State v. Bisso Realty & Investment Co.

The facts in this case are not disputed. The corporation was organized in 1931 and at the time this suit originated it had issued and outstanding par value capital stock amounting to $276,000, with no surplus, undivided profits, or borrowed capital. In the year 1934 it suffered a net loss of $108,807.45, so that at the end of that year the value of its capital stock, as reflected by its books, was $276,000 less $108,807.45, or $167,192.55. It was called upon to pay the franchise tax levied by Act No. 8 of 1932, as finally amended by Act No. 25, First Extra Session of 1934. It paid the tax computed upon the value of its outstanding par value capital stock, as reflected by its books for the year preceding; that is, as a basis for computing the tax, it deducted its loss in 1934 from the par value of its capital stock.

It was contended by counsel for the state, and their contention is upheld by the majority, that the corporation had no right to deduct its loss, and that the tax should be computed upon the original and not the present value of the capital stock. *Page 609

I dissent from that holding. It is held by the majority, and I concur in that view, that the Legislature intended that "for the purpose of measuring the tax" the value of the capital stock, whether having par value or not, should be ascertained, and that the tax, where the corporation has neither surplus, undivided profits, nor borrowed capital should be computed upon the value of the capital stock.

In explaining the purpose and meaning of subdivision 3, § 1, Act No. 25, First Extra Session of 1934, the opinion of the majority says:

"We emphasize the fact that this amendment did not change the definition of `capital stock' but merely prescribes a uniformrule for the valuation thereof and the correctness of this observation is strengthened when it is noted that Act No. 25 of the First Extra Session of 1934 did not attempt to change the definition of `capital stock' but reiterated a uniform rule forthe valuation thereof by employing the identical language used insubdivision (3) of section 1 of Act No. 18 of 1934." (Italics are mine.)

Subdivision 3 of the said act says that "for the purpose of ascertaining the tax hereby imposed, capital stock, whether having par value or not, shall be deemed to have such value as is reflected on the books of the said corporation."

The tax imposed by the statute is an annual tax and corporations are required to make annual reports. The purpose of these annual reports is to put into the hands of the secretary of state each year specific *Page 610 data showing the financial condition of the corporation so that he may determine the amount of the tax due for the current year. These annual reports, among other things, must show the value of the capital stock as reflected by the books of the corporations. The report of the corporation, showing the value of its capital stock as reflected by its books, is not binding upon the secretary of state, but is subject to revision by him "from the information contained in the report filed by said corporation, as herein provided, and from any other information obtained by the Secretary of State, but in no event shall such value be less than is shown on the books of the corporation."

It is held in effect by the majority that the purpose of resorting to the books of the corporation and to such other information as the secretary of state may gather is to ascertain the amount of cash originally contributed by the stockholders, or the real value of the services or property for which the stock was originally issued, if the stock was not paid for in cash, and it is definitely held that the tax should be computed upon the value of the capital stock at the time the corporation was organized.

In so holding, the majority have overlooked the fact that the tax levied by the statute is an annual tax and that the purpose of the annual reports required by the statute is to show the current, and not the original, condition of the corporation's affairs. It will be conceded, I think, that even though a corporation has no surplus, undivided profits or borrowed capital, it must make and file with the secretary of state the annual report required by the act. *Page 611 Surely the Legislature did not intend that the annual report of such corporations should show the value of the stock at the time the corporation was organized. The purpose of the Legislature in requiring these annual reports undoubtedly was to enable the secretary of state to determine the value of the capital stock at the close of the preceding year in order that he might determine the amount of the tax for the ensuing year. It was contemplated that the amount of the tax might vary from year to year, depending upon the value of the capital stock in cases where the corporation had neither surplus, undivided profits, nor borrowed capital. According to the majority holding, it was intended that the amount of the tax, where the corporation had nothing except its capital stock, should be the same from year to year. This was never contemplated.

According to subdivision 2, § 1, of the amended act, the purpose of requiring these annual reports showing the condition of the corporation's affairs is to serve "as the basis for computing the franchise tax under this Act and determining the extent of the use of its franchise in this State." The extent of the use of a corporation's franchise depends in a large measure upon the amount of capital which it has for use in the conduct of its business. Theoretically a corporation has in its possession and available for use in its business or enterprise the whole amount which the stockholders have paid in or contributed. But, while that is true theoretically, it is not necessarily true in fact. It often happens, as it did in this case, that corporations in *Page 612 the conduct of their business suffer severe losses. When they suffer losses, the value of the capital stock is necessarily depreciated to the extent of the loss. They may and frequently do lose part and even all of their capital stock. If part of the amount paid in as capital stock is lost by the corporation, the part which was lost is no longer available for use in its business or enterprise and for that reason cannot be included in the capital invested. The lawmakers realized this and for that very reason wrote into the act, as amended, subdivision 3, which relieves corporations of the burden of paying the franchise tax on capital which they do not possess, and therefore cannot use.

It is inconceivable to me that the Legislature intended that a corporation which has suffered such financial losses as to greatly reduce the value of its capital stock should pay as much franchise tax as it would if it had suffered no loss at all. I dissent.