Maxwell v. Kent-Coffey Mfg. Co.

Decision Date15 March 1933
Docket Number513.
Parties204 N.C. 365, 90 A.L.R. 476 v. KENT-COFFEY MFG. CO. MAXWELL, Com'r of Revenue,
CourtNorth Carolina Supreme Court

Appeal from Superior Court, Caldwell County; McElroy, Judge.

Action by the State, on the relation of A. J. Maxwell, Commissioner of Revenue, against the Kent-Coffey Manufacturing Company. From an adverse judgment, plaintiff appeals.

Reversed.

The following judgment was rendered by the court below:

"In this cause, pursuant to the authority granted to counsel for Kent-Coffey Manufacturing Company, at the May term 1932, of this court, the defendant above named was granted permission to file its amendment to the petition by alleging that the tax charged was and is obnoxious to the provisions of the Interstate Commerce Clause of the United States Constitution.
"And a hearing in said action having been had by consent of the parties plaintiff and defendant, at a regular term of the Burke superior court on May 13, 1932, the parties having theretofore agreed to waive all technicalities, and that hearings might be had outside of the county in which the controversy was pending and having agreed that all such orders could be made at Burke superior court as fully as they could have been made at Caldwell superior court.
"And the matter having been heard upon agreed facts as set forth in the petition and the exhibits thereto, and upon the whole record certified from the office of the commissioner of revenue, and the subsequent record made in this court.
"It is now considered and adjudged by the court that the basis of taxation adopted by the commissioner of revenue is arbitrary and unreasonable and in conflict with the Interstate Commerce Clause and the Fourteenth Amendment of the United States Constitution; and that the proper method of taxation would be to allot as income to the state of North Carolina such proportionate part of its entire income as the total of all of its tangible property in North Carolina bears to the total, tangible and intangible, properties in North Carolina and elsewhere.
"It is thereupon considered and adjudged that the Kent-Coffey Manufacturing Company have and recover of the state of North Carolina on the relation of A. J. Maxwell, commissioner of revenue, the sum of $4,295.27, as shown from the report of Jack B. Phelps, acting chief income tax division, together with interest on said sum from August 9, 1930, until paid."

The plaintiff excepted and assigned error to the judgment assigned and appealed to the Supreme Court. The necessary facts will be stated in the opinion.

Dennis G. Brummitt, Atty. Gen., and A. A. F. Seawell and W. D. Siler, Asst. Attys. Gen., for the State.

Mark Squires, L. H. Wall, and Houston D. Squires, all of Lenoir, and W. C. Ervin, of Morganton, for appellee.

CLARKSON Justice.

The defendant paid to plaintiff the tax assessed against it, $4,295.27, under protest, excepted to the ruling of the commissioner of revenue, and appealed to the superior court of Caldwell county, waiving jury trial. Pub. Laws 1929, c. 345, § 341.

The sole question involved on this appeal is: Was the basis of taxation adopted by the commissioner of revenue arbitrary and unreasonable and in conflict with the Interstate Commerce Clause and the Fourteenth Amendment of the United States Constitution? We think not.

This is an action to review an assessment of income taxes against the defendant Kent-Coffey Manufacturing Company, made by the commissioner of revenue.

The appellee, Kent-Coffey Manufacturing Company, is a Delaware corporation carrying on a manufacturing business in Caldwell county, N.C. All of its manufacturing is done in this state.

The appellee filed its income tax return for the year 1929, showing therein a net income of $230,138.76 for the taxable year. In filing its return, it allocated to North Carolina 58.538 per cent. of its net income and upon that allocation paid to the commissioner of revenue, for the state, an income tax of $6,062.34.

In reaching this result, it used the value of its tangible property in North Carolina and the value of all of its property, tangible and intangible, both within and without the state.

When the return of the taxpayer came before the commissioner of revenue for review, he assessed an additional tax against the appellee which, with interest, amounted to $4,295.27. It is this latter sum, and that only, which is in controversy in this action.

The cause was certified by the commissioner of revenue to the superior court of Caldwell county and there heard at May term, 1932; the court holding "that the proper method of taxation would be to allot as income to the state of North Carolina such proportionate part of its entire income as the total of all of its tangible property in North Carolina bears to the total, tangible and intangible properties in North Carolina and elsewhere."

The court thereupon adjudged that Kent-Coffey Manufacturing Company recover of the state the sum of $4,295.27, the amount in controversy.

The reassessment made by the commissioner of revenue was based upon the language of section 311 (a) of chapter 345, the Revenue Act of 1929. The business of the defendant comes within the type of that described in that section. The allocation formula set up in that section for the apportionment of net income to this state is "such proportion of its entire net income as the fair cash value of its real estate and tangible personal property in this State on the date of the close of the fiscal year of such company in the income year is to the fair cash value of its entire real estate and tangible personal property then owned by it, with no deductions on account of encumbrances thereon."

Section 311 (c) of the Revenue Act of 1929 defines "tangible personal property" as follows: "The words 'tangible personal property' shall be taken to mean corporeal personal property, such as machinery, tools, implements, goods, wares and merchandise, and shall not be taken to mean money deposits in bank, shares of stock, bonds, notes, credits, or evidence of an interest in property and evidences of debt."

The commissioner of revenue found, and the agreed facts in the record show, that the appellee owned real estate and tangible personal property, both within and without the state, of the fair cash value of $555,418.61, of which such property of the value of $550,961.48 was situated in North Carolina. Applying the statute to the facts as so ascertained, the commissioner of revenue found that 99.2 per cent. of the net income of the defendant was apportionable to North Carolina. The additional tax of $4,295.27 was assessed by the commissioner and paid by the appellee under protest. The case comes here by appeal from the judgment of the superior court of Caldwell county in the regular way.

In support of its contentions, appellee sets up that it had a paid-up capital stock of $652,500. With respect to this capital stock, its position is stated in its petition as follows: "The said capital stock was employed by your petitioner for the purpose of manufacturing and, as your petitioner is advised and believes, had its situs within the state of its domicile, or the state of Delaware. Petitioner had also reserved and set aside as surplus or working capital $140,354.06; all of which surplus was employed in the business of your petitioner as a manufacturer, and all of which sum had a taxable situs, as your petitioner is informed and believes, in the state of Delaware and not in the state of North Carolina."

Appellee contends that the formula properly applicable to it is the relation of its tangible property in North Carolina to all of its property, tangible and intangible, both within and without the state. These intangibles consist of the following items: Cash, $61,349.91; accounts receivable, $203,933.08; notes receivable, $70,821.10; stock in other corporations, $13,100; prepaid expense, $36,585.04;-- making a total of $385,789.13. Of these items, the cash is made up of deposits of $41,220 in banks without the state and deposits of $20,121.91 in banks in North Carolina. The inclusion of these bank deposits in North Carolina is evidently upon the theory that such intangibles have their situs within the domiciliary state of the corporation upon the maxim, "Mobilia sequuntur personam."

It is also set up in the record, as a part of the appellee's petition to the commissioner of revenue, upon which this case is being reviewed, that: "As a statement of fact rather than a contention for the allocation of petitioner's taxes, the sales for the period of the report made without the state were the sum of $1,545,485.95, or 99.8 per centum of the total sales; and within the state the sum of $3,021.13, or 00.2 per centum of the total sales."

It is admitted in the brief for appellee that its business is unitary. That term is simply descriptive, and primarily means that the concern to which it is applied is carrying on one kind of business--a business, the component parts of which are too closely connected and necessary to each other to justify division or separate consideration, as independent units. By contrast, a dual or multiform business must show units of a substantial separateness and completeness, such as might be maintained as an independent business (however convenient and profitable it may be to operate them cojointly), and capable of producing a profit in and of themselves.

Conceding that a unitary business may produce an income which must be allocated to two or more states in which its activities are carried on, such a business may not be split up arbitrarily and conventionally in applying the tax laws. It would seem to be necessary that there should be some logical reference to the...

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