TRAYNOR, J. I dissent.
The allowance of the deduction in section 8(h) of the-Bank and Corporation Franchise Tax Act is designed solely to pre[689]vent double taxation of corporate income by this state. This section was drafted to cover dividends generally; it was not aimed particularly at dividends declared out of earnings or profits not included in the measure of the tax because of the percentage depletion deduction. Dividends out of earnings or profits not included in the measure of the tax on the dividend-declaring corporation because of the percentage depletion deduction are on the same footing as any other dividends out of earnings or profits not included in the measure of the tax on such corporation. Earnings or profits may be excluded from the measure of the tax for a variety of reasons other than the percentage depletion deduction. They may represent income earned by the dividend-declaring corporation from business outside of this state; they may have been accumulated before the effective date of the act; they may have been declared by a corporation not taxable under the Bank and Corporation Franchise Tax Act. Whatever the reason earnings or profits of the dividend-declaring corporation are not included in the measure of the tax on such corporation, a recipient corporation cannot deduct dividends declared out of such earnings or profits, for the deduction is expressly limited to dividends declared out of income that was included in the measure of the tax.
If all of the net income of a corporation is derived from business in California, and all of its earnings or profits are included in the measure of the tax, all dividends declared out of such earnings or profits will be deductible by the recipient corporations. The same income would be taxed twice if it were included in the measure of the tax on the dividend-declaring corporation and included again in the measure of the tax on the recipient corporations. If none of the income of the dividend-declaring corporation is included in the measure of the tax on such corporation, none of its dividends will be deductible by the recipient corporations. Thus the dividend-declaring corporation may be a foreign corporation that does no business in California and is not subject to the act; it may be a Federal Reserve Bank not subject to state taxation; it may be an insurance company not subject to taxation on or measured by net income; it may have earned the income in question before the effective date of the Bank and Corporation Franchise Tax Act.
The income of the dividend-declaring corporation may be derived in part from business carried on outside the state. [690]Income from out of state business is not included in the measure of the tax and consequently dividends representing such income are not deductible by the recipient corporations.
The deduction is allowed only when the earnings or profits out of which the dividends are declared have been included in the measure of the tax on the corporation declaring the dividends. Por example: X Corporation, which derives all its income from business done in this state, declares a dividend from its earnings or profits to Y, a foreign corporation not subject to the act, which in turn, out of the money received declares a dividend to Z, which is taxable under the act. Since the earnings or profits from which the dividend was declared by Y was not included in the measure of a tax under the Act on Y, the dividend is not deductible by Z. Even if Y did business in California, and was therefore taxable under the act, Z could not deduct the dividend, since the earnings or profits from which the dividend was declared would not be included in the measure of the tax on Y because the dividend would be deductible by Y under section 8(h).
A dividend may be declared by a foreign corporation that operates an oil well outside this state and does no business here. It may have no net income for purposes of taxation, and yet have earnings or profits for dividend purposes. A California corporation receiving such a dividend could not deduct the amount thereof under section 8(h), for the earnings or profits out of which it was declared were not included in the measure of the tax by this state on the dividend-declaring corporation. The result would be no different if the dividend-declaring corporation were a California corporation operating its oil well in this state. Since it would have no net income under the act, it would pay the minimum tax of $25. Yet it would have earnings or profits from which to declare dividends to its shareholders. Such dividends would not be deductible for the reason that prevails in all eases in which dividends are not deductible, namely, the earnings or profits out of which the dividends are declared would not be included in the measure of the tax on the dividend-declaring corporation.
In the foregoing example, the dividend-declaring corporation had no net income. The principle that the deduction is allowed only to the extent necessary to prevent double taxation’ by this state is equally applicable when the dividend-[691]declaring corporation has net income. Thus a California oil company after deducting percentage depletion, may have net income for tax purposes of $500,000 but earnings or profits of $1,000,000 for dividend distributions. If the earnings or profits are distributed as a dividend to a California corporation, only one-half of the dividend will be deductible, since the measure of the tax on the dividend-declaring corporation will include only one-half of the earnings or profits out of which the dividend is declared.
In the present cases, the earnings or profits from which the dividends were declared likewise exceeded the net income by which the tax on the dividend-declaring corporation was measured, and there has obviously been no tax measured by such excess. To the extent they represent such excess, dividends cannot be deducted without defeating the purpose of section 8(h) to limit the deduction to the extent necessary to prevent double taxation.
Not only the purpose of section 8(h) but its express provisions preclude a deduction in their entirety of the dividends in question. Section 8(h) as amended in 1937 provides: “Section 8: In computing ‘net income’ the following deductions shall be allowed: . . . (h) Dividends received during the income year from a bank or corporation doing business in this State declared from income which has been included in the measure of the tax imposed by this Act upon the bank or corporation declaring the dividend.” In 1939 the Legislature added the following to section 8(h): “or from income which has been taxed under the provisions of the Corporation Income Tax Act of 19371 to the corporation declaring the dividends.”
The purpose of this provision can be grasped only if its terms are understood. The “measure of the tax imposed by this Act” is net income. (§§ 1, 2, 4.) “Net income” is defined in section 7 of the act to mean “gross income” as defined in section 6, less the deductions provided for in section 8. “Dividends” mean “any distribution made by a corporation to its shareholders . . . out of its earnings or profits. . . .”2 [692](§ 6(e) (1).) “Earnings or profits,” generally speaking, mean gross receipts less the expense of producing them. (Weyerhaeuser, 33 B.T.A. 594, 597; Ayer, 12 B.T.A. 284, 287.) Since dividends are declared, not from statutory gross income or statutory net income, but from earnings or profits, and only from earnings or profits, the word “income” in the phrase “Dividends . . . declared from income ...” necessarily means earnings or profits.
Since net income (statutory gross income less statutory deductions) and earnings or profits (gross receipts less the expense of producing them) are computed differently, they will usually not be the same. If the earnings or profits exceed net income, it follows as a mathematical certainty that part of the earnings or profits have not been included in the measure of the tax and that the dividends declared out of such earnings or profits are not fully deductible.
The following illustrations, cited by defendant, show the difference between net income and earnings or profits and demonstrate that dividends may be declared from earnings or profits that have not been included in the measure of the tax. A domestic corporation, engaged in activities solely within this state, receives gross income of $100,000 and pays salaries amounting to $40,000, rent amounting to $25,000 and federal income taxes amounting to $15,000. For purposes of computing earnings or profits all of these items are taken into consideration, but for purposes of computing net income, federal income taxes are not, since they are not deductible under the act. Thus we have the following comparison:
Earnings or Profits Net Income
Gross Gross
Income $100,000 Income $100,000
Minus Minus
Salaries $40,000 Salaries $40,000
Rent 25,000 Rent 25,000 65,000
Federal
Income
Taxes 15,000 80,000
Earnings
or profits $20,000 $35,000
In the foregoing illustration, the statutory net income is greater than the earnings or profits because federal income taxes are not deductible in computing net income. Since the [693]net income includes all the earnings and profits (it even exceeds them), any dividends declared out of such earnings or profits will represent income included in the measure of the tax, and will therefore be fully deductible. The reverse may be true. Suppose the same facts as above except that the corporation engages in activities both within and without the state and that under an appropriate allocation formula only 30 per cent of its net income is attributable to this state. The comparison would then be:
Earnings or profits $20,000 Total Net Income $35,000
Net income attributable to California 30%
$10,500
In the foregoing illustration the earnings or profits are greater than the pet income by which the tax is measured because net income not attributable to California is excluded from the measure of the tax. Dividends declared out of earnings or profits representing such income will therefore not be deductible.
Similarly, dividends declared out of earnings or profits excluded from the measure of the tax by virtue of the deduction for percentage depletion are not deductible. It makes no difference whether percentage depletion is allowed as an exemption, an exclusion from gross income, or as a deduction from gross income. Income representing the allowance for depletion is as effectively excluded from the measure of the tax by way of deduction as it would be by way of an exemption or exclusion from gross income. The figure that is left after the deductions are taken is net income. That part of the gross income accounted for by deductions cannot possibly be included in net income, for the deductions exclude the amount thereof from the net income. Most of the deductions will represent outlays made in earning the gross income, and since such outlays cannot be the source of dividends, no problem with respect thereto can arise under section 8(h). The problem presented in the instant cases can arise only when the item deducted is itself income that is part of the corporation’s earnings and profits. When the deduction for depletion represents a return of the corporation’s capital, any dividend distribution represented by the amount of such deduction would be a return of capital to the shareholders and [694]would lower the basis of the stock for computing gain or loss. If the depletion allowance does not represent a return of capital it can only represent earnings and profits (See Rudick, “Dividends” and “Earnings or Profits” Under The Income Tax Law, 89 U. of Pa. L.Rev., 865, 866; 1 Mertens’ Law of Federal Income Taxation, 472; Ayer, 12 B.T.A. 284; Treas. Reg. 111, § 29.115-3.) that are not included in the measure of the tax. Since such earnings and profits are not included in the corporation’s net income and therefore not included in the measure of the tax, dividends declared therefrom do not meet the requirements of section 8(h) as dividends “declared from income which has been included in the measure of the tax.”
Suppose a domestic corporation is engaged in activities solely within this state. Suppose further that it receives gross income in the amount of $130,000, including royalties from oil and gas wells in the amount of $100,000, and that the corporation pays salaries of $40,000, and that it does not have any cost depletion but takes a deduction for depletion equal to 27% per cent of the $100,000, or $27,500. The comparative computations would then be:
Earnings or Profits Net Income
Gross Gross
Income $130,000 Income $130,000
Minus Minus
Salaries $40,000 Salaries $40,000
Rent 25,000 Rent 25,000
Federal Percentage
Income Depletion 27,500 92,500
Taxes 15,000 80,000
Earnings
or profits $50,000 Net Income $37,500
In this illustration nothing is subtracted for depletion in computing earnings or profits because there was no depletion cost, and nothing is subtracted for federal income taxes in computing net income because the act does not provide for a deduction for federal income taxes. On the other hand, federal income taxes are subtracted in computing earnings or profits because they are an expense, and percentage depletion is deducted in computing net income because the act provides for such a deduction. In this illustration the earnings or profits exceed the net income by $12,500, and it is mathematically impossible for such excess to be included in the net in[695]come. Consequently, dividends cannot be deducted to the extent they are declared out of such excess.
In the present cases, the “net income” of the Ventura Land and Water Company (hereinafter called “Ventura”) for tax purposes for the year 1937 was $775,282.65. It was stipulated that the earnings or profits of Ventura for that year were $963,338.63. The two figures differ for the following reasons: The “earnings or profits” were not re-
duced on account of cost of depletion because there was none, but in computing “net income,” $328,836.47 was deductible as percentage depletion, because this deduction was provided for by statute. On the other hand, Ventura had outlays of $110,372.58 for federal income taxes, $30,157.90 for California franchise tax and $250 as non-deductible contributions, all of which served to reduce Ventura’s “earnings or profits,” because they constituted expenses, but none of which was deductible in computing “net income” for franchise tax purposes, because the act does not provide for such deductions. Thus, although Ventura’s “net income” for franchise tax purposes for the income year 1937 was $775,282.65, its “earnings or profits” (the fund available for distribution of dividends) for that year amounted to $963,338.63, or $188,055.98 more than its net income. The excess for 1938 was $203,976.28.
As in the preceding example, it is mathematically impossible for the earnings or profits in excess of the net income to be included in the net income. Consequently, at least to the extent the dividends represent such excess, they are not deductible.
Plaintiff contends, and the majority opinion sustains the contention, that the phrase “income which has been included in the measure of the tax” refers to “gross income subject to taxation by the state” and since that item would include earnings and profits attributable to California sources, dividends paid therefrom would be ‘ ‘ declared- from income which has been included in the measure of the tax.”
The Bank and Corporation Franchise Tax Act imposes a tax ‘‘according to or measured by net income.” (§§ 1, 2, 4.) How could the Legislature state in plainer terms that “net income” is the measure of the tax? In the light of this language how can it be seriously contended that the measure of the tax is “gross income subject to taxation by the state?” Plaintiff confuses the measure of the tax with its computation. It is true that gross income is a necessary factor in computing net [696]income. So are the deductions allowed, but that does not make them the measure of the tax. Any gross income that remains after deductions are taken is included in the measure of the tax, but it is logically and mathematically impossible for any gross income that is represented by such deductions to be included therein. In concrete figures, plaintiff’s contention amounts to saying that if a corporation has gross income of $100,000 and is allowed deductions of $50,000, leaving a net income of $50,000, then the whole $100,000 has been included in the net of $50,000.
Any possible doubt that section 8 (h) requires the source of the dividend to be included in the net income of the dividend declaring corporation has been dispelled by the 1939 amendment adding the phrase “or from income which has been taxed under the provisions of the Corporation Income Tax Act of 1937 to the corporation declaring the dividends.” The purpose of this amendment is to place corporate shareholders of corporations taxable under the Corporation Income Tax Act on an equal footing with corporate shareholders of corporations taxable under the Bank and Corporation Franchise Tax Act. The two acts are complementary. (See West Publishing Co. v. McColgan, 27 Cal.2d 705, 708 [166 P.2d 861].) The rate of tax is the same and the provisions for the two acts are correlated. The essential difference between them is that in the former the subject of the tax is net income, in the latter the subject of the tax is the privilege of doing business in this state in corporate form, and net income is the measure of the tax. Since the Corporation Income Tax Act is imposed directly nn net income, the 1939 amendment does not use the phrase “income included in the measure of the tax.” Had the Legislature intended the phrase as used with respect to corporations subject to the Bank and Corporation Franchise Tax Act to mean gross income it would have provided in the 1939 amendment for the deduction of dividends declared from gross income rather than from income taxed under the Corporation Income Tax Act.
Assume for the purposes of argument that “income” as used in section 8(h) means “gross income” as plaintiff contends. Section 8(h) would then be construed as if it read, “Dividends received during the income year declared from gross income which has been included in the measure of the tax.” Even this construction would not support plaintiff’s contention, for the section would still contain the qualifying [697]phrase, “which has been included in the measure of the tax” a phrase that recognizes unequivocally that not all “gross income” is included in the measure of the tax.
Only if all gross income is included in the measure of the tax can plaintiff’s contention be sustained. In the foregoing discussion it has been demonstrated that when the earnings or profits out of which dividends have been declared exceed the statutory net income of the dividend-declaring corporation, it is mathematically impossible for all of the gross income to be included in the measure of the tax on such corporation. Confusing net income with the process of computing it, plaintiff contends that all gross income is included in the measure of the tax because it is “income which has been taken into account” or “income which has been through the tax mill” or “income which has been flailed by the tax master.” This contention would render meaningless the limitation of the deduction to “dividends declared from income which has been included in the measure of the tax, ’ ’ for the gross income of all corporations taxable under the act is “taken into account” or goes “through the tax mill” or is “flailed by the tax master.” Accordingly, dividends declared by such corporations would be deductible in their entirety. Thus the entire gross income of a corporation doing business within and without this state is “taken into account” in computing its tax. The corporation is required to report its gross income from all sources, both within and without the state, and the net income that is arrived at after taking the statutory deductions is allocated part to this state and the remainder to the other states, usually by means of a formula. (Butter Bros. v. McColgan, 17 Cal.2d 664 [111 P.2d 334] ; 315 U.S. 501 [62 S.Ct. 701, 86 L.Ed. 991].) Thus, for purposes of illustration, suppose a corporation that does business in California and in other states has a total gross income from all its business for a particular year of $1,000,000, earnings or profits of $800,000, and net income of $600,000, of which $60,000 is attributable to California. If the corporation then pays out the entire $800,000 of earnings or profits as dividends to California corporations whose only activities were in this state, the view that all amounts that have been taken into account as “gross income” have thereby been included in the measure of the tax would mean that the California corporations receiving these dividends amounting to $800,000 could deduct them in their entirety although the corporation declaring the dividends had only paid a tax [698]measured by $60,000. Certainly no such result is necessary to avoid double taxation by this state, and plaintiff concedes that such dividends would not be fully deductible. Yet such dividends meet the conditions urged by plaintiff for the deduction of the dividends in question, for all the gross income of the dividend-declaring corporation was “taken into account,” “went through the tax mill” and was “flailed by the tax master.”
Plaintiff’s suggestion that the disputed phrase in section 8(h) should be interpreted to mean ‘ ‘ gross income attributable to California sources” is not only administratively unworkable but is inconsistent with the basic structure of the act. With respect to a corporation doing business within and without the state, the act provides, not for the ascertainment of the gross income attributable to this state, but for the ascertainment of the net income attributable to this state. Such a corporation is required to report its gross income from all sources within and without the state; all applicable deductions are taken, and the total net income is determined. Part of this total is then allocated to this state. Ordinarily, in the cases of businesses conducted within and without the state there is no feasible way of determining what part of the gross income or of the deductions is attributable to this state. Consequently, the act provides for a determination of the amount of net income earned by the business as a whole and then for an allocation of part of that income to this state.
It is contended that it is anomalous for the Legislature to allow oil companies a deduction for depletion that is more than sufficient for a recovery of costs and then in effect to nullify the tax savings derived by the dividend-declaring corporation from percentage depletion by denying their corporate shareholders a deduction for dividends out of earnings or profits represented by the depletion deduction. The extent to which income is taxed and the extent to which deductions are allowed is entirely a matter of legislative discretion so long as constitutional restrictions are observed. The Legislature has seen fit to allow a deduction for depletion in the terms prescribed. It has also seen fit to deny a deduction for dividends unless double taxation by this state would result. Whether it was wise for the Legislature to do either of these things is of no concern here. The Legislature has not chosen, as it could have, to require domestic corporations to include their entire net income, including income from out of state business, in the [699]measure of the tax. Yet it denies corporate shareholders of such corporations a deduction for dividends declared out of earnings or profits from out of state business, and the very reason it does so is that such earnings or profits are not included in the measure of the tax on the dividend-declaring corporation. There is no more reason to grant corporate shareholders of oil companies a deduction for dividends out of earnings or profits excluded from the measure of the tax on such companies by way of the deduction for percentage depletion than there would be to grant corporate shareholders of domestic corporations a deduction for dividends declared from earnings or profits excluded from the measure of the tax on such corporations because derived from out of state business. In each case the recipient corporations are denied the deduction because the tax savings allowed the dividend-declaring corporation preclude double taxation by this state.
Section 3 of the Corporation Income Tax Act provides: “provided, however, that the income of any corporation which is included in the measure of the tax imposed by the Bank and Corporation Franchise Tax Act, Statutes 1929 Chapter 13, as amended, shall not be subject to the tax imposed by this act. ...” Plaintiff contends that if the Bank and Corporation Franchise Tax Act applies, the Corporation Income Tax Act does not apply and that since this is the clear meaning of section 3 it follows that the phrase “included in the measure of the tax” in section 3 of the Corporation Income Tax Act must mean gross income from California sources. The purpose of the Corporation Income Tax Act is to prevent discrimination against corporations subject to the Bank and Corporation Franchise Tax Act. Since the subject of the tax in the latter act is the privilege of exercising corporate franchises in this state, decisions of the United States Supreme Court prevent its application to foreign corporations engaged exclusively in interstate commerce. (See cases cited in West Publishing Co. v. McColgan, 27 Cal.2d 705, 708 [166 P.2d 861].) A tax on the net income of such corporations, however, is valid, and the Corporation Income Tax Act imposes such a tax. (Ibid. p. 709, West Publishing Co. v. McColgan, 328 U.S. 823 [66 S.Ct. 1378, 90 L.Ed 1603].) In order to avoid any suggestion of discrimination against interstate commerce the act was made applicable to the income of all corporations derived from sources within this state, including the income of corporations taxable under the Bank and Corporation [700]Franchise Tax Act. In order to prevent discrimination against corporations taxable under the latter act by the imposition of a double tax burden thereon, section 3 of the Corporation Income Tax Act was added to exempt the income included in the measure of the tax on such corporations. If that were the only exemption provision in the Corporation Income Tax Act, other income, such as income from out of state business, from dividends for which a deduction is allowed, and income represented by the depletion deduction would be taxable under the Corporation Income Tax Act. That act, however, contains other provisions identical with provisions of the Bank and Corporation Franchise Tax Act that allow a deduction for dividends (§ 7(h) and percentage depletion (§ 7(g) and that exclude income from out of state business. (§3,13.) Thus the exemption of such income in the Corporation Income Tax Act arises because of specific provisions of that act and not from any theory that gross income is included in the measure of the Bank and Corporation Franchise Tax within the meaning of section 3 of the Corporation Income Tax Act.
A comprehensive tax statute such as the Bank and Corporation Franchise Tax Act exemplifies intricate draftsmanship; it evolves out of the painstaking deliberations and studies not only of public officials but of others interested in tax legislation. Such a statute, wrought from a consideration of many conflicting interests, cannot long retain unity and coherence if one section or another is refrabrieated by the courts without regard for the structural whole. The technical concepts of the statute, its express provisions, should not lightly be vitiated by facile phrases such as “gone through the tax mill” or “flailed by the taxmaster” that denote a lack of insight into the legislative purpose that binds together the provisions of the statute. If the express words of the statute are overridden by such phrases neither taxpayers nor tax officials can look to the written word of the statute for its authentic meaning, and the already difficult task of understanding the revenue acts becomes hopeless.
The majority opinion relies heavily on the case of Burton E. Green Investment Co. v. McColgan. (60 Cal.App.2d 224 [140 P.2d 451], petition for hearing denied by this court.) That case unquestionably supports plaintiff’s contentions, but in my opinion it was erroneously decided and should be disapproved. It is contended, however, that section 8(h) was not amended at the regular session or the two special sessions of [701]the Legislature after the decision in that case, that in 1945 a Senate committee rejected a proposed amendment providing that dividends were deductible only in the ratio of the dividend-declaring corporation’s earnings or profits to its net income, and that therefore the Legislature adopted the court’s construction of the act in the Green case. The opinion in the Green case, however, contains so many errors fundamentally at variance with many provisions of the act that the Legislature cannot reasonably be presumed to have adopted the construction of the act in that case. These errors will be briefly described.
(1) The court in the Green case states (60 Cal.App.2d 224, 231) that net income “does not constitute the ‘measure of the tax.’ The income included in the measure of the tax is all income.” These statements repudiate the following express provisions of the act: “Every national banking association located within the limits of this State shall annually pay to the 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 fiscal or calendar year. ...” (§1; italics added.) “Every bank, other than a national banking association, 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 fiscal or calendar year. ...” (§ 2; italics added.) “Every financial corporation doing business 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. . . .” (§ 4(1); Italics added.) “With the exception of financial corporations, every corporation doing business 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 fiscal or calendar year. ...” (§4(3); italics added.) If the income included in the measure of the tax were all income, as the court in the Green case states it is, [702]the tax on national banks would be invalid under section 5219 of the United States Revised Statutes, for, while that section authorizes a tax on national banks according to or measured by their net income, it does not authorize a tax measured by all their income. Can it reasonably be contended that the Legislature adopted a construction that would not only repudiate express provisions of the act but invalidate the tax on national banks?
(2) The court in the Green case states (60 Cal.App.2d 224, 233) that proof of the legislative intention is to be found in section 9(d), which was also enacted in 1937. That section provides: “In computing net income no deduction shall be allowed for: . . . (d) Any amount otherwise allowable as a deduction which is allocable to one or more classes of income not included in the measure of the tax imposed by this act.” The court states that the word “income” is used in section 9(d) in the sense of “gross income” and that the word “income” in section 8(h) must have been used in the same sense. Why must it? The two sections serve different purposes and there is no necessary relation between them. Assume, however, for the purpose of argument, that the word “income” means “gross income” in both sections. The court also states (60 Cal.App.2d 224, 231) that all income is included in the measure of the tax. Yet section 9(d) specifically refers to ‘ ‘ classes of income which have not been included in the measure of the tax. . . .” If all income is included in the measure of the tax, as the court says it is, how can there be classes of income that have not been included in the measure of the tax? The court’s reasoning renders section 9(d) meaningless, for, if, as the court says, all income is included in the measure of the tax, there would never be a case in which items of income had not been included in the measure of the tax, and hence, there never would be a case in which any amount was allocable to one or more classes of income not included in the measure of the tax.
In section 9(d) the Legislature was not concerned with the question whether the classes of income referred to were either “gross income” or “net income.” There are several reasons why a class of income may not have been included in the measure of the tax: it may be a class of income that has been excluded from the statutory definition of gross income, e. g. amounts received under life insurance policies (§ 6(b)); it may be a class of income, which, although required to be re[703]ported in gross income is fully deductible, such as income from business activities of certain types of corporations ( §§ 8(1) and 8 (m); or it may be a class of income that is allocated to other states because it is derived from sources outside this state, e. g. income from intangibles having a situs outside the state. (§10.)
(3) The court in the Green case states (60 Cal.App.2d 224, 235) that “the Act makes no provision for computing depletion on the basis of cost.” This statement is erroneous. Section 8(g) of the act as amended in 1937 incorporated by reference the provisions of section 113 and 114 of the federal Revenue Act of 1936. Since 1939 these provisions have been set forth in full in the California Act. Under these provisions, a deduction may be taken for either cost depletion or percentage depletion, whichever is greater'. Hence, if cost depletion exceeds percentage depletion a deduction for cost depletion may be taken. Certainly, the Legislature did not adopt a construction of the act that repudiates so vital a provision.
(4) The court in the Green ease erroneously assumed that percentage depletion represents an exhaustion of capital and that the dividends were fully deductible to prevent a tax on capital. The court states (60 Cal.App.2d 224, 234) that “Whatever method of computing depletion be followed . . . the purpose is to leave in the hands of the taxpayer unappropriated that portion of the cost attributable to the amount of capital exhausted in earning the income on which any variety of tax is to be paid. ... In view of the extreme difficulty of devising a precise formula ... it was obviously determined that depletion based on a percentage of the gross income from the mineral or oil deposit must closely approximate the actual physical exhaustion. ... If it represents a positive exhaustion of capital it should be deducted by the owner of the property as a method of avoiding the exhaustion of capital. If it is properly deducted in computing the oil operator’s income for dividend purposes it should not thereafter be charged to the recipient corporation in computing his income for franchise tax purposes. To avoid such a hardship the recipient is authorized to deduct the dividend. ...”
The foregoing statement is in error on at least three counts: (a) Percentage depletion does not necessarily represent an exhaustion of capital. “Percentage depletion is not based on cost and in many eases taxpayers recover tax free by way of [704]percentage depletion far in excess of the cost of their oil properties. ...” (Estate of Japhet, 3 Tax Court 86.) The percentage depletion deduction may continue, as here, after cost or capital invested has been completely recovered. Thus, in the present cases Ventura had deductions of $328,836.47 and $384,872.10 for percentage depletion in the two years here involved. It is stipulated that Venturi fully recovered its cost or capital in prior years. Therefore, there can be no question of “invasion of capital” since Ventura has completely recovered its capital investment in prior years. There also was no question of invasion of capital in the Green case.
(b) Percentage depletion in excess of cost depletion is not deductible in computing earnings or profits for dividend purposes. (Ayer, 12 B.T.A. 284; Wood, 3 T.C. 187; see, Rudick, “Dividends” and “Earnings or Profits” under The Income Tax Law, 89 U.ofPa.L.Rev., 865, 886; 1 Mertens, Law of Federal Income Taxation 472.) Plaintiff in the present cases recognized this and stipulated to the computations of ‘ ‘ earnings or profits” for the years involved. These computations plainly show that percentage depletion in excess of cost depletion is not a deductible item in computing the fund available for dividends.
(c) If a corporate distribution is a “dividend” within the méaning of the act, then necessarily no element of capital can be present in the distribution. “Dividends” are specifically defined in the act (§6(1)) as distributions out of earnings or profits. In computing “earnings or profits” available for dividends, a deduction for cost depletion is always allowed as long as there is any cost to be recovered. Any distribution out of capital would not be a “dividend” because it would not be made out of earnings or profits. If a distribution is made out of capital it does not constitute a dividend and the recipient cannot claim a deduction for it under section 8(h), which permits a deduction only for dividends. A distribution out of capital reduces the basis for tax purposes of the stock held by recipients of the distribution, but cannot constitute a dividend. Since a dividend is defined as a distribution out of “earnings or profits,” it follows that any corporate distribution that constitutes a dividend cannot represent an invasion of capital. The distributions in the Green case were admitted to be dividends. Hence the conclusion of the court that a deduction of the Belridge dividends was necessary to prevent a tax on capital was clearly in error.
[705](5) The court iu the Green case erroneously stated (60 Cal.App.2d 224, 233), that the 1937 amendment to section 8(h) was not intended to alter its meaning as expressed in 1933. A comparison of the amended sections and a list of the changes effected will show the extent of the court’s error. Section 8(h) as amended in 1933 (Stats. 1933 ch. 209) provided: “In computing ‘net income’ the following deductions shall be allowed: (h) Dividends received during the taxable year from a bank or corporation doing business in this State declared from income arising out of business done in this State: . . . The provisions of this subsection shall not apply to dividends received from corporations not taxable under article thirteen of the Constitution of this State. ...” Section 8(h) as amended in 1937 provided: “Dividends received during the income year from a bank or corporation doing business in this State declared from income which has been included in the measure of the tax imposed by this act upon the bank or corporation declaring the dividends.” The most obvious change made by the 1937 amendment was to restrict the deduction to dividends declared by corporations taxable under the act, as contrasted with the 1933 section, which permitted the deduction as long as the declarer corporation was doing business in the, state and was subject to tax under article XIII of the Constitution. Thus, for example, dividends from insurance companies would be deductible under the 1933 act, but not under the 1937 act. Another obvious change was the restriction of the dividend deduction to distributions from income that had been included in the measure of the tax imposed upon the corporation declaring the dividends. The insertion of this restriction was prompted by the decision in Corporation of America v. Johnson, 7 Cal.2d 295 [60 P.2d 417], which interpreted the language “income arising out of business done in this State, ’ ’ which appeared in the 1929 version of section 8(h) as not restricted to income from business done by the corporation declaring the dividends. Since the same phrase “income arising out of business done in this State” was present in the 1933 provisions of section 8(h) presumably the rule of the Corporation of America case applied to it except as restricted by other conditions in the 1933 act.
The plaintiff seeks to dismiss these errors as “rhetorical imperfections. ’ ’ They cannot be dismissed so lightly, for they [706]were the very premises on which the court based its interpretation of the statute. This court’s denial of a hearing in the Green ease, does not constitute approval of the propositions of law laid down in the opinion of the District Court of Appeal. (Western Lithograph Co. v. State Board of Equalization, 11 Cal.2d 156, 167-168 [78 P.2d 731; 117 A.L.R. 838] ; Bohn v. Bohn, 164 Cal. 532, 537-538 [129 P. 981] .)1 In Helvering v. Halloch, 309 U.S. 106, 119 [60 S.Ct. 444, 84 L.Ed. 604, 125 A.L.R. 1368], the United States Supreme Court said that “It would require very persuasive circumstances enveloping congressional silence to debar this court from re-examining its own doctrines.” In the present case not even the reexamination of this court’s own doctrines is involved.
Rules of statutory construction are at best only aids in ascertaining the legislative purpose. One of those aids has here been seized upon, in disregard of the plain signposts within the statute and the basic concepts underlying it, to establish administratively unworkable conditions, accord unequal treatment to dividends, and open the way to a more extensive deduction than necessary to achieve the legislative purpose of avoiding double taxation.
Girourard v. United States, 328 U.S. 61 [66 S.Ct. 826, 90 L.Ed. 1084] directly involved the question whether failure to amend a statute after a judicial construction thereof constituted congressional adoption of that construction. The court said: “We conclude that the Schwimmer, Macintosh and Bland Cases do not state the correct rule of law. We [707]are met, however, with the argument that even though those cases were wrongly decided, Congress has adopted the rule which they announced. The argument runs as follows: Many efforts were made to amend the law so as to change the rule announced by those cases; but in every instance the bill died in committee. Moreover, in 1940 when the New Naturalization Act was passed, Congress reenacted the oath in its preexisting form, though at the same time it made extensive changes in the requirements and procedure for naturalization. From this it is argued that Congress adopted and reenacted the rule of the Schwimmer, Macintosh and Bland Cases. . . .
“It is at best treacherous to find in Congressional silence alone the adoption of a controlling rule of law. We do not think under the circumstances of this legislative history that we can properly place on the shoulders of Congress the burden of the Court’s own error. The history of the 1940 Act is at most equivocal. It contains no affirmative recognition of the rule of the Schwimmer, Macintosh and Bland Cases. The silence of Congress and its inaction are as consistent with a desire to leave the problem fluid as they are with an adoption by silence of the rule of those cases.” (66 S.Ct. 826, 830.)
The foregoing statement is particularly applicable here, where it is contended that the silence of the Legislature in 1945 establishes the intention of the Legislature that enacted the provision some eight years previously, even though administrative construction antedating the Green case and in contradiction with it was followed by reenactment of the section without change. It would be as logical to contend that the Legislature thereby adopted the administrative construction. Although legislative silence may sometimes give a clue to legislative intention, it is by no means conclusive. (Whitcomb Hotel, Inc. v. California Emp. Com., 24 Cal.2d 753, 756-758 [151 P.2d 233, 155 A.L.R. 405].)
The conclusion that legislative silence constitutes approval of what the courts have done, as Mr. Justice Rutledge so aptly stated in his concurring opinion in Cleveland v. United States, -U.S. - [67 S.Ct. 13, 17, 91 L.Ed.-], “must be derived by a form of negative inference, a process lending itself to much guesswork.”
This view is forcefully amplified in that opinion as follows: “There are vast differences between legislating by doing nothing and legislating by positive enactment, both in the [708]processes by which, the will of Congress is derived and stated and in the clarity and certainty of the expression of its will. And there are many reasons, other than to indicate approval of what the courts have done, why Congress may fail to take affirmative action to repudiate their misconstruction of its duly adopted laws. Among them may be the sheer pressure of other and more important business. (See Moore v. Cleveland R. Co. (CCA 6th) 108 F.2d 656, 660.) At times political considerations may work to forbid taking corrective action. And in such cases, as well as others, there may be a strong and proper tendency to trust to the courts to correct their own errors, see Girouard v. United States, supra, as they ought to do when experience has confirmed or demonstrated the error’s existence.
“The danger of imputing to Congress, as a result of its failure to take positive or affirmative action through normal legislative processes, ideas entertained by the Court concerning Congress’ will, is illustrated most dramatically perhaps by the vacillating and contradictory courses pursued in the long line of decisions imputing to ‘the silence of Congress’ varied effects in commerce clause cases. That danger may be and often is equally present in others. More often than not the only safe assumption to make from Congress’ inaction is simply that Congress does not intend to act at all. (Cf. United States v. American Trucking Assoc., 310 U.S. 534, 550 [60 S.Ct. 1059, 84 L.Ed. 1345].) At best the contrary view can be only an inference, altogether lacking in the normal evidences of legislative intent and often subject to varying views of that intent. In short, although recognizing that by silence Congress at times may be taken to acquiesce and thus approve, we should be very sure that, under all the circumstances of a given situation, it has done so before we so rule and thus at once relieve ourselves from and shift to it the burden of correcting what we have done wrongly. The matter is particular, not general, notwithstanding earlier exceptional treatment and more recent tendency. Just as dubious legislative history is at time much overridden, so also is silence or inaction often mistaken for legislation.”
Gibson, C. J., and Carter, J., concurred.
Appellant’s petition for a rehearing was denied March 17, 1947. Gibson, C. J., Carter, J., and Traynor, J., voted for a rehearing.
The Corporation Income Tax Act supplements the Bank and Corporation Franchise Tax Act and imposes a tax on the net income of certain corporations not subject to the latter act. (See West Publishing Co. v. McColgan, 27 Cal.2d 705, 708 [166 P.2d 861].)
This definition was added in 1939. The Franchise Tax Commissioner, following the federal income tax law on which the state act is based, ascribed the same meaning to the term “dividend” in the administration of the act before this definition was added.
In Bohn v. Bohn, supra, the court declared: ‘1 Our further examination of the case has led us to the conclusion that the Department opinion was correct. The principal reason for granting a hearing in Bank was that, in a ease between the same parties, presenting precisely the same issues of fact and law, the district court of appeal for the second appellate district had reversed an order like the one here appealed from, and that a petition to have the appeal transferred to this court for hearing and determination had been denied. (Bohn v. Bohn, 16 Cal.App. 179 [116 P. 568].) It is, of course, much to be regretted that opposite rulings should be made in two cases which present identical questions. But an order of this court, refusing to transfer a cause after judgment in the district court of appeal, does not adopt the opinion of the appellate court so as to give it, in this court, the authoritative effect which one of our own decisions would have. Being now convinced that the order appealed from should be affirmed, we must so declare, even though this view necessarily involves the conclusion that the earlier appeal should have been transferred to this court, and thereupon disposed of by a judgment differing from that rendered in the district court of appeal. Indeed, believing, as we do, that the order now under review was properly made, it would be our duty to affirm it, even if this court had itself, in another ease, reversed an order similar in all respects. ’ ’