Golden State Theatre & Realty Corp. v. Johnson

TRAYNOR, J. — The plaintiff, Golden State Theatre and Realty Corporation, during the year 1936 owned 50 per cent of the stock of East Bay Theatres, Inc., which in turn owned 100 per cent of the stock of Hayward Theatre, Inc., and 100 per cent of the stock of San Leandro Theatre, Inc. During that year plaintiff received dividends from East Bay Theatres, Inc., representing one-half of the dividends received by the latter from its two subsidiaries. Plaintiff did not include the dividends it received in its return under the Bank and Corporation Franchise Tax Act (Stats. 1929, ch. 13, p. 19, as amended, Deering’s Gen. Laws, 1937, Act 8488) for the income year 1936, but paid under protest an additional tax, with interest, measured by the amount of such dividends. The present appeal is from a judgment denying plaintiff a refund of such tax and interest.

Plaintiff contends that the dividends are deductible from its gross income "as “dividends received during the income year from a . . . corporation doing business in this State declared from income arising out of business done in this State ...” (§ 8(h), Stats. 1935, ch. 281, p. 996.) Plaintiff maintains that the corporation declaring the dividends was doing business as defined in section 5 of the act, and was not a holding company within the meaning of section 4. When the tax was levied section 5 provided: “The term ‘doing business’ as herein used, means actively engaging in any transaction for the purpose of financial or pecuniary gain or profit.” (Stats. 1935, ch. 275, p. 962.) Section 4 provided: “Any corporation organized to hold the stock or bonds of any other corporation or corporations, and not trading in [495]such stock or bonds or other securities held, and engaging in no other activities than the receipt and disbursement of dividends from such stock or interest from such bonds, shall not be considered a corporation doing business in this State for the purposes of this act.” (Stats. 1935, ch. 275, p. 960.) Whether Bast Bay Theatres, Inc. was a holding company or was doing business in 1936 turns upon its activities during that year. The record discloses that Bast Bay Theatres, Inc., engaged in the following transactions in 1936: On January 20th its board of directors authorized the endorsement of a note of San Leandro Theatre, Inc. for $59,000. On May 12th the board of directors ratified the renting by its officers of certain theatre property to Hayward Theatre, Inc., for a monthly rental of $400. On August 3rd the board of directors authorized the purchase for $113,229 of certain theatre property, which Hayward Theatre, Inc., had previously leased from a third party for its theatre operations, and continued the lease to Hayward Theatre, Inc. The board of directors authorized the borrowing on August 6th of $84,000, and on September 30th of $32,000 for the completion of the purchase. Subsequent to the purchase and leasing of this property, Bast Bay Theatres, Inc., took actions, such as collecting rents, giving notices to quit, and arranging for improvements, as landlord for its principal tenant, Hayward Theatre, Inc., and for tenants who rented store space on the ground floor of the building.