Morris & Essex Investment Co. v. Director of Division of Taxation

Citations: 161 A.2d 491; 33 N.J. 24; 1960 N.J. LEXIS 132

Court: Supreme Court of New Jersey; June 6, 1960; New Jersey; State Supreme Court

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Morris Essex Investment Co. Inc., a New Jersey corporation focusing on lending against second mortgage liens, appealed a determination by the Director of the Division of Taxation that it was subject to the Financial Business Tax Law. The law imposes an annual excise tax based on net worth for entities engaged in financial business. The petitioner argued that it does not engage in financial business as defined by the law, while the taxing authorities contended that the law explicitly includes the petitioner’s activities within its scope. The definition of "financial business" encompasses enterprises that compete with national banks and utilize capital to generate profit through various financial activities, including loaning, investing, and dealing in securities. The law also specifies that certain entities, such as national banks and credit unions, are excluded from the definition. The court's review centers on whether the petitioner falls within the statutory definition of "financial business."

The primary class of enterprises subject to taxation includes those utilizing moneyed capital for profit, competing significantly with national banks. New Jersey statutes have mandated taxation of the capital stock of national banks and state-organized banks since 1866, with similar taxes on trust companies established in 1899. These entities are currently taxed under R.S. 54:9-1 et seq. Prior to 1945, ownership of stock in other financial businesses was taxed under general property tax laws, but a legislative amendment that year exempted intangible personal property from this tax. Consequently, while national and state banks and trust companies remained taxable, interests in other financial businesses were not. Incorporated financial businesses outside the Bank Stock Act were taxed under the Corporation Business Tax Law at a lower rate, and unincorporated financial enterprises were mostly exempt from taxation, aside from general property tax.

This shift posed a threat to the Bank Stock Act’s validity and its associated revenue due to a federal statute restricting state taxation on national bank shares. National banks function as federal agencies, and their shares can only be taxed by states with Congressional consent and under specified conditions, including the limitation that the tax rate on national bank shares cannot exceed that imposed on other moneyed capital competing with national banks. The federal law aims to prevent tax discrimination that could disadvantage national banks and lead to a potential shift of investment capital from national banks to other financial entities due to preferential tax treatment. The focus remains on maintaining fair competition among financial businesses for investment capital.

In Mercantile National Bank of New York v. Mayor, etc. of New York, 121 U.S. 138 (1887), the focus is on whether moneyed capital competing with national banks receives favorable tax treatment. It was established that savings bank deposits do not require state taxation to avoid discrimination against national banks, as they originate from a different capital source with no competitive threat. The Financial Business Tax Law exempts savings banks and was enacted following a recommendation from the Commission on State Tax Policy to address concerns over the repeal of the tax on intangibles. The law defines "financial business" subject to taxation, establishing two criteria: substantial competition with national banks and the use of moneyed capital for profit. The law explicitly includes various businesses such as industrial banks and mortgage financing companies, indicating the Legislature's intent for these entities to be taxed. The distinction between "coming into competition" and "in substantial competition" is not significant, as federal provisions interpret both phrases similarly. The conclusion that mortgage financing businesses are taxable aligns with the statutory language and legislative intent.

The excerpt explains the interpretation of the term "financial business" as defined in a legal context. The first sentence establishes the definition, while the second specifies examples that fall under this definition, suggesting that entities mentioned in the second sentence, such as "mortgage financing businesses," are indeed included in the broader category of "financial business" and thus subject to taxation. The text uses analogies, such as the definition of a "book," to illustrate that the inclusion of specific examples reinforces the classification rather than leaving it ambiguous. It emphasizes that terms like "this shall include" imply that the examples provided are recognized categories within the defined term, further supported by legislative history. Specifically, the 1946 Assembly Bill 283 aimed to tax mortgage loan companies, aligning with recommendations from the Commission on State Tax Policy, which indicated that such companies compete with national banks and should not be exempt from taxation. The excerpt concludes that there is no evidence to suggest that the legislature's intent diverged from the Commission's recommendations, and the petitioner does not challenge the constitutionality of the classification.

The key issue is whether the petitioner qualifies as a "mortgage financing business" under N.J.S.A. 54:10B-2(b), as the statute does not provide a definition. The ordinary meaning of the term encompasses companies that lend against second mortgages on real property, with no distinction made between first and second mortgages. The petitioner contends that the statute should only apply to first mortgage companies, as national banks exclusively lend on first mortgages and thus are the only competitors. However, the court argues that a second mortgage lender competes with national banks from the perspective of a landowner seeking additional financing or a prospective homeowner looking for combined loans. The potential for second mortgage lenders to operate profitably due to tax advantages could create unfair competition, which the statute aims to prevent. Therefore, the court concludes that "mortgage financing businesses" includes those lending on second mortgages and acknowledges that such businesses compete with national banks, thus subjecting them to taxation as enterprises using capital in competition with national banks. The decision is affirmed, with all justices in agreement.