Long Beach Firemen's Credit Union v. Franchise Tax Board

Opinion

WOODS, Acting P. J. At issue is the applicability of the franchise tax deduction authorized by Revenue and Taxation Code section 24405. Appellant, Long Beach Firemen’s Credit Union, (hereinafter sometimes referred to as the credit union) sought refund of corporate franchise [53]taxes for the years 1975 and 1976, on the basis that the foregoing section authorized the deduction of certain income received from its investments. The Franchise Tax Board (hereinafter the board) denied the claim for refund. The credit union brought suit in the superior court for recovery of the taxes and following trial, judgment was entered in favor of the defendant board. This appeal followed.

The relevant statute (Rev. & Tax. Code, § 24405) authorizes a credit union to deduct from its gross income; for purposes of determining state franchise taxes owing, “all income resulting from or arising out of business activities for or with their members carried on by them of their agents; ...” We are asked to decide whether the transaction in question was a business activity carried on by the credit union with its member, within the meaning of the statute. We have concluded that it was not.

The credit union is a state chartered credit union organized for the purpose of promoting thrift and creating a source of credit for its members, usually employees or pensioners of the Long Beach Fire Department or members of their families. In 1971, the credit union began investing its surplus funds in the International Credit Union Government Securities Program (hereinafter ICU). ICU is a program operated by the ICU Services Corporation, a wholly owned subsidiary of the Credit Union National Association, which provides for investments in United States government securities.

In 1975, the appellant requested ICU to become a member of the credit union. ICU completed the membership application and returned it with a check for $5, the required initial share deposit, and was issued a membership card and membership number. Thereafter, in 1975 and 1976, the credit union continued to invest its surplus funds in the ICU Government Securities Program, which investment generated interest income. The claimed tax refund is based on the credit union’s contention that those investments amounted to business activities with a member and that the income thereby generated was deductible pursuant to Revenue and Taxation Code section 24405.