First American Title Insurance & Trust Co. v. Franchise Tax Board

Opinion

IRWIN, J.

*

This is an action for refund of taxes paid under the Bank and Corporation Tax Law of the State of California. Upon agreed facts, judgment allowing recovery was entered in favor of First American Title Insurance and Trust Company (“First American”), and defendant Franchise Tax Board (the “Board”) appeals.

The relevant facts for this appeal are: Respondent, First American, is an “insurer” within the meaning of that term in section 14⅘ of article XIII

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of the California Constitution, and during the fiscal periods involved transacted title insurance and had a “trust department” and conducted a “trust business” within the meaning of those terms in said section 14⅘ of article XIII. On and prior to December 31, 1964, First American owned four subsidiary corporations which engaged in escrow and abstract issuing activities. On December 31, 1964, these subsidiaries were liquidated and their business assets were transferred to First American, which continued operation of all the business and operating assets of each subsidiary. None of the subsidiary corporations had a trust department or conducted trust business. Hence, the acquisitions were unrelated to respondent’s trust operation.

The disputed franchise tax was assessed by the Board on the theory that California Revenue and Taxation Code section 23253 applied to First American with respect to the liquidation of the subsidiary corporations and, accordingly, that the measure of respondent’s franchise tax obligation for the income year ending December 31, 1964, should have included the net income during 1964 of the four subsidiary corporations.

With the exception of financial corporations, the franchise tax law (Rev. & Tax. Code, § 23151) provides for taxation of corporations

not expressly exempted from taxation by the California Constitution,

and the amount of tax payable is computed on the basis of its net income for the next preceding year. When a corporation, subject to the tax, dissolves, it pays no franchise tax based on its last year’s operation, since the tax for that year will have already been paid, based on the income of the next preceding year’s operation (Rev. & Tax. Code, §§ 23331-23334). However, where there is a reorganization, any such tax loss is overcome by section 23253, when applicable, because the transferee corporation is required thereby to compute its franchise tax for the year following the date of transfer on the basis of the net income of the acquired corporation for the prior year.