139 F.2d 809 (2nd Cir. 1943), 34, Spector Motor Service v. Walsh

Docket Nº:34.
Citation:139 F.2d 809
Party Name:SPECTOR MOTOR SERVICE, Inc., v. WALSH, Tax Com'r.
Case Date:December 24, 1943
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

Page 809

139 F.2d 809 (2nd Cir. 1943)



WALSH, Tax Com'r.

No. 34.

United States Court of Appeals, Second Circuit.

December 24, 1943

As Modified March 18, 1944.

L. HAND, Circuit Judge, dissenting.

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Leo V. Gaffney, Asst. Atty. Gen., State of Connecticut (Francis A. Pallotti, Atty. Gen., State of Connecticut, on the brief), for defendant-appellant.

Cyril Coleman, of Hartford, Conn. (Israel Nair and Nair & Nair, all of New Britain, Conn., and Day, Berry & Howard, of Hartford, Conn., on the brief), for plaintiff-appellee.

Before L. HAND, CLARK, and FRANK, Circuit Judges.

CLARK, Circuit Judge.

This appeal by the Connecticut State Tax Commissioner brings up for consideration the validity of the Connecticut Corporation Business Tax of 1935, Conn. Gen. Stat., Cum. Supp. 1935, Sec. 418c, assessed against the plaintiff, a Missouri corporation having its principal place of business in Chicago, Illinois, and engaged in the interstate trucking of freight. The district court held that the statute, construed to avoid an unconstitutional burdening of interstate commerce, did not justify the tax assessed by the commissioner against the plaintiff for the period from June 1, 1937, to December 31, 1940, upon what he had found to be business done within the state. It, therefore, granted the plaintiff's prayer for an injunction against the assessment and collection of the tax and for an adjudication of its nonliability for the tax. D.C. Conn., 47 F.Supp. 671, 676. Jurisdiction was rested upon the constitutional issues and the diverse citizenship of the parties, the court holding inapplicable the prohibition of 28 U.S.C.A. § 41(1), as amended in 1937, against federal injunction of state tax proceedings, because it found no plain, speedy, and efficient remedy in the state courts. Notwithstanding the fact that the parties were in agreement with the court on this point, we have found it not free of doubt. Since, however, we have concluded that jurisdiction does exist, we shall postpone our discussion as to it until later, 1 and turn at once to the very interesting question of the extent to which an interstate trucking business

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can be subjected to a state corporate franchise tax based fundamentally on net income allocated and attributed to the business done within the state.

Plaintiff pioneered in the development of the 'two-way haul' of goods between St. Louis, Missouri, and New York City, that is, the system whereby trucks which have come East with freight are supplied a minimum holdover at the terminals. As developed, this involved the collection of freight in less than truckload amounts at certain eastern terminals, where it was sorted and the loads consolidated and placed in the returning trucks. Hence in 1934 and 1935, plaintiff leased terminals for its exclusive use in Chicago, Illinois, and New Britain, Connecticut, in addition to those already in existence in St. Louis, Missouri, and New York City; and later it leased another in Bridgeport, Connecticut. It has also required agency terminals, where it has the use of terminal facilities of some other carrier, in certain cities in Massachusetts, Rhode Island, and New Jersey. Plaintiff utilizes about 150 trucks for its interstate hauling, almost all of these being leased from its corporate affiliate, the Wallace Transport Company of Illinois. For shipments less than truckloads these trucks are loaded and unloaded at the terminals, to or from which the goods are brought or delivered by separate pickup or cartage trucks, some leased from local truckers and some owned by plaintiff. Thus, at the New Britain terminal plaintiff has five such pickup trucks, all owned by it on conditional bills of sale.

At the New Britain terminal plaintiff has 17 employees, and at the Bridgeport terminal 10, including loading, accounting, and sales personnel. Bills, as well as wages of employees, are usually paid by draft on plaintiff at Chicago, although some cash is kept in New Britain for incidental expenses. Plaintiff has a bank account in Brodgeport for collections made by its drivers, but no Connecticut employee is authorized to disburse this money. That is left entirely in the control of plaintiff's main administrative offices in Chicago, which handle all matters relating to rating and billing. Plaintiff has no real estate in Connecticut; its total physical assets there-- outside of the pickup trucks-- amount to only some $1, 500 or $2, 000 of office equipment in the two terminals. Between one-third to one-half of the dollar volume of plaintiff's business, however, originates in Connecticut.

When plaintiff negotiated for the lease of the New Britain terminal, the lessor, as a precaution in case of future litigation regarding the lease, required the company to qualify as a foreign corporation doing business in the state and to designate the Secretary of State as its agent for service of process. Plaintiff then paid the annual statutory fee of $50 and has since maintained its qualifications, paying this yearly fee. It has not applied for or received the certificate of public convenience and necessity from the Connecticut Public Utilities Commission which is a prerequisite for the doing of local business as a motor common carrier. Conn. Gen. Stat., Cum. Supp. 1935, Sec. 577c, amended by Supp. 1939, Sec. 499e. Moreover, its permit from the Interstate Commerce Commission-- granted under the so-called 'grandfather clause' of Sec. 206(a) of the Interstate Commerce Act, 49 U.S.C.A. § 306(a)-- limits its traffic, except for lines from St. Louis to Chicago and to Quincy, Illinois, to interzone hauling between the West and the East. See In re Spector Motor Service, Inc., Common Carrier Application, 32 M.C.C. 443. Hence, although a very substantial part of its business originates within the state, that business must go into interstate commerce and plaintiff has not engaged in purely intrastate business.

The Connecticut Corporation Business Tax Act of 1935, Gen. Stat., Cum. Supp. 1935, Secs. 416e et seq., passed as a result of the recommendations of the Connecticut Temporary Tax Commission, Rep. 1934, 455 et seq., imposes upon every corporation 'carrying on business in this state' which has to file a report for federal income tax purposes, with certain exceptions not here material, 'annually, a tax or excise upon its franchise for the privilege of carrying on or doing business within the state, such tax to be measured by the entire net income as herein defined received by such corporation or association from business transacted within the state during the income year and to be assessed at the rate of two per cent, ' Cum. Supp. 1935, Sec. 418c, 2 with a further provision for a minimum

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tax, more specifically defined in Secs. 421c and 422c. By Sec. 419c, net income is gross income less the deductions under the federal corporation net income tax, with certain exceptions which include 'interest and rent paid during the income year. ' 3

There follow special and ingenious provisions as to allocation of net income in the case of business carried on partly without the state. Sec. 420 (amended by Supp. 1939, Sec. 356e, Supp. 1941, Sec. 177f, and Supp. 1943, Sec. 292g) states: 'If the trade or business of the taxpayer shall be carried on partly without the state, the business tax shall be imposed on a base which reasonably represents the proportion of the trade or business carried on within the state. ' Provision is then made for the allocation of certain specific receipts--interest, dividends, royalties, and gains on sales of assets-- to the state of the principal place of business unless they can be 'clearly established' as coming from local business or are sales or rentals of tangible property within the state-- and the remainder of net income is to allocated under rules and regulations of the commissioner, except in the case of income 'derived from the manufacture, sale or use of tangible personal or real property. ' In the latter case the local income is found by use of an allocation fraction which is the mean or average of three ratios: (1) the ratio of tangible property in the state to all tangible property, (2) the ratio of wages and salaries paid, and (3) the ratio of gross receipts assignable to the state to all gross receipts. 4 The commissioner computed the tax by use of this allocation fraction. Not great amounts are involved; the total tax for the 5 1/2 years involved was $6, 122.77, upon which the commissioner also claimed a 25 percent penalty and interest

Sec. 421c (amended by Supp. 1939, Sec. 357e and Supp. 1941, Sec. 178f) provides for the minimum tax which is set up as an alternative to Sec. 418c, and requires the corporation to pay, whichever is the larger, either the tax already defined in Sec. 418c or the tax here defined of one mill per dollar based substantially on outstanding securities and corporate stock and reserve. Sec. 422c contains provisions for the allocation of this minimum tax in the case of business carried on partly without the state, which corresponds to the plan of Sec. 420c for the main tax. Since the minimum tax is not involved here, we need refer to these provisions no further than to point out the extensive and ingenious steps taken by the legislators in attempting to devise a fair system of allocation between business within and without the state and yet prevent a corporation from escaping what was thought to be its fair share of the tax. See Lenox Realty Co. v. Hackett, 122 Conn. 143, 187 A. 895, 107 A.L.R. 1306.

This objective is still further emphasized by Sec. 423c, which provides that a company's officers, when believing that the allocation method applied to it by the commissioner has operated to subject it to a tax 'on a greater portion of its business than is reasonably attributable to this state, ' may file with its return a statement of their...

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