In Cliffs Corp. v. Evatt (1941), 138 Ohio St. 336, 347, 20 O.O. 442, 35 N.E.2d 144, we stated, "The amount of the franchise tax turns, then, on whether business was done by appellant `during the year preceding the date of the commencement of its current annual accounting period' * * *," quoting G.C. 5498, a predecessor of R.C. 5733.05.Summary of this case from LSDHC Corp. v. Zaino
Decided June 11, 1941.
Taxation — Corporation franchise — Sections 5495, 5498 and 5499, General Code — One-tenth of one per cent open certified base or $25 minimum — Domestic corporations — Minimum tax not dependent alone on not doing business — Corporation organized to acquire share of other corporations, doing business, when.
1. The excise, required under Section 5495, 5498, 5499, General Code, to be paid by a corporation organized for profit under the laws of Ohio, is a fee (one-tenth of one per cent upon the certified value or base as provided therein) charged for the privilege of exercising its corporate franchise during the calendar year in which such fee is payable; but in no case is the fee (or franchise tax) to be less than $25.
2. A domestic corporation, which is not doing business within the meaning of Section 5498, General Code, is not for that reason alone subject to the minimum fee.
3. C. Corporation was organized in 1929 for the purpose of acquiring large blocks of stock in certain iron and steel corporations, including all the common stock of The Cleveland-Cliffs Iron Company. Upon organization C. Corporation acquired and has since owned, cared for and managed such stock and other stock subsequently acquired as a money-making enterprise in the iron and steel industry. During the period after organization but before 1938, C. Corporation borrowed and lent money, to further transactions in its interest, acquired additional stock under rights issued to it as a stockholder in one of such iron and steel companies and sold part of such stock at a profit. C. Corporation has paid to The Cleveland-Cliffs Iron Company, $10,000 per year for management, accounting and other services and the officers of C. Corporation have received no compensation for their official services. During the year 1938, there were no transactions other than those necessary for the care and management of stocks owned and held — no stock was acquired or sold, no money borrowed or lent and no action was taken with respect to change in plans and methods. Other purposes were specified in the articles of incorporation but none of them was ever carried out. Held: C. Corporation was doing business in the year 1938 within the meaning of Section 5498, General Code, which provides that business done by a corporation shall be considered in determining the amount of the franchise tax.
APPEAL from the Board of Tax Appeals.
This cause comes to this court by way of an appeal pursuant to Section 5611-2, General Code (as amended effective May 15, 1939), from a decision by the Board of Tax Appeals of Ohio. The Tax Commissioner of this state made an assessment and certification in the sum of $20,083.47 against appellant herein, The Cliffs Corporation, organized and incorporated under the laws of Ohio, for a franchise tax for the year 1939, based upon operations for the year 1938.
On appeal from the Tax Commissioner to the Board of Tax Appeals, the cause was submitted to the board upon the transcript of the original files of the Tax Commissioner and an agreed statement of facts. The agreed statement reads:
"1. The Cliffs Corporation was incorporated on May 31, 1929, by the filing of its articles of incorporation in the office of the Secretary of State of Ohio pursuant to the General Corporation Act of Ohio. A true copy of said articles of incorporation, with all amendments thereof, is hereto attached is 'Exhibit 1' and made a part hereof.
"2. The plan for the organization of the corporation was summarized in a letter dated May 4, 1929, from Wm.G. Mather, president of The Cleveland-Cliffs Iron Company, to the stockholders of that company as follows:
" 'The plan involved in this arrangement is submitted herewith. This provides, first, for the, creation of 500,000 shares of preferred stock of The Cleveland-Cliffs Iron Company, entitled to annual dividends of $5 per share, such preferred stock to be distributed to the stockholders of the company, thereby providing them with a high-class investment, security; and after this has been done and a cash dividend paid, the plan provides for placing the common stock of The Cleveland-Cliffs Iron Company in a holding company in exchange for one-half of the holding company's stock, and Mr. Eaton and his associates acquiring the other half of the stock of the holding company by turning over to it a group of agreed upon steel company stocks having a market value of approximately $40,000,000.'
"3. Pursuant to such plan, following its organization in 1929 The Cliffs Corporation acquired, in exchange for its own shares, substancial blocks of the common stock of Republic Iron Steel Company, Central Alloy Steel Corporation, The Youngstown Sheet Tube Company, Inland Steel Company and Wheeling Steel Corporation. The two first named stocks subsequently became stock of Republic Steel Corporation by merger. The foregoing blocks of steel company stocks acquired by the corporation constituted in each case a relatively small percentage of the total outstanding common stock of the respective companies involved, in no case constituting or approximating technical control of any such companies.
"4. Also pursuant to such plan, following its organization the corporation acquired in exchange for its own shares, 397,867 shares of the outstanding common stock of The Cleveland-Cliffs Iron Company, an Ohio corporation, incorporated in 1920 as successor to a West Virginia corporation organized in 1914. In 1930, in exchange for its own shares, the corporation acquired 10,000 shares of class 'A' stock of Oglebay, Norton Co., Inc., and later in the same year exchanged this stock with The Cleveland-Cliffs Iron Company in consideration of the issuance to it of 10,000 shares of common stock of that company. In 1930 the corporation acquired for cash 400 shares of The Cleveland-Cliffs Iron Company outstanding in the hands of the public and in 1932 acquired for cash 29 such shares, and thereby became the sole holder of common stock of that company.
"5. Pursuant to an agreement between William G. Mather and Cyrus S. Eaton, which provided for the formation of The Cliffs Corporation, the common stock of The Cleveland-Cliffs Iron Company acquired by the corporation was subjected to a ten-year voting trust, which expired June 19, 1939, under which William G. Mather, Cyrus S. Eaton and Edward B. Greene were named voting trustees. Mr. Mather had been president, as well as a director, of The Cleveland-Cliffs Iron Company since its organization and Mr. Greene was a director of that company. Under the voting trust agreement Messrs. Mather and Greene were empowered to elect six of the nine directors of The Cleveland-Cliffs Iron Company. The purpose of such voting trust agreement was to permit the then existing management of The Cleveland-Cliffs Iron Company to continue to elect a controlling number of that company's directors during the period of the voting trust. Since September 15, 1931, the holders of 487,218 preferred shares of The Cleveland-Cliffs Iron Company, by reason of dividend defaults, have had the right to vote their shares and thereby to elect a majority of the directors of that company.
"6. In 1929 the corporation loaned to a stockholder-director the sum of $1,100,000 to aid him in providing funds required by a compromise of an underwriting obligation to stockholders of Interstate Iron Steel Company. This underwriting had been undertaken in connection with the proposed merger of Interstate Iron Steel Company with and into Central Alloy Steel Corporation, of whose common stock the corporation, as above stated, held a substantial block. The corporation deemed such merger advisable, and its consummation had been rendered doubtful by a controversy over such underwriting. Following the compromise of such underwriting obligation, the merger was concluded.
"7. In 1929 the corporation borrowed from The Cleveland-Cliffs Iron Company the sum of $1,100,000 in order to enable it to make the loan of the same amount above referred to. In 1930 for its own purposes it borrowed from a subsidiary of The Cleveland-Cliffs Iron Company the sum of $241,575. These loans were paid in 1931 from the proceeds of a loan to the corporation from The Cleveland Trust Company. Said bank loan was repaid in installments in 1932, 1933, 1934 and 1935, principally with funds derived from the following sources:
"(a) The sale of approximately 22,000 shares of common stocks of steel companies in 1933;
"(b) the sale of 6400 shares of common stock of a steel company in 1934;
"(c) cash received in 1935 by way of dividends on steel company stock held; and
"(d) cash received from The Cleveland-Cliffs Iron Company in 1935 in payment of the loan to that company hereinafter mentioned.
"8. In the latter part of 1931 the corporation obtained a bank loan in the original amount of $500,000 for the purpose of loaning the same to The Cleveland-Cliffs Iron Company. In the same year The Cleveland-Cliffs Iron Company repaid $250,000 of said loan to it, which was applied by the corporation in partial payment of said bank loan. In 1932 the corporation loaned to The Cleveland-Cliffs Iron Company an additional sum of $450,000. These loans were made because the iron company was in need of funds to carry on its operations and pay interest on its large indebtedness.
"9. The remaining balance of said bank loan was repaid by the corporation from the following sources:
"(a) Dividends received on common stocks of steel companies in 1932 and 1933; and
"(b) proceeds of sale of common stock of a steel company in 1934.
"The promissory notes representing the loans to The Cleveland-Cliffs Iron Company were paid to the corporation in 1935.
"10. In 1937 the corporation, pursuant to rights received by it as a common stockholder of Inland Steel Company and in order to protect its holdings against dilution, purchased its pro rata portion of an additional issue of common stock of that company. The greater portion of the funds required for such purchase was obtained by bank loans. Of the 5,000 shares so purchased, 500 were sold at a profit in 1937 and the proceeds of such sale were applied against such bank loans. The loans were further reduced in 1938 with cash received by way of dividends on stock of Inland Steel Company. In 1939 the corporation sold an additional 2000 of such shares at a small profit and applied the proceeds of the sale against the bank loans.
"11. The corporation has never engaged in the iron ore business or any other operating business authorized by its articles of incorporation.
"12. The corporation at the present time has in excess of 800,000 shares outstanding, held by approximately 3,400 persons.
"13. The corporation has occupied the same offices as The Cleveland-Cliffs Iron Company. Its officers receive no compensation as such. Their services are furnished by The Cleveland-Cliffs Iron Company, of which they are officers, in accordance with a management agreement under which The Cleveland-Cliffs Iron Company receives an annual payment of $10,000 for fur nishing management, accounting and other services.
"14. Except for the activities above referred to, occurring in the years above specified, the only activities of the corporation during the years since its organization to the end of the year 1939 (other than routine activities, such as the holding of stockholders' and directors' meetings, the payment of dividends to its stockholders, the payment of taxes and the making of reports to governmental bodies) have been the holding of the securities and notes above mentioned and the receipt of dividends and interest thereon. In the years 1936 to 1939, inclusive, only dividends were so received.
"15. Amounts charged against the corporation as and for Ohio corporate franchise fees for the year 1930 through 1938, inclusive, have been duly paid by the corporation. Additional assessments as and for franchise fees have been heretofore made for the following years as indicated:
"1932 .............................. $2,902.58 "1933 .............................. 755.84 "1934 .............................. 1,054.99 "1936 .............................. 8,287.97
"Said additional assessments were imposed by reason of the treatment by the Tax Commission, as 'business done' in Ohio, of certain dividends received by The Cliffs Corporation upon stock owned by it, issued by the Inland Steel Company, a foreign corporation. Said additional assessments not been paid by the corporation and have been certified to the Attorney General of Ohio for collection.
"16. In determining, under Ohio General Code Section 5498, the base upon which should be computed the franchise fee of the corporation, provided for in Ohio General Code Section 5499, for each of the years above mentioned, including the year 1939, the Ohio Tax Commission (in 1939 Tax Commissioner of Ohio) has treated receipt by the corporation of dividends and interest (if any) as business done by it and as business done in Ohio and has treated the amount of such dividends and interest (if any) as the measure of business done and of business done in Ohio, and accordingly has applied to one-half of the value of the corporation's capital stock, as determined by it, a fraction whose numerator has consisted of all the dividends and interest (if any) received by the corporation during the preceding year, treated as business done in Ohio, and whose denominator has consisted of all the dividends and interest (if any) received by the corporation during the preceding year, treated as all business done, wherever transacted. The fraction so applied has accordingly been the integer 1.
"17. Following the determination by the Tax Commissioner in the manner above stated of the franchise fee of The Cliffs Corporation for the year 1939, The Cliffs Corporation received on September 2, 1939, from the Treasurer of State of Ohio 1929 Domestic Franchise Fee Notice No. 29198, claiming as and for a franchise fee the amount of $20,083.47, based upon a valuation of $20,083,468, which fee was stated to be subject to 15 per cent penalty if not paid on or before September 30, 1939. A copy of such notice is attached hereto as exhibit 2 and made a part hereof. Within thirty days following the receipt of such notice, to wit on September 29, 1939, the corporation instituted the above captioned appeal by filing with the Board of Tax Appeals and the Tax Commissioner, respectively, copies of its application for review and notice of appeal relating to such determination of and claim for such franchise fee. Such amount claimed as and for franchise fee, with 15 Per cent penalty, has been certified to the Attorney General of Ohio for collection, but has not been paid by the corporation at the date hereof.
"18. By a ruling dated February 8, 1940, the United States Commissioner of Internal Revenue held that The Cliffs Corporation was not carrying on or doing business during the year ended June 30, 1939, within the meaning of the law and regulations, and was consequently exempt from the federal capital stock tax. A copy of said ruling is attached hereto as exhibit 3 and made a part hereof."
A copy of the articles of incorporation of the appellant is attached to the agreed statement and made part thereof. Many purposes were expressed in the purpose clause of the articles but except as herein stated none of them was carried out.
Other material facts shown by the record outside the agreed statement will be referred to in the opinion.
The Board of Tax Appeals approved and confirmed the assessment and certification. From this decision of the Board of Tax Appeals, appeal was taken to this court.
Messrs. Jones, Day, Cockley Reavis, Mr. George B. Young, Mr. George H. Rudolph and Mr. Robert Crafts, for appellant.
Mr. Thomas J. Herbert, attorney general, and Mr. Perry L. Graham, for appellee, William S. Evatt, tax commissioner.
The sole matter of inquiry is the amount of franchise tax payable by The Cliffs Corporation for the year 1939.
This excise is regulated by Sections 5495, 5498 and 5499, General Code, which, after being summarized in part and quoted in part, may be applied to the facts without setting the sections out in full.
The tax payable by a domestic corporation organized for profit is a fee of one-tenth of one per cent upon the certified value (or base) for the privilege of exercising its franchise for the calendar year; but in no event is the fee to be less than $25.
Ascertainment of the certified value involves two steps: (1) Fixing the determined value, and (2) applying thereto the prescribed formula.
In the first step the value of the issued and outstanding shares of the corporation's stock is fixed as of the date shown by the corporation's annual report to have been the beginning of the then current annual accounting period. Such value is deemed to be the total value (as shown by the books of the company) of its capital, surplus, undivided profits, and reserves, but exclusive of (a) proper and reasonable reserves for depreciation and depletion, (b) taxes for the year for which such report is made, (c) the item of good will when shown by certified balance sheet to be carried as an asset and (d) such further amount as the book value of assets (other than good will) exceeds the fair value thereof. The result is the determined value.
In the second step the formula to be applied to the determined value is found in those portions of Section 5498, General Code, which will be quoted below in connection with the process of computation.
As computed by the franchise tax division the determined value amounted to $20,284,355. Divided by two the quotient is $10,142,177.50. The first part of the formula shown in Section 5498 reads: "Take one part [$10,142,177.50] and multiply by a fraction whose numerator is the fair value of all the corporation's property owned or used by it in Ohio and whose denominator is the fair value of all its property wheresoever situated * * *."
The fair value of the corporation's property owned and used in Ohio during the year involved was $20,205,384 and the value of its total property "wheresoever situated" was $20,613,680. Omitting the fractional dollar, the application is made thus:
$10,142,177 X 20205384/20613680 = $9,941,290
Section 5498 proceeds: "Take the other part and multiply by a fraction whose numerator is the value of the business done by the corporation in this state during the year preceding the date of the commencement of its current annual accounting period and whose denominator is the total value of its business during said year wherever transacted."
As it is agreed that no business was done outside Ohio the numerator and denominator in the fraction of this part of the formula would be equal whether business was done within the meaning of the statute or not.
Appellant claims that no business was done in Ohio or elsewhere and, if so, the fraction would be zero over zero.
Appellees' claim is that business was done in Ohio and none elsewhere; therefore regardless of the amount of business the fraction would be one over one.
This part of the formula, to show the respective claims of the parties, may be stated in the alternative thus:
$10,142,177 X 0/0 or $10,142,177 * 1/1
The certified value (better called the base) is then found by adding together the two results obtained by the application of the two parts of the formula in the manner stated.
The appellant's contention, however, goes further than asserting that the correct fraction to be applied in the second part of the formula was 0/0. Its contention is in reality twofold. Appellant contends that since the corporation was not doing business it could only be liable for a minimum fee of $25, but, if wrong in that contention, the appellant nevertheless insists that since no business was done the fraction in the second part of the formula should be 0/0 and the fee correspondingly reduced to $9,941.29, as hereinafter more fully explained.
The contention that appellant is liable for the minimum fee only is grounded upon the theory that the liability for the franchise tax is based upon the doing of business. Consequently, since no business was done, appellant claims, the minimum only is chargeable. This position is too narrow. The tax imposed on a domestic corporation for profit is charged for the privilege of exercising its franchise. If the appellant was not doing business the fraction in the part of the formula expressing the ratio between business done inside and outside the state would be zero over zero. The multiplicand would be $10,142,177 (in round numbers), the multiplier zero (the equivalent of zero over zero) and the product zero. So if no business was done during the year involved, the amount of $9,941,290 would be the base for the computation of the fee of one-tenth of one per cent. The amount of the fee in that event would be $9,941.29. On the other hand, if business was done during the year (it being conceded that there was no business done outside Ohio in any event), the fraction in the second part of the formula would be 1 over 1 (the equivalent of 1) and the fee on that basis would be $20,083.47, the amount charged for collection from the appellant.
The amount of the franchise tax turns, then, on whether business was done by appellant "during the year preceding the date of the commencement of its current annual accounting period," that is, during the year 1938.
Some authorities assert the rule that a holding corporation which is no more than an intermediary or instrumentality for its stockholders and acts only as a conduit in the receipt and distribution of dividends for stockholders, is not engaged in the doing of business. Welch Holding Co. v. Galloway, 161 Ore., 515, 89 P.2d 559. Other cases are collected in the following annotations: 70 L. Ed., 678; 40 A. L. R., 1451; 75 A. L. R., 1242; and 98 A.L.R., 1511. There is, however, no supreme test for determining what constitutes "business done" as the basis for determining the excise tax provided in our statutes. A few quotations may serve to show the trend of juristic thought with respect to holding companies that are more than mere "dry holders" of stock assets:
"If the corporation was one that Congress had power to tax in this way, it is hard to say that it is not within the taxing acts. It was organized for profit and was doing what it principally was organized to do in order to realize profit. The cases must be exceptional, when such activities of such corporations do not amount to doing business in the sense of the statutes. The exemption 'when not engaged in business' ordinarily would seem pretty nearly equivalent to when not pursuing the ends for which the corporation was organized, in the cases where the end is profit. In our opinion the plaintiff was liable to the tax." Edwards, Collector, v. Chile Copper Co., 270 U.S. 452, 70 L.Ed., 678, 46 S.Ct., 345.
"This is a Michigan corporation whose articles of association contemplate that it shall have an office in Boston. It is a holding company and owns various corporate stocks and bonds and certain mineral lands in Michigan. Its activities in Massachusetts consist in holding stockholders' and directors' meetings, keeping corporate records and financial books of account, receiving monthly dividends from its holdings of stock, depositing the money in Boston banks and paying the same out, less salaries and expenses, as dividends to its stockholders three or four times a year. The exaction of a tax for the exercise of such corporate faculties is within the power of the state. Interstate commerce is not affected." Cheney Bros. Co. v. Massachusetts, 246 U.S. 147, 62 L.Ed., 632, 38 S.Ct., 295. That case involved "an excise tax imposed by Massachusetts in 1913 on each of seven foreign corporations on the ground that each was doing a local business in the state."
These passages may be deemed characteristic of language that may be found elsewhere in the authorities. However it must be conceded that there is a dearth of cases in point.
It is not necessary to determine the exact line of demarcation between holding companies that are doing business and those that are not. It is only necessary now to ascertain into which class the appellant falls.
During appellant's existence, it has purchased stock of the Inland Steel Company under rights issued to it as shareholder of that company, has sold at a profit part of the stock so purchased, and has borrowed and lent large sums of money to further transactions in appellant's interest. These activities show that appellant, during the years of its existence, was more than a passive holder of shares of stock in corporations engaged in the iron and steel industry. The events of all that period must be given consideration for they are competent, material and relevant in determining the real purpose of incorporation and the character of the enterprise; so in determining whether appellant was doing business in 1938, transactions in previous years are entitled to weight. Lending, borrowing, acquiring or disposing of stocks did not take place during that particular year but did to some extent during the previous period of existence. Although in the basic year 1938 there was no corporate action except the holding of stockholders' and directors' meetings, the paying of dividends, the making of reports required by governmental regulations and other essentials with respect to the proper management of the affairs of appellant, such facts are not conclusive in determining whether the appellant was then doing business. Rather what was done in the basic year should be interpreted in the light of previous years, especially in view of the fact that there was no change in plans or methods.
Weighed in the light of past experiences, what significance should be attached to corporate undertakings of 1938? In other words was there business done during that year?
The appellant was organized, inter alia, to acquire and manage substantial stock interests in various iron and steel companies and according to the plan of organization did acquire stock in such companies valued at many millions of dollars. It was thus in a position to wield a considerable influence in the iron and steel industry though not owning a majority interest in any outside corporation whose shares of stock had been acquired, other than The Cleveland-Cliffs Iron Company, which, by reason of dividend defaults, has been subject to control by the holders of its preferred stock since September 15, 1931.
Appellant's ownership of iron and steel stocks, not being merely quiescent, served to accomplish the very objective for which the corporation was created and has since existed, namely, making money out of the portfolio of stocks comprising its assets. Success in the undertaking required good management, and good management involved intelligent and wise participation in the affairs of the various iron and steel companies to the full extent to which appellant as shareholder could participate and assert influence. The legal aspect of the case is not changed because the appellant paid to The Cleveland-Cliffs Iron Company the sum of $10,000 "for furnishing management, accounting and other services." Whether such services were performed under direct control of the appellant or were hired to be done by its agents, as they were, the responsibility of the appellant's officers and directors for proper performance would be the same. By procuring another corporation to perform such services for compensation, the officers and directors of the appellant were not relieved of the duty that rested upon them to see that the affairs of appellant were well managed. The care and preservation of assets running into millions of dollars in value in behalf of 3,400 shareholders is confessedly a business in itself. If good management had required the sale of some of the stock assets during the basic year, the duty to act in respect thereto would have rested upon the officers and directors of the appellant, and if upon such a sale, business prudence required the re-investment of the proceeds, the obligation to conserve the corporate interests was likewise on the same officers and directors.
The business in which the appellant was engaged was gathering and distributing profits growing out of the iron and steel industry, by the management and ownership of stocks in corporations engaged in such industry, and it was to engage in that business that the appellant was organized and has continued in existence. Appellant's activities in the care and management of those stocks during the year 1938 constituted business done within the meaning of the statute.
The decision of the Board of Tax Appeals is affirmed.
WEYGANDT, C.J., TURNER, HART, ZIMMERMAN and BETTMAN, JJ., concur.
MATTHIAS, J., not participating.