For affirmance -- Chief Justice Weintraub, and Justices Jacobs, Francis, Proctor, Hall and Schettino. For reversal -- None. The opinion of the court was delivered by Schettino, J.
Petitioner, Walnut Realty Company, (hereafter referred to as Walnut) seeks to reverse a judgment of the Division of Tax Appeals which held the company subject to franchise taxes at the rates provided for a "financial business" rather than at the lower rates specified for a general business corporation. While the appeal was pending before the Appellate Division, we certified the matter on our own motion. R.R. 1:10-1(a).
For the years 1952 through 1957 Walnut filed corporate franchise tax returns and paid annual taxes under the claim that it was a real estate business and therefore taxable as a general business corporation under the Corporation Business Tax Act. L. 1945, c. 162; N.J.S.A. 54:10A-1 et seq. Although no objection was originally made to the method
used for computing the tax, the Director of the Division of Taxation reviewed those returns in 1957 pursuant to N.J.S.A. 54:10A-19.1, determined that Walnut was engaged in a "mortgage financing business" within the definition of a "financial business" in the Financial Business Tax Law (L. 1946, c. 174, § 2; N.J.S.A. 54:10B-2), and accordingly issued a deficiency notice for additional taxes for the years 1952 through 1957.
In 1958 Walnut paid under protest the calculated additional assessments plus interest and filed a petition of appeal with the Division of Tax Appeals. In April 1959 while that appeal was pending, Walnut tendered, again under protest, its tax for the year 1958 calculated as required by the Financial Business Tax Law.
No formal petition of appeal from the assessment for 1958 was ever filed but in March 1960 Walnut orally moved to amend its original petition to include an appeal for 1958. The motion was denied by the Division of Tax Appeals. Walnut appeals from that ruling and from the determination that it is a financial business. In addition to contending that it is not a financial business, it argues that it relied to its detriment upon the State's acceptance of its initial returns. Further, it asserts that the Financial Business Tax Law denies it the equal protection of the laws provided by the Fourteenth Amendment to the Federal Constitution.
An analysis of Walnut's business becomes necessary. Some of its activities are concerned with real estate interests and others with mortgage loans. Understandably, Walnut places heavy emphasis upon the real estate aspects.
Organized in 1920 under the laws of New Jersey for the purpose of taking title to real estate, it was then and is now a two-family enterprise. The amount of realty held by it has varied from time to time, but during the tax years in question the only real estate it owned was a commercial building on Halsey Street, Newark. Walnut also held a leasehold interest in a commercial building on Lyons Avenue, Irvington, during this period. Up to eleven tenants occupied
space in the Newark building, but the number of subtenants in the Irvington leasehold does not appear in the record.
Our attention is directed to the fact that gross rentals exceeded annually the gross interest income from its mortgage investments. We note in passing, however, that no net income figures were provided. Furthermore, the record indicates that Walnut obtained discounts on a number of its mortgage loans, but it is not clear how much such discounts would add to the annual mortgage income figures.
Walnut's vice-president testified that in his opinion the fair market value of the land and building on Halsey Street was $175,000 in 1960. The assessed valuation of that property for tax purposes was $57,000 for the latter years in question. No figures are listed regarding the value of the leasehold interest, but the percentage of Walnut's gross income attributed to rentals from that property fluctuated between 2.51% and 6.26% from 1953 through 1956 and was 3.8% in 1956, the last year for which these figures are reported. With combined rentals from both properties representing slightly more than 50% of the company's total gross income each year, it seems unlikely that the fair market value of the leasehold was as great as that of the Halsey Street property. In comparison, the capital investment in mortgage financing exceeded $300,000 through 1956 and still involved substantial sums of investment capital in 1957 and 1958.
Walnut's initial transactions in the area of mortgage financing involved the acquisition of purchase money mortgages on properties it sold. But mortgages on other realty were subsequently accepted as security for loans to friends of the families who owned the company and to persons recommended by friendly attorneys and accountants.
No argument is made that the company would not be taxable under the Financial Business Tax Law were these and similar transactions Walnut's sole form of business activity. Rather, the transactions are characterized by Walnut as an incidental adjunct to its "real estate business," nothing
more than an accommodation to friends and relatives. To support this contention it asserts that the business has not been listed in a telephone directory and has never advertised in any periodical as a mortgage and loan business or otherwise. In addition, all of its business is carried on in a private home, primarily by two stockholders who are over eighty years of age. Although these facts are persuasive (especially when viewed out of context) that no large scale attempt was made to corner the mortgage market, they fall short of being determinative as to the true character of the business for tax purposes under N.J.S.A. 54:10B-1 et seq.
In contrast to the relatively static nature of its real estate activities from 1952 through 1958, Walnut held during the same period a cumulative total of 25 mortgages which were the product of the various loan transactions already referred to. A number of the underlying debts were repaid in full, but other mortgages were acquired or renewed, causing the number owned at the end of each year to increase between 1952 and 1957. Thus, as of the end of 1952 Walnut owned 12; at the same time in 1953 the number was 14; in 1954, 16; in 1955, 18; and by the end of 1956, 20. None was acquired after 1956.
One of the mortgages held during the years in question was a purchase money mortgage acquired when Walnut sold a hotel in 1936 or 1937. The balance due thereon had been reduced to $12,600 by 1952 (the only year for which this figure was supplied). Another was a purchase money mortgage in the amount of $11,200 obtained in 1956 when Walnut sold a tax sale certificate it had acquired. But there is no assertion or evidence that any of the others was connected to petitioner's real estate activities.
While some of the capital used for mortgage loans represented profits from real estate activities, advancements by stockholders (reflected primarily in notes payable) were the main source of funds for this purpose. The following comparison of outstanding debts to stockholders and ...