Citations
- 121 Cal. App. 4th 505
Full opinion text
Opinion
GRIGNON, J.
In this case, we are concerned with the interplay between two unrelated provisions of the Revenue and Taxation Code. The first provision imposes a higher net income tax rate on financial corporations in lieu of other taxes, including municipal taxes. (Rev. & Tax. Code, § 23182.) The second provision permits a wholly-owned limited liability company to be disregarded as a separate entity for tax purposes and to be taxed as a division of its parent corporation. (Rev. & Tax. Code, § 23038.) In this case, a municipality imposes a gross receipts tax on limited liability companies doing business within the municipality and is seeking to impose its gross receipts tax on a limited liability company, wholly owned by a financial corporation, whose separate existence has been disregarded for tax purposes. The municipality acknowledges that it could not impose the gross receipts tax on the parent financial corporation, but contends the in lieu tax provisions are not applicable to the limited liability company. We conclude the municipality may not levy taxes on a limited liability company wholly owned by a financial corporation, where the income of the limited liability company has been included in the income of the parent financial corporation and subjected to the higher income tax rate imposed on financial corporations in lieu of other taxes.
PROCEDURAL BACKGROUND
Plaintiff and appellant City of Los Angeles (the City) imposes a business tax measured by gross receipts on limited liability companies doing business within the City. The City levied the tax on defendant and respondent Furman Selz Capital Management, L.L.C. (Furman) for the tax years 1999-2001. Furman disputed the tax. On October 15, 2002, the City filed a complaint against Furman for money due on an unpaid tax assessment. The City sought a total of $279,410.96 in taxes, interest, and penalties. Furman filed an answer that alleged as a defense that it is a limited liability company wholly owned by a financial corporation, whose separate existence has been disregarded for tax purposes and whose net income has been subjected to the higher net income tax rate imposed on financial corporations. A one-day court trial was held on May 19, 2003. The trial court entered judgment in favor of Furman. The City filed a timely notice of appeal.
FACTS
Furman provides money management, investment advice, and other financial services to institutional clients. Furman is a limited liability company formed in 1995 under the Delaware Limited Liability Company Act (Del. Code Ann. tit. 6, § 18-101 et seq.) and authorized to do business in California since 1996. Furman is owned by a single member, ING Furman Selz Asset Management L.L.C. In turn, Asset Management is owned by a single member, ING Financial Holdings Corporation (ING).
ING is a financial corporation under California law. As a financial corporation, ING pays a higher net income tax rate than the standard corporate tax rate and is exempt from most other state, county, and municipal taxes. Furman has elected for tax purposes to have its separate entity disregarded and to be treated as a division of ING. ING’s consolidated state income tax return includes Furman’s revenues, expenses, and other financial information.
In February 2002, the City assessed a business tax against Furman based on Furman’s gross receipts for the period 1999-2001. In April 2002, the City threatened to suspend or revoke Furman’s certificate to do business. Furman sent a letter to the City asserting that it was a division of ING for tax purposes and entitled to immunity from the City’s tax.
DISCUSSION
Standard of Review
The material facts are undisputed. Where the facts are undisputed, only questions of law confront us and the trial court’s findings do not bind us. (Ghirardo v. Antonioli (1994) 8 Cal.4th 791, 799 [35 Cal.Rptr.2d 418, 883 P.2d 960]; Mole-Richardson Co. v. Franchise Tax Bd. (1990) 220 Cal.App.3d 889, 894 [269 Cal.Rptr. 662].) We may examine the facts and make our own conclusions and findings. (Gates Rubber Co. v. Ulman (1989) 214 Cal.App.3d 356, 363 [262 Cal.Rptr. 630]; Newman v. Franchise Tax Bd. (1989) 208 Cal.App.3d 972, 977 [256 Cal.Rptr. 503].)
Historical Background
Historically, federal statutes severely restricted state taxation of national banks. (Western States Bankcard Assn. v. City and County of San Francisco (1977) 19 Cal.3d 208, 215-216 [137 Cal.Rptr. 183, 561 P.2d 273].) The federal statutory scheme required tax-rate parity between national and state banking institutions. (Ibid.) The federal statutory scheme permitted the states to levy only one tax on national and state banking associations in lieu of all other taxes at a rate no higher than the combined rate of tax imposed on other corporations. (Ibid.) In 1929, California adopted an in lieu tax on net income and made it applicable to all banks within the state. (Cal. Const., art. XIII, § 27; Rev. & Tax. Code, §§23181, 23182.) “The end result was that competing state and national institutions received the same benefits and paid taxes at the same rate.” (Western States Bankcard Assn. v. City and County of San Francisco, supra, 19 Cal.3d at p. 216.)
In 1979, the Legislature amended Revenue and Taxation Code section 23182 by extending the in lieu income tax to financial corporations. (California Fed. Savings & Loan Assn. v. City of Los Angeles (1991) 54 Cal.3d 1, 9 [283 Cal.Rptr. 569, 812 P.2d 916].) A financial corporation predominantly deals with money or moneyed capital in substantial competition with banks. (Cal. Code Regs., tit. 18, § 23183, subd. (a).) The purpose of the amendment was to ensure competitive parity between banks and financial corporations by imposing an equivalent tax burden. (California Fed. Savings & Loan Assn. v. City of Los Angeles, supra, 54 Cal.3d at p. 10.) “The amendment to Revenue and Taxation Code Section 23182 contained in this act reaffirms the Legislature’s long standing purpose of insuring competitive parity between banks and financial corporations by subjecting both types of institutions to an equivalent tax burden. Equal tax treatment of banks and financial corporations promotes the continued existence of both types of institutions thereby affording a full range of financial services at competitive rates. Moreover, taxation of banks and financial corporations at the rate determined under Revenue and Taxation Code Section 23186 insures that their tax burden will be comparable to the combined state and local tax burdens of nonfinancial corporations subject to Revenue and Taxation Code Section 23151. [f] The Legislature further finds that divergent and competing local tax measures imposed on financial corporations impair the uniform statewide regulation of banks and financial corporations. For this reason and those earlier expressed, the Legislature declares that the state, by this amendment, has preempted such local taxation of financial corporations to the same extent as the state has heretofore preempted local taxation of banks.” (Stats. 1979, ch. 1150, § 20, p. 4220.)
In short, over the years, the Legislature has attempted to adopt a statutory scheme that achieves a “ ‘tax rate parity,’ between federal and state commercial banks, between commercial banks and financial corporations (including savings banks), and between banks and financial corporations and nonfinancial corporations . . . .” (California Fed. Savings & Loan Assn. v. City of Los Angeles, supra, 54 Cal.3d at p. 18.)
At the same time as the amendment extending the in lieu income tax to financial corporations, the Legislature mitigated the loss to local governments resulting from the elimination of municipal taxes on financial corporations by establishing a fund for a portion of the revenues paid to the state by financial corporations, which was to be allocated to local governments. (California Fed. Savings & Loan Assn. v. City of Los Angeles, supra, 54 Cal.3d at p. 9 & fn. 7.) However, the Legislature did not renew the fund in 1982 or thereafter. (Ibid.) Cities do not receive any portion of the increased revenues collected by the state from financial corporations. (Id. at pp. 11, 23-24.) Nevertheless, cities may not impose business license taxes in the form of a gross receipts tax on financial corporations. (Ibid)
State Taxation of Financial Corporations
Except for banks and financial corporations, every corporation doing business in California that is not expressly exempt from taxation must pay a tax to the state based on the corporation’s net income at the rate of 8.84 percent. (Rev. & Tax. Code, § 23151.) Banks and financial corporations must pay a tax to the state based on their net income at the rate of 10.84 percent. (Rev. & Tax. Code, §§ 23181, 23183, 23186.) The higher rate of net income tax imposed on banks and financial corporations is “in lieu of all other taxes and licenses, state, county and municipal, upon the said banks and financial corporations except taxes upon their real property, local utility user taxes, sales and use taxes, state energy resources surcharge, state emergency telephone users surcharge, and motor vehicle and other vehicle registration license fees and any other tax or license fee imposed by the state upon vehicles, motor vehicles or the operation thereof.” (Rev. & Tax. Code, § 23182.) Revenue and Taxation Code section 23182 prohibits a city from levying a business tax measured by gross receipts on a financial corporation. (California Fed. Savings & Loan Assn. v. City of Los Angeles, supra, 54 Cal.3d at pp. 18-25.)
Limited Liability Companies
“A limited liability company is a hybrid business entity that combines aspects of both a partnership and a corporation. It is formed under the Corporations Code and consists of ‘members’ who own membership interests. Members may be individuals, corporations, partnerships, or other limited liability companies. [Citation.] [