Rainier Bancorporation v. Department of Revenue

Stafford, J. The sole question is whether Rainier Bancorporation (Rainier) may deduct the income received "from investments and the use of money as such" from the amount to be paid under the Business and Occupation (B [671] & O) tax. We hold that under RCW 82.04.430(1) Rainier is engaged in a "financial business" and thus is ineligible for the statutory deduction. Rainier is a bank holding company registered with the Governors of the Federal Reserve System pursuant to the Bank Holding Company Act of 1956, 12 U.S.C. § 1844. It has three wholly owned subsidiaries: Rainier Bank, Rainier Mortgage Company and Rainier Credit Company. Rainier's business activities at issue during the relevant period were the receipt of dividends and interest from some marketable securities which were in the process of being liquidated, gains on the sale of securities and interest received from its subsidiaries for financing in the form of equity capital, loans and advances. The Department of Revenue (Department) assessed B & 0 tax deficiencies against Rainier for two contiguous audit periods, the first running from January 1, 1972 through December 31, 1975, and the second from January 1, 1976 through March 31, 1978. The disputed B & O tax deficiencies, amounting to $413,875.03, were assessed under RCW 82.04.290 which requires everyone doing business in this state to pay a tax of 1 percent of the business' gross profits unless otherwise exempted. Rainier claimed a deduction under former RCW 82.04.430(1), which reads as follows: In computing tax there may be deducted from the measure of tax the following items: (1) Amounts derived by persons, other than those engaging in banking, loan, security, or other financial businesses, from investments or the use of money as such, and also amounts derived as dividends by a parent from its subsidiary corporations^] The Department disallowed the deduction. Rainier petitioned the Department for correction of the assessments, but the petitions were denied. Thereafter, Rainier paid the amount assessed, plus interest, and brought this refund action pursuant to RCW 82.32.180. The parties presented cross motions for summary judgment [672] based on stipulated facts. Both parties agree the income at issue was derived "from investments or the use of money as such".1 The Department's motion was granted and judgment was entered against Rainier. We affirm the decision of the trial court and hold that, under the narrow facts before us, Rainier is engaged in a "financial business" and as such does not qualify for the B & 0 tax deduction set forth in RCW 82.04.430(1). In so holding, we turn first to the rules of statutory construction applied by this court in determining whether certain other taxpayers were engaged in a "financial business" as used in RCW 82.04.430(1). See John H. Sellen Constr. Co. v. Department of Revenue, 87 Wn.2d 878, 558 P.2d 1342 (1976). In Sellen, the Department assessed the John H. Sellen Construction Company, the Olympia Brewing Company, King County Medical Blue Shield, Blue Cross Washington-Alaska, Inc., the Acacia Memorial Park, and Acacia's Permanent Care Fund on their investment income. We held the taxpayers were not "financial businesses" as defined by RCW 82.04.430(1) and, therefore, their investment income was not subject to the B & O tax. In deciding the case, we declined to conclusively define the term "financial business". We merely ruled that those particular taxpayers did not come within the phrase "financial business". The analytical framework employed in Sellen, however, causes us to conclude that Rainier is a "financial business”. In Sellen, we began our analysis by stating that, in the absence of a contrary statutory definition, the phrase "financial business" must be given its ordinary and common meaning. See Sellen, at 882. See also Pacific First Fed. Sav. & Loan Ass'n v. State, 92 Wn.2d 402, 598 P.2d 387 (1979); Pope & Talbot, Inc. v. Department of Revenue, [673] 90 Wn.2d 191, 580 P.2d 262 (1978). We thereupon pointed out that the common meaning of the phrase "contemplates a business whose primary purpose and objective is to earn income through the utilization of significant cash outlays.” Sellen, at 882.2 In this regard, one indicia of Rainier's status is the fact that of the approximately $60 million lent by Rainier to its subsidiaries during the relevant audit periods, less than one-half of the funds came from Rainier's surplus funds. Most of the money loaned was borrowed from outside sources. Next, by applying the rule of ejusdem generis in interpreting the deduction statute, we find that Rainier falls within the term "other financial business". In Sellen we quoted the definition of the rule found in State v. Thompson, 38 Wn.2d 774, 777, 232 P.2d 87 (1951): [G]eneral terms appearing in a statute in connection with precise, specific terms, shall be accorded meaning and effect only to the extent that the general terms suggest items or things similar to those designated by the precise or specific terms. In other words, the precise terms modify, influence or restrict the interpretation or application of the general terms where both are used in sequence or collocation in legislative enactments. (Italics ours.) Sellen, supra at 883-84. Based on the foregoing we went on to say in Sellen: [674] Thus, the generic term "other financial businesses" must be read in conjunction with the terms "banking, loan, and security." The generic term only extends to businesses that are comparable to one of the specific categories but technically not falling within one of the three categories. (Italics ours.) Sellen, at 884. Technically, Rainier does not fall within the specific definition of a banking, loan, or security business and is not so regulated pursuant to RCW Titles 30, 31, or 33. Rather, Rainier is granted the authority to borrow and loan money and hold securities by the Washington business corporation act. See RCW 23A.08.020. Rainier's activities do not include loaning money to the public at large and are not identical to those of a bank, loan or security business. But, by loaning money to its subsidiaries Rainier's activities are similar or comparable to those of the aforementioned businesses. Finally, it is important to remember that tax deductions must be narrowly construed. Cf. Evergreen-Washelli Memorial Park Co. v. Department of Revenue, 89 Wn.2d 660, 574 P.2d 735 (1978) (interpreting RCW 82.04.390, which exempts proceeds derived from the sale of real estate from the business and occupation tax). This, coupled with the fact that Rainier's activities are similar or comparable to that of a banking, loan or security business, compels us to conclude that Rainier is ineligible for the deduction from the B & 0 tax, as found under RCW 82.04.430(1). Our decision today is limited to holding companies, such as Rainier, which are engaged in a "financial business". We venture no opinion on the question of whether a holding company that makes its loans solely out of its own surplus funds is subject to the B & O tax. We affirm the trial court. Rosellini, Hicks, Williams, and Dimmick, JJ., concur. Footnotes [1] The claimed deductions at issue, amounting to approximately $35 million, were confined to interest received from Rainier's subsidiaries on advances and loans, along with dividends and interest on Rainier's portfolio of marketable securities, interest on oui>-of-state municipal bonds, and gain on the sale of securities. [2] In John H. Sellen Constr. Co. v. Department of Revenue, 87 Wn.2d 878, 558 P.2d 1342 (1976), we made note of the amount of investment income as compared to the total gross income of each taxpayer. In each instance, the investment income constituted less than 1 percent of the total. We observed that considering this, and other factors, the taxpayers clearly were not "financial businesses". We did not, however, attempt to adopt a "percentage test" in arriving at our conclusion. In the instant case, the interest income from the subsidiaries on their loans amounted to 41.1 percent of Rainier's gross income during the first audit period and 58.1 percent during the second audit period. We note, as we did in Sellen, that this alone is only one of many factors in determining whether Rainier is an entity which has, as its primary purpose and objective, the earning of income through cash outlays. We do not hereby adopt a "percentage test", however.