Opinion
No. 20076
Decided March 8, 1927.
Taxation — Franchise — Tax accrues although corporation in hands of receiver continuing business — Whether such corporation taxable, mixed question of law and fact — Finding that corporation subject to tax sustained by facts, when — Solvent corporation operated by receiver and sold as going concern.
1. Section 5498, General Code, prior to its amendment in 1925, imposed a franchise tax upon Ohio corporations for the privilege of exercising corporate franchises, and the tax accrues against a corporation, though its property is in the custody and control of a receiver, if the receiver is authorized to continue the usual business of the corporation in furtherance of the purposes stated in its articles of incorporation, and if such receiver in fact continues such business.
2. Where the state seeks to collect such franchise tax for the period during which the property was in the custody and control of a receiver, the question for determination is one of mixed law and fact, and the inquiry of fact relates to the manner of control by the receiver and whether or not his operations amounted to a continuation of the business.
3. Where creditors of an Ohio corporation, by means of court proceedings, procure the appointment of a receiver, and the pleadings allege that the corporation is solvent, but in danger of suffering judgments and consequent depreciation and dissipation of assets, and does not pray dissolution of the corporation nor determination of liens nor distribution of assets, but asks that the court administer the property and appoint a receiver with the incidental powers of a receiver, including the power to borrow money on issuance of receiver's certificates, and to continue the business, and, where the court orders the continuance of the business, and where the receiver files frequent reports showing continuation of the business on a small scale, using materials on hand, and purchasing other materials, producing finished product, and marketing the same, all of which Operations are conducted at a profit, and after the lapse of approximately one year applies for, and obtains, authority to sell the property, and actually sells the same as a going concern, the court does not commit error of law in finding that such facts constitute a continuance of the business by such receiver.
ERROR to the Court of Appeals of Cuyahoga county.
This cause comes to this court on error from the Court of Appeals of Cuyahoga county, where it was heard on appeal. The action originated in the common pleas court of that county, as a foreclosure suit on the property of the Templar Motors Company. The question involved in the error proceeding in this court relates to the liability of a corporation for the annual franchise tax assessed under Section 5503, General Code, as it stood before the amendment of 1925 (111 Ohio Laws, p. 475, Section 11), and which was then numbered Section 5498, General Code, and the determination of the priority of liens under Section 5506, General Code. It was sought to collect the franchise tax during a period when the corporation was in the hands of a receiver.
On October 6, 1922, a receiver was appointed for the Templar Motors Company by the District Court of the United States for the Northern District of Ohio. The bill was filed by a creditor, and did not allege insolvency, but, on the contrary, alleged that the assets of the corporation were more than double the amount of its liabilities. The petition further alleged that the corporation was being pressed by its creditors, and had a large amount and value of raw materials and of manufactured products, but was unable to continue because of lack of working capital, that it was threatened with suits against which it would have no defense, and that, if judgments should be entered, the property would be sold and the assets depreciated and wasted. The bill contained no prayer that the business of the company should be wound up and its assets distributed; neither did it pray for a dissolution of the corporation itself. It did pray that the court would fully administer the property and funds; that a receiver should be appointed, with all the incidental powers of a receiver to appoint agents and attorneys to handle the property and business, to borrow money by issuing receiver's certificates, and to continue the business. The court did appoint a receiver, and authorized the receiver to continue the business, and to borrow money for that purpose by issuing receiver's certificates. Thereafter the receiver made regular reports, which showed that the business was conducted at a profit, although it was not conducted on a very large scale and the operation of the plant was at only a small fraction of its capacity. The receiver made regular reports showing profits in operation, but, after practically a year of operation, reported to the court that in his opinion the property should be ordered sold. Thereupon a sale was ordered and made, and, while the record is not entirely clear that it was made as a going concern, it is quite certain that all the property was offered and sold as one item, which included "all the property real and personal and the accounts, choses in action, and all the assets of every kind and description."
In the order of the federal court appointing the receiver for the company the receiver was ordered to "conduct its business in such manner as in his judgment will produce the best results, including the finishing of the motor cars now in process of manufacture in its factory, the completion of any and all spare parts and repairs, that in said receiver's judgment may be required to maintain its service department, and to do any and all other things which may be necessary to preserve the rights and property of said company."
On June 4, 1923, approximately eight months thereafter, the receiver applied for further authority to manufacture and complete 100 cars. The application stated, among other things:
"That it will be to the interest of the estate and of the stockholders and creditors of said corporation that the plant be continued in operation, and the personnel kept employed, and that the profit above estimated be realized in the manufacture, completion, and sale of said cars, as above set forth."
This application was granted, and the court's order contained the following:
"It appearing to the court that it will be for the interests of said estate and of the stockholders and creditors of said the Templar Motors Company that the business be continued for the purpose prayed for, it is therefore ordered that your receiver be, and he is hereby authorized, to continue the operation of the plant of said the Templar Motors Company, for the purpose of completing 100 motor cars," etc.
The testimony taken in the Court of Appeals in the instant case shows that there were 5,000 Templar cars in service; that parts were special, and had to be manufactured for the special use and benefit of all cars in service; and that in order to furnish the same, the plant was still being operated at the time of the hearing. The testimony further shows that the receiver was purchasing new materials, employing labor, and selling new machines and parts for old machines. As before stated, this present controversy was a foreclosure suit begun in the common pleas court of Cuyahoga county by the Guardian Savings Trust Company, as trustee of mortgage bonds on the property of the Templar Motors Company, in which it was claimed that the bonds were the first lien upon the property which had been operated and sold by the receiver. The state of Ohio filed an answer and cross-petition setting up its claim for the franchise tax alleged to be due to the state under Section 5503 (102 Ohio Laws, p. 224), as it existed before the amendment of 1925, claiming a first lien upon the property by virtue of Section 5506, General Code. The validity of this claim and the priority of liens constituted the issue in the Court of Appeals. This issue being heard on evidence, the Court of Appeals found in favor of the state, establishing the validity of the tax, and declaring it to be the first and best lien on the property. The cause comes to this court upon allowance of a motion to certify the record.
Messrs. Baker, Hostetler Sidlo, for plaintiff in error.
Mr. C.C. Crabbe, and Mr. Edward C. Turner, attorneys general, Mr. Arthur H. Wicks, Mr. David E. Green, Mr. Ira J. Warner, and Mr. Joseph A. Godown, for defendants in error.
This record presents for determination two questions: First, whether or not the franchise tax assessed against Ohio corporations under Section 5503, prior to its amendment in 1925, accrues during such period as a receiver is continuing the business of a manufacturing corporation and employing the plant and equipment in carrying out the purposes for which the corporation was organized; second, whether or not such franchise tax is a lien entitled to payment prior to a mortgage.
This latter question has not been seriously urged by counsel representing the mortgage, and Section 5506 clearly establishes the priority of lien, if the franchise tax is a valid claim. The first question is one of mixed law and fact. The question whether a corporation in the hands of a receiver continuing the business is subject to the franchise tax has never been determined by this court. The question has been discussed by Courts of Appeals of the state in different districts, and has also been discussed by the federal courts of the districts of Ohio, but all of those cases were decided upon their own peculiar facts. There is enough difference between the facts of the instant case and the facts of those several cases to render them of doubtful value, and, in any event, they are not sufficiently numerous, nor do they cover a sufficient period of time, to establish a principle.
In Bright v. Arkansas, 249 F., 950, the United States Court of Appeals of the Eighth Circuit held that a franchise tax should be assessed against a railroad corporation in the hands of a receiver. Manifestly a railroad enterprise in a receiver's hands would be operated in exactly the same way as though it were in full control of its board of directors. It was conceded in argument by counsel on both sides, and this court concurs, that the real test is whether or not the business of the corporation is being continued. No definite standard has ever been declared; neither would it be possible in the nature of things for any court to declare a definite standard as to the volume of business to be transacted, nor the ratio of the business transacted to the capacity of the plant and equipment, though it is obvious that these matters are important in determining the question of fact. When it is established as a matter of fact that the business is being continued by the receiver, the application of the law to the facts found presents no difficulty. The suit in which the receiver was appointed was what is usually called an administration suit to protect the property against dissipation and waste, and to maintain it as a going concern in order to preserve the good will, either for the purpose of eventually restoring it to complete control or to make sale of the property as a going concern. In this case, the ultimate purpose of the suit was not indicated in the original bill where the receiver was appointed. Neither do we find anything in the further applications of the receiver, nor in the orders of the court, to indicate the final outcome of the matter until approximately a year after the receiver was appointed, at which time he reported to the court that in his opinion it should be sold. The purpose of the creditors in filing the bill, and the purpose of their representative, the receiver, in conducting the business, as expressed in his further applications and the orders of the court obtained by him, become material to the inquiry. This was the inquiry which was in fact conducted in the Court of Appeals, where all these matters were developed, and where it appeared that the plant, equipment, and capital were employed for the same purposes as before the receivership, though on a reduced scale, and that the business was conducted in competition with other manufacturers of automobiles. The Court of Appeals determined the question of fact, and determined that the claim was a valid one, and that it was the first and best lien upon the property. This determination was made, as it could only be made, upon the theory that the business was in fact being continued by the receiver. This cause is in this court only for the purpose of reviewing questions of law and determining whether or not the correct rules of law were applied to the facts found. The Court of Appeals was better qualified than this court to determine the questions of fact, and by rule of this court, as well as by statute and long-continued practice, this court does not weigh the evidence. There is abundant evidence from which the Court of Appeals could have reached the conclusion that the business of the corporation as declared in its corporate purposes was being continued by the receiver, and this court will not substitute its judgment for that of the Court of Appeals. We have therefore reached the conclusion that the evidence adduced before the Court of Appeals justified its findings of fact, and that the rules of law were correctly applied. The judgment of the Court of Appeals will therefore be affirmed.
Judgment affirmed.
DAY, ALLEN, ROBINSON, JONES and MATTHIAS, JJ., concur.