporations. This

they failed to do.”

28. 55 Ady. Cal. 409, 423-424, Appendix to Jurisdictional State-

ment, pages 17-18.

29.) The trial courts finding that a higher burden was not im-

posed is set forth in footnote 36, ——

ee ee

id

16

Il. THE CALIFORNIA TAXING STATUTE CONFORMS WITH REVISED STAT-

UTES, SECTION 5219.

The California bank tax was so designed as te preclude

any possibility of a discriminatory tax burden in violation

of Revised Statutes, Section 5219. The only restriction

imposed by that section on the use of the according to or

measured by net income method of national bank taxation

is that “* * * the rate shall not be higher than the rate as-

sessed upon other financial corporations nor higher than

the highest of the rates assessed by the taxing State upon

mercantile, manufacturing, and business corporations doing

business within its limits. * * *”

The term “rate” is employed in this restriction in the

sense of burden, rather than in the sense of arithmetical

rate, (Tradesmens National Bank v. Oklahoma Tax Com-

mission, 309 U.S. 560) just as it is in the case of the restric-

tion on the share tax method.*! Amoskeag Savings Bank v.

Purdy, 231 U.S. 373; Covington v. First National Bank,

198 U.S. 100. The point was well summed-up in the decision

this vear in Michigan National Bank v. Michigan, 365 U.S.

467, 475, as follows:

“* ** And so, we are taught that in determining the

burden of the tax—its discriminatory character—we

look to its effect, not its rate. * * *”

That the California bank tax cannot impose a discrimina-

tory tax burden in violation of Section 5219 may readily be

established. State banks were taxed in exactly the same

manner as were national banks. The banks, together with

30. Traynor and Keesling, Recent Changes in the Bank and

Corporation Franchise Tax Act, 22 Cal. L. Rev. 499.

31. “In the ease of a tax on said shares the tax imposed shal! not

be at a greater rate than is assessed upon other moneved eapital in

the hands of individual citizens of such State coming into competi-

tion with the business of national banks. * * *’’ Revised Statutes,

Section 5219.

i

other financial corporations “ and with nonfinancial corpor-

ations, paid a tax measured by net income at a 4 rate.

The banks and other financial Corporations paid an addi-

tional tax measured: by net income at a rate based on the

ratio of the total amount required to be paid as personal

property taxes** by the nontinancial corporations to the

total California net income of these corporations.”

While the California tax burden on financial corporations

nay exceed, it cannot be less than, that on banks. As

compared with nonfinancial corporations, banks pay a tax

measured by net income at a total rate equal to the rate of

the franchise tax paid by chose corporations plus a rate

representing the average burden of the personal property

taxes of those corporations in terms of their net income.

The only possibie conclusion on a comparison of the tax

32. The term “financial corporation” ineluded all corporations,

ey. savings and loan associations, engaged im substantial competi-

tion with national banks. MWuA.S. Loan Service, Ine. v. MeColgan,

21 Cal. 2d S18; Crown Finance Corp. v. MeCoigan, 23 Cal. 2d 280.

Such finaneial corporations pay personal property taxes, but are

allowed to offset those taxes against their franchise tax payments,

the franchise tax after allowance of the offset not to result, however,

in a lesser rate of tax than that appiicable with respect to the net

income of banks.

33. The rate was 26 for the vears 1933 and 1934.

34. The many other taxes imposed by the State and its political

subdivisions to which the nonfinaneial corporations were subject,

but from which the banks were immune, were not considered in

arriving at this additional tax.

3. The rate of the additional tax was limited by the taxing

statute to 4. Tf, therefore. the ratio of the total amount required

to be paid as personal property taxes by the nonfinaneial eorpora-

tions to the total California net ineome of those corporations re-

sulted ina bank tax rate of 2.50, the banks and finaneial corpora-

tions paid an additional tax aecording to or measured by their ce-

spective net incomes at a 2.50 rate. If, however, that ratio resulted

in a rate in excess of 4, as it did for many vears (1933—5.560 ;

IN34-—4,830 5 1935--4.9567 . 1936 4.016: 1987--5.640 +. 1938

Foose | NBO 9526 5 140-8. 34 5 1941--5.366 5. the banks and

financial corporations paid an additional tax aecording to or meas-

ured by their respective vet incomes at a rate of only 46. Finding

6, e.w.. Sac. No. 6954. Clk. Tr. 55.

PAP RO TNO I. AM.

> aan

burdens of banks and nonfinancial corporations was ex-

pressed by the California Supreme Court as foilows:

“ee? The total percentage of net income paid by

banks as franchise taxes is equal to the percentage

paid by nonfinancial corporations as a group from

their combined net incomes as franchise taxes and per-

sonal property taxes. Thus, if the banks are required to

pay a higher percentage of their net income than some

of those corporations, there are necessarily others pay-

ing a greater portion of their net income than the

banks pay. It is apparent that the tax burden of the

banks is not ‘higher than the highest of the rates’

imposed upon nonfinancial corporations and is in ac-

cord with section 5219.” (55 Adv. Cal. 409, 417; Ap-

pendix to Jurisdictional Statement, page 6)*°

Appellants do not assert that California imposes upon

banks a discriminatory tax burden, but only that California

imposes upon banks a discriminatory franchise tar burden.

A comparison of franchise tax burdens is not, however, the

test of compliance with Section 5219. As this Court pointed

out with great clarity and precision in Tradesmens Na-

tional Bank v. Oklahoma Tax Commission, 309 U.S. 560,

568, the resolution of the issue of discrimination “* * *

turns upon an examination of the whole tar structure of the

state, * * *” (Emphasis added.) ‘

Appellants seek to limit the principle of the Trudesmens

case by asserting that the true rationale of the case is

that where a state reaches the tax-exempt income of na-

tional banks under one type of franchise tax, it is competent

36. The trial court found for cach vear in question that “the

tax burden imposed by the State of California upon plaintiff and

other banks for the taxable vear was neither higher than the tax

burden imposed by the State upon other financial corporations nor

higher than the highest of the tax burdens imposed by the State

upon mereantile, manufacturing and business corporations doing

business within the State of California.” Finding 19, e.g., Sae. No.

6952, Clk. Tr. 196.

ea

for it io reach the iax exempts of nontinancial corporations

vader another type of franchise tax, provided diserimina-

tion against banks is not shown. There is not the slightest

degree of support for this position in the opinion of the

Court. The references in the opinion to “the whole tax

structure of the state” and to “all the taxes jinposed upon

business and mereantile corporations doing business in the

state” and the specifie reference to an ad valorem tax

establish that the Court regarded a comparison of total

tax burdens, not one solely of franchise tax burdens, as the

standard for determining compliance of a state tax on na-

tional banks with Section 5219. .

Califorma has not taxed, either directly or indirectly,

the personal property of banks. The amount of tax to be

paid by a bank does not depend upon or vary in any way

With the amount of personal property owned by the bank.”

It is entirely permissible for California to include the

interest income of banks from federal securities in the

measure of the franchise tax on the banks. Tradesmens

Nationa’ Rank ¢, Oklahoma Tax Commission, 309 US. 560,

O64. The tax burden imposed on banks not being higher

than that imposed on other financial corporations nor

higher than the highest imposed on mereantile, manufactur-

uring and business corporations, the fact that banks TH AY

hold more tax-exempt securities than other classes of tax-

pavers offers no basis for objection to the State's method

of taxing banks under Section 5219.

~

37.) Traynor and Keesling, Reeent Changes in the Bank and Cor-

poration Franchise Tax Aet. 22 Cal. L. Rev. 499, 507.

UO

Pa hr eae

CONCLUSION

Inasinuch as appeliants’ contentions have been foreclosed

by prior decisions of this Court, we respectfully submit

that these appeals should be dismissed or in the alternative

that the judgments of the Supreme Court of California

should be affirmed.

STANLEY Mosk

Attorney General of California

JaMeEs BK. SaBine

Assistant Attorney General

ERNEST P. GoopMAN

Deputy Attorney General

Attorneys for Appellee.

Fenix S. WAHRHAFTIG

Of Counsel

( Appendix Follows)

Appendix

California Bank and Corporation Franchise Tax Act, Section 2.

Sretion 2. Tax ox Stare Banks. Every bank, other

than a national banking asseelation, located within the

limits of this State, shall annually pay to the State for

the privilege of exercising its corporate franchises within

this State, a tax according to or measured by its net income,

to be computed, in the manner hereinafter provided, upon

the basis of its net income for the next preceding fiseal

or calendar vear at the rate provided for in Seetion 4a

hereof,

California Bank and Corporation Franchise Tax Act, Section 3.

»

Sretios 3.) Bank Taxes ox Liev or Orure Taxes. The

tax referred to in Sections | and 2 hereof shall be in dieu

of all other taxes and licenses, state, county and municipal,

upon the banks and banking associations therein mentioned,

except taxes upon their real property,

California Bank and Corporation Franchise Tax Act, Section 4.

Section 4.0 Tax ox Convorations, (1) Tax on Fix anxciai

CorroratioNs. Every financial corporation deing business

within the limits of this State, taxable under the provisions

of Seetion 16 00 Article NIT of the Constitution of this

State, shall annually pay to the State for the privilege of

exercising its corporate franchises within this State, a tax

according to or measured by its net income, to be computed,

in the manner hereinafter provided, upon the basis of its

net income for the next preceeding fiscal or calendar vear

at the rate provided for in Section 4a hereof,

2 alppendir

(2) Fisanctan Corporations; Tax Orrset. Each such

financial corporation shall be entitled to an offset against

said franchise tax, in the manner hereinafter provided, in

the amount of personal property taxes and license fees

for the privilege of operating as personal property brokers,

or brokers as defined in Chapter 634, Statutes of 1909, as

amended, and those engaged in the business of loaning

money, advancing credit, or loaning credit or arranging

for the loan of money or advancing of credit or loaning of

credit, paid during the income year to this State or to any

county, city and county, city, town or other political sub-

division of the State, and licenses for the privilece of

operating motor vehicles paid to this State under Chapter

362, Statutes of 1935, as amended; provided, however, that

the tax on such financial corporation after the allowance

of offset shall not be less than 4 percentum of its net income

for the preceding fiscal or calendar year or less than twenty-

five dollars ($25).

(3) Tax on Oruer Corporations. With the exception of

financial corporations, every corporation doing business

within the limits of this State and not expressly exempted

from taxation by the provisions of the Constitution of this

State or by this act, shall annually pay to the State, for

the privilege of exercising its corporate franchises within

this State, a tax according to or measured by its net income,

to be computed, in the manner hereinafter provided, at the

rate of 4 percentum upon the basis of its net income for

the next preceding fiscal or calendar vear. In any event,

each such corporation shall pay annually to the State, for

the said privilege, a minimum tax of twenty-five dollars

($25).