UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT
STATE LOAN AND FINANCE CORPORATION (Successor by Merger to
Petition for Rehearing En Banc Denied August 17, 1967.
Fahy,* Circuit Judge, Bastian, Senior Circuit Judge, and Tamm, Circuit Judge. Fahy, Circuit Judge (dissenting).
DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE TAMM
The petitioner State Loan and Finance Company seeks review *fn1 in this case of a decision of the District of Columbia Tax Court which increased the petitioner's District of Columbia franchise taxes on its net income derived from sources within the District of Columbia for the fiscal year ended June 30, 1958, and for the taxable period July 1, 1958, through March 16, 1959. The petitioner is a Delaware corporation which merged with the Lincoln Service Corporation on September 16, 1959, and assumed all of Lincoln's assets and liabilities as of that date. During the taxable periods here involved, the petitioner, hereinafter called Lincoln, was a holding company whose principal place of business was in the District of Columbia. It was the owner of all, or almost all, of the corporate stock of several subsidiary corporations engaged in the business of making small loans to individual borrowers in the states in which their offices were located. The subsidiaries engaged in no other business except the small loan business. Each subsidiary had to be licensed by the state in which its office was located, in order to carry on the small loan business. At the end of the fiscal year ending June 30, 1958, the subsidiaries operated 103 small loan offices in 11 states; as of March 16, 1959, they operated 105 loan offices in 11 states. None of the subsidiaries conducted the business of lending money in the District of Columbia, id est, no loan offices were located in the District of Columbia, nor did they own any properties or have any payroll here.
Lincoln derived gross income from three sources: (1) interest on loans to subsidiaries, (2) administrative fees paid by the subsidiaries for supervision and management services rendered by Lincoln, and (3) dividends declared by the subsidiaries and received by Lincoln on the capital stock it held in the subsidiaries. *fn2
Each of Lincoln's subsidiaries was strictly controlled by laws and regulations of the state in which the loans were made. The subsidiaries, in accordance with the requirements of state law, kept in their home offices the borrower's note, the chattel mortgage, the application for the loan, the ledger card, and a statement of the transaction. The managers of the subsidiaries were in charge of the loan offices and had complete authority to reject a loan, as well as in determining the collection procedure to be followed. The subsidiaries belonged to local civil organizations and maintained bank accounts in the cities where they were located. The managers had complete discretion in the operating of the loan offices. They hired, trained, and discharged their employees; they paid expenses such as rent, heat, light, telephone, administrative and supervisory fees, and local taxes from their local bank accounts; and they determined money needs of the subsidiaries and borrowed funds from Lincoln for operational purposes. Money in the local bank account could be withdrawn upon the joint signature of the manager and cashier. Lincoln did not have the authority to draw on these accounts, but an officer of the subsidiary who was physically present in the District of Columbia also had authority to draw on the local account of the subsidiary.
During the period here involved, the subsidiaries of Lincoln had approximately 350 employees, all of whom worked outside of the District of Columbia, while Lincoln had 20 employees. Lincoln supplied supervisory and management services to its subsidiaries located in the several states and charged and received substantial sums for such services. These services were performed by supervisors employed by Lincoln, and these supervisors advised the personnel of the subsidiaries and reported to Lincoln. The supervisors had offices, or were headquartered, in the states in which the small loan subsidiaries were located. Each supervisor supervised 8 to 10 small loan offices. The supervisors would visit each office, investigate all loans that had been made since the last visit, review with the manager of the subsidiary its activities, calculate what had been accomplished, and endeavor to correct any errors that may have been made. In addition, the supervisor trained and instructed the other personnel in the subsidiary's office. Virtually all of the services rendered by the supervisors to the subsidiaries were rendered outside the District of Columbia. Lincoln, in its office in the District, performed services for its subsidiaries such as accounting, purchasing, advertising, the printing of forms, preparation of income tax returns, and the keeping of the formal books and records, including the general ledgers. Lincoln had no written agreement concerning the management services to be rendered for the subsidiaries; the fee paid by each subsidiary was based on the amount of the subsidiary's outstanding loan balance. Lincoln corporate officers were also officers of the subsidiaries. All of the officers of the subsidiaries were located in the District of Columbia. Almost all, if not all, of the subsidiaries' directors were either officers or directors of Lincoln and were located in the District of Columbia. All the directors and stockholders meetings for both Lincoln and the subsidiaries were held in the District. All the dividends were determined and paid in the District of Columbia.
The amounts received by Lincoln during the taxable periods were as follows: (For detailed tax computation, see Appendix A).
Fiscal Year Ended Period Ended
Interest $986,806.88 $595,197.03
Administrative Fees 900,768.57 650,035.53
Dividends 689,890.14 700,159.00
Total $2,586,465.59 $1,945,391.56
The question before the Tax Court was whether the interest, dividends, and administrative fees received by Lincoln from its subsidiaries were taxable under the District of Columbia corporate franchise tax, D.C.Code §§ 47-1571, 47-1571a (1961 ed.). Section 47-1571 of the Code provides that "taxable income" shall mean "the amount of net income derived from sources within the District within the meaning of sections 47-1580 to 47-1580b." Section 47-1571a of the Code provides that:
"For the privilege of carrying on or engaging in any trade or business within the District, and of receiving income from sources within the District there is hereby levied for each taxable year a tax at the rate of 5 per centum upon the taxable income of every corporation whether domestic or foreign."
Section 47-1580 provides that:
"It is the purpose of this article to impose . . . (2) a franchise tax upon every corporation . . . for the privilege of carrying on or engaging in any trade or business within the District and of receiving such other income as is derived from sources within the District."
"the interest and dividends paid or issued by them [the subsidiaries] were income from sources within the District under principles announced in the Virginia Hotel Company and Consolidated Title Corporation cases and under Section 47-1571(a)
No question is raised before this court now of the Tax Court's findings in regard to the sources and allocation of the administrative fees received by Lincoln from the subsidiaries. The Tax Court found that the services for which the fees were received were performed partly within and partly without the District of Columbia. On the basis of section 10-2(c) of the regulations pertaining to the District of Columbia corporate franchise tax, which provides for allocation of the income on the basis of the site at which the business was carried out, and the stipulation of parties in respect to the compensation of officers and employees of Lincoln who were engaged in supervision of the subsidiaries, including the time spent in performing that service both within and without the District of Columbia, the Tax Court found that 42.47 per cent of the administrative services was performed within the District of Columbia for the fiscal year ended June 30, 1958, and 34.87 per cent for the fiscal year ended June 30, 1959. It thereupon applied these percentages to the total administrative fees received to determine the amount properly includible in gross income for the respective periods.
The sole issue before us now for resolution is: What was the source *fn3 of the dividends and interest payments received by the parent Lincoln? If it was "income from sources within the District," *fn4 then petitioner must pay the franchise tax on it. The Tax Court found that both interest and dividend income had its source within the District. That court found, on the basis of the facts presented, that each subsidiary had acquired a commercial domicile in the District of Columbia.
The Tax Court discussed, first, the rule in regard to finding the source of dividend and interest income:
" Interest and Dividends. These two classes of revenue are combined for discussion because the rules or principles relating to the source of interest and dividend income are the same, or to be more exact, one and the same rule or principle. This rule or principal in respect of interest is that the source of interest income is the domicile of the debtor, and as to dividends it is the domicile or locale of the paying or issuing corporation."
The Tax Court then applied these rules in light of its commercial domicile determination and came to the conclusion that both interest and dividend income had their source within the District of Columbia for franchise tax purposes.
The rule in this jurisdiction in regard to the source of interest on a note is clear. The Tax Court, in its opinion in the Virginia Hotel case, reversed on other grounds, *fn5 there indicated that the:
" (Source) of interest income is the obligor and its situs is his residence. . . . Resort must be had to the ordinary meaning of the term 'sources.' As Judge Goodrich said in Lord Torres, 25 BTA 154, 161, 'the commonly accepted definition of the term "source" is that from which anything comes forth, regarded as its cause or origin.'" [Citations omitted.]
The rule in regard to the source of dividends is equally clear in this jurisdiction. The District of Columbia Tax Court in Consolidated Title Corp. v. District of Columbia, *fn6 there indicated that the source of the dividends was the domicile of the paying or issuing corporation.
"The principles relating to the situs of dividends are essentially the same as those concerning the taxable locale of interest. Statutes and treaties treat of them together as having the same characteristics or natures. Both involve the use of money and a person or corporation obligated to pay for its use or retention. The domicile of the obligor in both instances is a taxable situs, which does not mean, of course, that some other jurisdiction may not also impose taxes on or in relation thereto. Curry v. McCanless,
This reservation in the last sentence refers to the constitutionality of the imposition by two states of a tax on the transfer of the same intangibles, as well as the possibility of double taxation on intangibles as in Wheeling Steel Corp. (infra ) something which is neither questioned nor at issue in this case.
The Tax Court, after applying the correct rules for the ascertainment of the source of dividends and interest income, here incorrectly applied the commercial domicile theory as laid down in Wheeling Steel Corporation v. Fox, 298 U.S. 193, 56 S. Ct. 773, 80 L. Ed. 1143 (1936); First Bank Stock Corp. v. State of Minnesota, 301 U.S. 234, 57 S. Ct. 677, 81 L. Ed. 1061, 113 A.L.R. 228 (1937); and Memphis Natural Gas Co. v. Beeler, 315 U.S. 649, 62 S. Ct. 857, 86 L. Ed. 1090 (1942), to find that the income sources were in the District of Columbia. *fn7
We are not without some guidance in the meaning of "source" as used in the statute in regard to dividends and interest source. In Consolidated Title Corp. v. District of Columbia (supra) which involved a corporation organized under the laws of Maryland, and which corporation had its statutory office in Baltimore but kept all of its books and records, transacted all of its corporate business, and held all of its shareholders and directors meetings in the District of Columbia, this court had before it the issue of dividend source. The corporation was organized to carry out a court-approved reorganization of a bankrupt corporation. Its entire income consisted of dividends from three subsidiary corporations, all of which were organized under the District of Columbia laws and had their principal offices and business in the District, where they engaged in the real estate title examination and insurance business.
In regard to dividend source, Judge Edgerton said:
"The Tax Court held, and we agree, that petitioner received its income from 'sources within the District' and was therefore subject to these taxes. The 'sources' were petitioner's subsidiary corporations. Since they had their principal offices and businesses in the District, they were 'within the District'; they were '"domiciled" therein, corporately and commercially', as the Tax Court found. It is immaterial that some of their business was done elsewhere. We are not concerned with the sources of their income, but only with the sources of petitioner's income. Cf. Eastman Kodak Co. v. District of Columbia, 76 U.S.App.D.C. 339, 340, 131 F.2d 347, 348. We need not consider whether petitioner was 'engaging in . . . business within the District' within the meaning of the franchise tax. Cf. District of Columbia v. Virginia Hotel Co., 92 U.S.App.D.C. 186, 187, 204 F.2d 390, 391. Affirmed." Consolidated Title Corp. v. District of Columbia, 107 U.S.App.D.C. at 222, 275 F.2d at 886.
The court clearly indicated that the source of income was the place where the "principal offices and businesses" were located. The search for such a place in the context of this statute is a search for one place, not many. The concept of commercial domicile is one leading to more than one domicile for a corporation at one and the same time, while the doctrine of domicile taken in the normal sense *fn8 is a unitary concept -- one of a single, exclusive domicile. The plain meaning of source, as used in this statute, the interpretation of domicile in the context of source of dividend income in Consolidated Title Corp. (supra) and common sense all require that the question of source or domicile in the case of dividend and interest source is one which is resolved by finding the "principal office and business" of the subsidiary. *fn9 In this case, there is no question that the principal offices and businesses were located outside the District of Columbia and were located in the states where the loans were made and the payments thereon received. The facts are clear that the principal place of business for each subsidiary was not in the District of Columbia, and the argument that for source purposes there could be more than one source -- one within and one without the District of Columbia -- is answered by pointing out that by its clear meaning this cannot be. Any other interpretation would also make the statute suspect of multiple taxation, something the Supreme Court has recently shown concern for in regard to this same franchise tax statute. General Motors Corp. v. District of Columbia, 380 U.S. 553, 85 S. Ct. 1156, 14 L. Ed. 2d 68 (1965). In that case, the Supreme Court construed certain regulations issued by the Commissioners under the franchise tax statute as being beyond their authority and thus avoided the necessity of reaching the constitutional question.
Because of our interpretation as to the meaning of source as used by the statute, *fn10 we need not reach the difficult constitutional questions *fn11 of whether the use of commercial domicile in a determination of source within this statute would result in an unconstitutional apportionment within the General Motors case, supra, *fn12 or would be under General Motors Corp. v. Washington, 377 U.S. 436, 84 S. Ct. 1564, 12 L. Ed. 2d 430 (1964), a tax without apportionment, *fn13 or without "nexus" within the state.
Lincoln was engaged in some business or trade in the District, *fn14 id est, that of supervising its subsidiaries, and for that activity it became subject to the franchise tax. *fn15 It has not been suggested, nor would it be true, that Lincoln in this case was engaged in a business or trade solely because it received interest or dividend payments. *fn16 The receipt of interest and dividends is taxable in this case under the franchise tax statute only if its source was, in fact, in the District of Columbia. Mere receipt alone, without a showing of more, would not be covered by the "engaging in any business or trade" provision, because such receipt is simply not engaging in any business or trade. This means that if a company is in the business of lending money within the District, the "engaging" provision would apply. It would apply because the company was so engaged, but a mere showing of the receipt of interest is not enough to bring that action within this section.
Our learned brother, although agreeing with our result that in this case the dividend and interest source as used in section 47-1580 of the Code was not within the District of Columbia, would, nevertheless, remand for a further hearing to determine whether Lincoln was engaging in a business or trade in the District of Columbia within the first part of (2) of section 47-1580 by loaning money to or receiving dividends from its subsidiaries. We cannot agree; first, because it would seem impossible that any more relevant facts could be elicited than have already appeared in the extensive record before us now in regard to the activities of Lincoln and its subsidiaries and, secondly, it is clear to us beyond peradventure that the Tax Court made an implicit finding on the basis of the facts before it that Lincoln was not engaged in a business or trade within the meaning of the franchise tax statute by receiving interest and dividends from its subsidiaries. It is of course true that no explicit finding to that effect appears in the opinion of the Tax Court, and the better procedure would be to make such a finding. We may now do what was done by this court in the Virginia Hotel case (supra) and that is, we may look to the whole opinion. When we do, we there find an implicit finding that Lincoln was not engaged in any business or trade within the meaning of the franchise tax statute by receiving interest or dividend income from its subsidiaries on the facts as presented in this case. The items cited by Judge Fahy support our view in this regard, because these and other such items (as for example, the answer of the Government to the complaint filed in the Tax Court to appeal the increased assessments) show that before the Tax Court it was contended *fn17 that Lincoln was either engaged in business wholly within the District of Columbia or it derived all of its income from trade or business activities conducted within the District. The question which he would now remand for determination was clearly and precisely raised before, and decided by, the Tax Court. Further still, the case which he cites as authority was also cited by the Tax Court, *fn18 whose member sole, incidentally, was presiding there during the whole of the proceeding and remand in that case. To now imply that the Tax Court disregarded that case is not very persuasive. It should be noted too that the concession in opening argument by counsel for Lincoln stands in contradistinction to the testimony of the vice president of Lincoln, who indicated that only a slight profit was made on the pure interest income received on the money loaned to the subsidiaries and that he didn't know whether there was a "profit" after the "other expenses" incurred in obtaining the money were charged against the "profit." These inconsistencies, as well as others, merely show that the issues were present to be decided, and they were decided.
As much of the Tax Court's opinion as imposes the District of Columbia franchise tax upon dividend and interest received by petitioner from its subsidiaries during the fiscal year ending June 30, 1958, and the period July 1, 1958, to March 16, 1959, is reversed. The case is remanded to the Tax Court to enter judgment for the petitioner consistent with this opinion for the refunds due, plus interest, on the taxes paid on dividends and interest income for the taxable periods here involved.
STATE LOAN AND FINANCE ...