Southern Realty Corporation v. McCallum

• Decision Date: 17 October 1932
• Docket Number: No. 381.,381.
• Parties: SOUTHERN REALTY CORPORATION et al. v. McCALLUM, Secretary of State, et al.
• Court: U.S. District Court — Western District of Texas

1 F. Supp. 614

SOUTHERN REALTY CORPORATION et al. v. McCALLUM, Secretary of State, et al.

No. 381.

District Court, W. D. Texas, Austin Division.

October 17, 1932.

Ben H. Powell, of Austin, Tex., McCormick, Bromberg, Leftwich & Carrington, of Dallas, Tex., Polk, Sansom & Terrell, of Fort Worth, Tex., and Rice, Hyman & Suggs, of Dallas, Tex., for plaintiffs.

James V. Allred, Atty. Gen., and F. O. McKinsey and Sidney Benbow, Asst. Attys. Gen., for defendants.

McMILLAN, District Judge.

Plaintiffs, comprising a large number of domestic and foreign corporations, seek by bill in equity to enjoin the enforcement of what is commonly known as the "Franchise Tax Law of the State of Texas." Acts Tex. 1930, 5th Called Sess., c. 68. While the act is assailed on constitutional grounds, the issuance of a preliminary injunction was not insisted on, the parties having by agreement provided for holding in suspense the taxes paid under protest. The matter has accordingly been submitted for final hearing in the District Court, without the necessity for the organization of a three-judge court. Counsel for defendants have conceded that the laws prior to 1930 have no application to the payments made and now held in suspense, nor is the amendment of 1931 (see Vernon's Ann. Civ. St. Tex. arts. 7084, 7089), pertinent, at this time, to the issue involved. Accordingly, the matter for consideration here is the validity of the 1930 Franchise Act.

This statute substantially provides that every domestic or foreign corporation chartered or authorized to do business in Texas shall, on or before May 1 of each year, pay in advance to the Secretary of State a franchise tax for the year following, based upon that proportion of the outstanding capital stock, surplus, and undivided profits, plus the amount of outstanding bonds, notes, and debentures, other than those maturing within less than a year from the date of issuance, as the gross receipts from its business done in Texas bears to the total gross receipts from its entire business. Where a foreign corporation, not theretofore doing business in Texas, applies for permit, the tax is not payable until the end of one year from the date of such permit, at which time the tax is computed according to the first year's business. The law contemplates the payment of the tax on the basis of a sworn report made by the corporation to the Secretary of State, between January 1 and March 1 of each year. Penalties for failure to make the report or pay the tax, of 10 per cent. and 25 per cent., respectively of the amount of the tax due, are denounced, as well as provision for forfeiture of the right to do business.

Complainants assail the 1930 act on a number of grounds, the principal ones being as follows:

First. That there is discrimination against domestic corporations on account of the fact that foreign corporations obtaining permits to do business in the state are not required to pay a franchise tax until the end of the first year, whereas the domestic corporations pay annually in advance.

Second. That the act is discriminatory, arbitrary, and unreasonable, and the tax exacted thereunder unequal and lacking in uniformity, for the reason that outstanding indebtedness, evidenced by bonds, debentures, or notes with maturities greater than one year, is considered as part of the capital funds of the corporation in determining the tax to be paid.

Third. That the act is unconstitutional by reason of its violation of the provisions of the State Constitution for uniform and equal taxation.

Fourth. That the act is void in that it attempts to tax liabilities incurred and outstanding beyond and outside the confines of the state.

Fifth. That the act constitutes a denial of due process in that: (a) The determination of surplus and undivided profits is a matter of uncertainty and opinion. (b) The portion of the gross receipts from the business done in Texas is uncertain. (c) No machinery is set up for the ascertainment of the truth or falsity of the reports made, which fact operates to the detriment of honest taxpayers. (d) An absolute discretion is vested in the Secretary of State to determine the amounts due and to adjudicate the matter without notice and hearing and impose subsequent penalties in event of default. (e) Even if notice were given and hearing had, the statute makes no provision for appeal or judicial review. (f) Unless the tax is paid pursuant to notice provided for in May, heavy penalties, including forfeiture of right to do business, are incurred. (g) The act provides for no additional notice after that provided to be given in the month of May. (h) No relief is provided from penalties to be assessed, except by payment. (i) and (j) The penalties are excessive and such as to deter any effort to resist. (k) The tax being payable annually, it is really an ad valorem tax.

The foregoing constitute, as heretofore stated, the principal grounds on which the statute is assailed. At the outset, it is proper to say that the court approaches this matter upon the assumption that the statute should be sustained if it is possible to do so without clearly doing violence to the constitutional rights attaching to the complainants in the case. As said by the Supreme Court in Southwestern Oil Company v. Texas, 217 U. S. at page 119, 30 S. Ct. 496, 498, 54 L. Ed. 688, in discussing the application of the Fourteenth Amendment to a taxing statute: "* * * It was never contemplated, when the Amendment was adopted, to restrain or cripple the taxing power of the states, whatever the methods they devised for the purposes of taxation, unless those methods, by their necessary operation, were inconsistent with the fundamental principles embraced by the requirements of due process of law and the equal protection of the laws in respect of rights of property."

With this preliminary observation, the various points urged will now be considered, seriatim.

First. It is difficult to perceive any invalidity in the provision requiring foreign corporations to make payment after the transaction of the first year's business, instead of in advance. This appears on its face to be a reasonable classification. There is no other practicable or feasible way to determine the tax under the other provisions of the statute. The state is given a lien on all assets of the corporation within the state, to secure the tax. The losses that might be sustained on account of corporations which fail to remit the tax after the first year would be so negligible, in the court's opinion, as not to warrant material consideration. Furthermore, the principle is well settled that some distinction and classification may be made by the states as between foreign and domestic corporations. See the Stiles Case, 242 U. S. at page 118, 37 S. Ct. 58, 61 L. Ed. 176. The classification is also probably warranted by the fact that a domestic corporation is authorized to take charter for a fifty-year period, whereas the permit granted a foreign corporation is very much more limited in time. Furthermore, the point would seem to be ruled against complainants by the decision of the Supreme Court in the Latrobe Case, 279 U. S. 421, 49 S. Ct. 377, 73 L. Ed. 776.

Second. This contention relates to the inclusion of outstanding long-time indebtedness as part of the capital structure of the corporation to be used as a factor in computing the tax to be paid. At the outset in this connection, it is necessary to say that, in the opinion of the court, the exaction is a privilege tax and not a property tax. Counsel for complainants virtually admitted that this was their opinion, when the case was orally argued before the bar. Without regard to that admission, however, the decisions of the Supreme Court of the United States appear to settle this beyond question. Accordingly, treating the exaction of the law as a privilege tax, it is valid "so long as it bears some real and reasonable relation to the privilege granted or to the protection of the interests of the State." See the Latrobe Case, 279 U. S. 421, 49 S. Ct. 377, 379, 73 L. Ed. 776, and the Emmerson Case, 258 U. S. 290, 42 S. Ct. 305, 66 L. Ed. 622.

It seems to be well settled that in assessing these franchise and privilege taxes it is proper to use capital stock as a means of measurement. In domestic corporations the entire authorized capital may be considered. In the case of foreign corporations, capital issued and outstanding has been used with approval. Furthermore, the Supreme Court has approved statutes providing not only for the use of the capital, but for the use of the surplus of the corporation. See the Middlekamp Case, 256 U. S. 226, 41 S. Ct. 489, 65 L. Ed. 905, and the Shartel Case, 279 U. S. at page 431, 49 S. Ct. 380, 73 L. Ed. 781. Accordingly, there seems to be no doubt as to the right of the state to use both the capital stock and the surplus as a basis on which to compute the tax, within proper limitations with regard to the amount of the capital and surplus devoted to the business of the corporation in that state.

The question of the right to go one step further and include long-time indebtedness as a part of the capital structure for this purpose does not seem to have been directly passed on.

It is perfectly apparent, from the evidence, that the act of the state in including this long-time indebtedness was aimed at a condition which had arisen and which, in the opinion of the lawmaking body, merited consideration and correction. Corporations with a comparatively small capital stock were transacting large amounts of business in the state, using borrowed capital for that purpose, thereby escaping the privilege tax based on authorized or outstanding capital stock and admitted surplus. To all intents and purposes, the funds acquired in this way constituted a part of the capital structure of the corporation. It is to be presumed under the law that value was received by the corporation for these debentures...