Farmers Underwriters Ass'n v. Franchise Tax Board

FLEMING, J. The sole issue on this appeal is the effective date of the 1963 amendments to Insurance Code, section 1530, and to Revenue and Taxation Code, section 12003 (Stats. 1963, eh. 1909). These amendments were intended to equalize the tax treatment of stock, mutual, and reciprocal insurers by reducing the amount of corporate franchise taxes paid by corporate attorneys in fact for reciprocal insurers.

Plaintiffs are corporate attorneys in fact which manage the insurance business of their respective reciprocal or interinsurance exchanges. Before the 1963 amendments, each plaintiff paid a corporate franchise tax on its entire net income in the same manner as other corporations within the state. The corporate franchise tax is a tax on the privilege of doing business in any given year, and its amount is calculated as a percentage of the corporation’s net income for the preceding year. (Rev. & Tax. Code, § 23151.) Under the 1963 amendments, plaintiffs’ income from the management of insurance exchanges is no longer taken into consideration in the calculation of their franchise taxes. Instead, each plaintiff is treated as a single unit with its insurance exchange and the unit pays a tax on the amount of its gross premiums in the same manner as do stock and mutual insurance companies. Plaintiffs are still subject to a franchise tax but pay either the minimum franchise tax or one based solely on noninsurance income. (Ins. Code, § 1530; Rev. & Tax. Code, §§ 12003, 23151.) As a consequence of these changes plaintiffs’ corporate franchise taxes have been reduced.

The 1963 amendments specified they were to become operative January 1, 1964. (Stats. 1963, ch. 1909, § 3.) Plaintiffs brought this suit for a refund of $400,000 of franchise taxes paid in 1964, claiming that these taxes had been improperly determined on the basis of their 1963 net income calculated under the old law. Plaintiffs contend that since the tax was calculated subsequent to January 1, 1964, the basis for determining their 1963 income should be that established by the new law. In opposition, the Franchise Tax Board argues that the 1963 amendments had no effect on a determination of net income earned during 1963, but by specific terms only applied to a determination of net income earned after January 1, 1964. [592]The trial court concluded that the Legislature intended the 1963 amendments to affect the determination of net income starting with income earned on January 1, 1964, and entered summary judgment in favor of the Franchise Tax Board. The court reasoned that the provision making the amendments operative January 1, 1964, had been inserted by the Legislature in order to negate the effect of Revenue and Taxation Code, section 23058, and that the provision for an operative date would be useless unless given that application.