John McClure Estate, Inc. v. Johnson

[513]

DORAN, J.

Appellant is a domestic corporation doing business in the State of California. Appellant received dividends on stock owned by it in an insurance company doing business in California and paying the insurance tax on gross premiums imposed during the year 1937, the income year in question, by section 14 of article XIII of the California Constitution. The dividends received by appellant were paid by the insurance company in part from gross premium income and in part from investment income. Appellant contended that, in computing its net income for 1937 by which its franchise tax for 1938 was measured, all the dividends received by it from the insurance company were deductible. The Franchise Tax Commissioner, respondent here, refused to allow any of such dividends to be deducted and increased appellant’s tax accordingly. After paying the additional tax appellant instituted this action for the recovery thereof. Judgment of the trial court was for respondent and this appeal followed. The appeal, involving the legality of a tax, was taken to the Supreme Court of this state and was transferred by the Supreme Court to this court.

Appellant contends that the provision of the Bank and Corporation Franchise Tax Act, which permits the deduction of certain dividends in computing net income for franchise tax purposes, applies to dividends received on the stock of insurance companies; and, if not so held to apply, the provision in question is unconstitutional, in that it does not afford equal protection of the law, is discriminatory and amounts to taking property without due process of law.

The provision of the Bank and Corporation Franchise Tax Act, section 8(h) thereof, read, at the time of the instant tax levy, as follows (Stats. 1929, p. 19, as

amended;

Act 8488, Deering’s General Laws) : “Sec. 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 dividends.”

The following provisions of the state Constitution were also in effect at the time of the instant levy: