Ziegler, William L.

English

Case Western Reserve University School of Law

Case Western Reserve Law ReviewVolume 6 | Issue 11954Taxation--Federal Securities Owned by aCorporation Not Deductible from Franchise TaxBaseWilliam L. ZieglerFollow this and additional works at: https://scholarlycommons.law.case.edu/caselrevPart of the Law CommonsThis Recent Decisions is brought to you for free and open access by the Student Journals at Case Western Reserve University School of Law ScholarlyCommons. It has been accepted for inclusion in Case Western Reserve Law Review by an authorized administrator of Case Western Reserve UniversitySchool of Law Scholarly Commons.Recommended CitationWilliam L. Ziegler, Taxation--Federal Securities Owned by a Corporation Not Deductible from Franchise Tax Base, 6 W. Res. L. Rev. 94(1954)Available at: https://scholarlycommons.law.case.edu/caselrev/vol6/iss1/13WESTERN RESERVE LAW REVIEWThe dissenting opinion prefers the third party beneficiary theory andwould agree with the lower court that there is federal jurisdiction in thiscase. They find the individual hiring subsidiary to the collective agreementin which the terms of the employee-employer relationship is detailed. Itis proper, then, to say that the right asserted is predicated upon a violationof the contract between employer and union and that the controversy comeswithin federal jurisdiction as conferred by Section 301 (a). After findingjurisdiction of the subject matter, the dissent relies on Rule 17(a) of theFederal Rules of Civil Procedure15 and Section 301 (b) of the Labor Man-agement Relations Act'0 for authority to sue in federal court for the benefitof those whom it represents.It seems that the better solution to the difficult problem presented in theinstant case is found in the well-reasoned majority opinion. The theory ad-vanced by the majority seems fairest to all parties concerned under the pres-ent labor law.FRED SIEGELTAXATION - FEDERAL SECURITIES OWNED BY ACORPORATION NOT DEDUCTIBLE FROM FRANCHISETAX BASEThe State of Ohio levies a franchise tax against the "value of the issuedand outstanding shares of stock" of a corporation.' In determining thevalue of the shares of stock, a corporation may not deduct therefrom thevalue of the federal securities it owns, 2 even though the federal law statesthat such securities shall be exempt from taxation by state authorities.3 Thisview was enunciated in the recent Ohio Supreme Court decision of FifthThird Union Trust Co. v. Peck4 which expressly overruled the opposingview as stated in Wrenn Paper Co. v. Glander.5 In the latter case it washeld that federal securities may properly be deducted from the assets of acorporation in determining the value of the issued and outstanding sharesof stock of that corporation.The Wrenn case came before the supreme court from a decision of theBoard of Tax Appeals affirming an order of the Tax Commissioner denyingclaims of the plaintiff corporation for certificates of abatement' relating toalleged overpayment of franchise taxes for the years 1945 through 1950.In determining the value of the issued and outstanding shares of stock, on"Every action shall be prosecuted in the name of the real party in interest; but. ..a party with whom or in whose name a contract has been made for the benefit ofanother... may sue in his own name without joining with him the party for whosebenefit the action is brought."" "Any such labor organization may sue or be sued as an entity and in behalf of theemployees whom it represents in the courts of the United States." 61 Stat. 156(1947), 29 U.S.C. § 185 (b).RECENT DECISIONSwhich figure the tax is based, the Commissioner had included in the assetsof the corporation certain federal securities.There were two reasons given by the court in the Wrenn case for-hold-ing the assessment invalid. First, federal securities are exempt from taxa-tion by state authority." Inclusion of them in the tax-base formula wouldimpose an illegal tax on such securities. Secondly, Ohio Revised Code Sec-tions 5701.06, 5709.02, 5709.03 and 5733.05 must be read in pari materia'and, when so read, exclude federal securities from the tax base for the pur-pose of determining the franchise tax.9In the principal case the court was confronted with precisely the sameissues as in the WYrenn case. The plaintiff banking corporations filed certif-icates of abatement, contending that their franchise taxes for the years 1947through 1951 had been computed erroneously because the tax base con-tained the value of certain federal securities. The Board of Tax Appealsreversed the Tax Commissioner's findings,10 and ordered that the abatementbe granted. The Ohio Supreme Court reversed the Board of Tax Appeals.The inclusion of federal securities in the tax base was held to be consis-tent with the federal code' for the reason that the tax levied under the Ohiocode is a franchise tax based on the value of the capital stock, and is not atax on the securities alone. Courts for years have recognized the distinctionbetween property taxes and franchise taxes, holding that a tax imposed upon1 OHIo REV. CODE § 5733.05.'Fifth Third Union Trust Co. v. Peck, 161 Ohio St. 169, 118 N.E.2d 398 (1954).'31 U.S.C. § 742 (1952).'161 Ohio St. 169, 118 N.E.2d 398 (1954).156 Ohio St. 583, 103 N.E.2d 756 (1952), af'd, 158 Ohio St. 15 (1952).'OHIO REV. CODE § 5703.05, permits corporations to apply to the Tax Commissionerfor certificates of abatement for overpayments of taxes within five years of the ap-plication.731 U.S.C. § 742 (1952) provides that "... all stocks, bonds, treasury notes andother obligations of the United States, shall be exempt from taxation by or understate or municipal or local authority."'Black's Law Dictionary, 4th Edition (1951) states: "Statutes in pari inateria areto be construed together."' OHIO REv. CODE § 5733.05 defines the tax base and then states: "In determiningthe value of intangible property ... the commissioner shall be guided by sections5709.02 and 5709.03 of the Revised Code." OHIO REV. CODE § 5709.02 provides:"All ... intangible property of persons residing in this state shall be subject to taxa-tion, except as provided in this section or as otherwise provided or exempted ...in this title." OIo REv. CODE § 5701.06 which is included in the same title withthe last mentioned statute, qualifies the definition of "investments" as follows:"... excepting those issued: (1) By the United States ......"The Tax Commissioner had ordered deduction of a portion of the banks' federalsecurities from their capital accounts, in the proportion that such federal securitiesbore to their total assets.131 U.S.C. § 742 (1952).19541WESTERN RESERVE LAW REVIEWthe corporate franchise is not void merely because the corporation mayhave seen fit to invest its money in securities of the United States. 2 Thereason for this distinction is that a franchise tax is a tax on the privilege ofexercising the corporate franchise within the state, and not a tax on theproperty of the corporation, as such.13Rules to determine franchise taxes must be reasonably fair and just intheir operation and must not result in absurd situations." The court in theinstant case held it would not be fair and just to exclude a major portion ofthe assets of one corporation because of the character of some of its invest-ments, and, at the same time, include all the assets of another corporationbecause it has no such investments.As to the statutory construction problem, the court reasoned as follows:Ohio Revised Code Section 5733.05 provides for certain specific exclusionsfrom the tax base, such as reserves for depreciation, taxes due and goodwill.There is no specific provision in the section directing that federal securitiesshall be excluded. It must follow therefore that the legislative intent wasnot to exclude federal securities from the tax base. The court further pointedout instances where an in pari materia construction of the statutes involvedwould lead to absurd consequences. The court held that the legislature didnot intend this result, and that the language should be construed accord-ingly.' 5WILLIAM L. ZIEGLER'Pacific Co. v. Johnson, 285 U.S. 480, 52 Sup. Ct. 424 (1931); Educational FilmsCorp. of America v. Ward, 282 U.S. 379, 51 Sup. Ct. 170 (1931); Home InsuranceCo. v. New York, 134 U.S. 594, 10 Sup. Ct. 593 (1890); Provident Institution v.Massachusetts, 6 WaIl. 611 (U.S. 1867); Coite v. Society for Savings, 6 Wall.594 (U.S. 1864); People ex rel. U.S. Aluminum Printing Co. v. Knight, 174 N.Y.475, 67 N.E. 65 (1903); People ex rel, Bank of Commerce v. Commissioners, 40Barb. 334 (N.Y. 1863)." Hamilton Mfg. Co. v. Massachusetts, 6 Wall. 632 (U.S. 1867); Holly SpringsSavings and Insurance Co. v. Marshall County, 52 Miss. 281 (1876); Manufacturers'Insurance Co. v. Loud, 99 Mass. 146 (1868); Monroe County Savings Bank v. Ro-chester, 37 N.Y. 365 (1867)."Western Union Telegraph Co. v. Omaha, 73 Neb. 527, 103 N.W. 84 (1905)." State v. Nickles, 159 Ohio St. 353, 112 N.E.2d 531 (1953); Railway v. Jump, 50Ohio St. 651, 35 N.E. 1054 (1893); Moore v. Given, 39 Ohio St. 661 (1884);State v. Blake, 2 Ohio St. 147 (1853); Kent v. Bierce, 6 Ohio 336 (1834).

Taxation--Federal Securities Owned by a Corporation Not Deductible from Franchise Tax Base

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Taxation--Federal Securities Owned by a Corporation Not Deductible from Franchise Tax Base

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