Spector Motor Service v. O'CONNOR

• Decision Date: 29 March 1950
• Docket Number: Docket 21557.,No. 180,180
• Citation: 181 F.2d 150
• Parties: SPECTOR MOTOR SERVICE, Inc. v. O'CONNOR, Tax Commissioner.
• Court: U.S. Court of Appeals — Second Circuit

181 F.2d 150 (1950)

SPECTOR MOTOR SERVICE, Inc. v. O'CONNOR, Tax Commissioner.

No. 180, Docket 21557.

United States Court of Appeals, Second Circuit.

Argued March 7, 1950.

Decided March 29, 1950.

Cyril Coleman, of Hartford, Conn. (Day, Berry & Howard, of Hartford, Conn., on the brief), for plaintiff-appellee.

Frank W. Flood, Asst. Atty. Gen., State of Conn. (William L. Hadden, Atty. Gen., State of Conn., on the brief), for defendant-appellant.

Before SWAN, CLARK, and FRANK, Circuit Judges.

See also D.C., 47 F.Supp. 671, 2 Cir., 139 F.2d 809, and 323 U.S. 101, 65 S.Ct. 152, 89 L.Ed. 101.

CLARK, Circuit Judge.

This case has had a long and circuitous history in both the federal and the state courts. It concerns the power of the State of Connecticut to collect a tax computed on net income apportioned to state business of an interstate trucking concern engaged in collecting freight within the State and transporting it by truck to Chicago and St. Louis. The tax assessments involved are for the years 1936 through 1940 and amount to a total of $6,122.77, plus a 25 per cent penalty and interest. Authority for the tax was found by the Tax Commissioner in the Corporation Business. Tax Act of 1935, Cum.Supp. 1935, c. 66b, § 416c et seq., as amended, Supp.1949, c. 91, § 195a et seq. This action for an injunction and a declaratory judgment of nonliability to the tax, brought by a Missouri corporation engaged exclusively in interstate trucking against the Commissioner, was begun on March 9, 1942. Obviously principle here has been more important than the amount of revenue immediately forthcoming; but to the thirty or more states which have adopted this form of statute developed by the National Tax Association and which are said to be awaiting the outcome of this case,¹ the answer has not been swiftly forthcoming.

After the initial trial, the plaintiff on November 14, 1942, obtained a ruling from the district court that it was entitled to an injunction against the collection of the tax and a declaration that plaintiff was not subject to it. This was based upon the court's conclusion that if the tax were applicable to plaintiff it must be held invalid as a burden on interstate commerce, in violation of Art. I, § 8, of the Constitution of the United States, and that to avoid such a holding it should be construed as inapplicable. Spector Motor Service, Inc. v. McLaughlin, D.C.Conn., 47 F.Supp. 671. On appeal from the judgment and declaration thus entered, we reversed, holding the tax applicable to plaintiff and valid as not burdensome to interstate commerce. Spector Motor Service, Inc., v. Walsh, 2 Cir., 1943, 139 F.2d 809. The Supreme Court granted certiorari, 322 U.S. 720, 64 S.Ct. 1155, 88 L.Ed. 1560, and held that the federal courts should defer determination of the constitutionality of the state tax until the state courts had an opportunity to determine the application and constitutionality of the tax as applied to plaintiff under local law. Accordingly it remanded the cause to the district court with directions to retain the bill pending the determination of proceedings to be brought in the state court to settle the issues of local law. Spector Motor Service, Inc. v. McLaughlin, 1944, 323 U.S. 101, 65 S.Ct. 152, 89 L.Ed. 101.

An action for a declaratory judgment was immediately instituted in the Superior Court of Connecticut, but did not go to judgment until August 1947, when that court held the tax applicable to plaintiff and an unconstitutional burden on interstate commerce. 15 Conn.Sup. 206. Upon appeal the Supreme Court of Errors of Connecticut held the tax clearly applicable to plaintiff and not in violation of the state constitution, but struck out the decision based on the federal constitution, holding that this question was already before the federal courts and that its answer was properly to be left to them. Spector Motor Service, Inc. v. Walsh, 135 Conn. 37, 61 A.2d 89. In February 1949 defendant moved in the district court for dissolution of the injunction, and last fall that court ruled that since the tax had been held to apply to plaintiff it must be held unconstitutional. This appeal is therefore from its refusal to dissolve the injunction.

The facts of this case are set forth in detail in our earlier opinion, 139 F.2d 809, a familiarity with which is assumed. For our present purposes we may quote this succinct statement by the distinguished Chief Justice of Connecticut: "The tax is then a tax or excise upon the franchise of corporations for the privilege of carrying on or doing business in the state, whether they be domestic or foreign. Stanley Works v. Hackett, 122 Conn. 547, 551, 190 A. 743. Net earnings are used merely for the purpose of determining the amount to be paid by each corporation, a measure which, by the application of the rate charged, was intended to impose upon each corporation a share of the general tax burden as nearly as possible equivalent to that borne by other wealth in the state." 135 Conn. 37, 61 A.2d 89, 98. As will be seen, the terms here used become of some importance in the discussion. It is to be noted, however, that, as the court is at pains to point out, the tax is not upon income as such, not even local net income; but special and ingenious provisions for the allocation of income are employed in a conscious endeavor to equate the tax fairly between local and nonlocal activities. Thus in the case of income from the use of tangible real or personal property an allocation fraction for the net income is found as the mean or average of three ratios: that of tangible property within the state to all tangible property of the taxpayer; that of wages and salaries paid within the state to all wages and salaries; and that of gross receipts assignable to the state to all gross receipts. How cautious is the impost is shown by the tax here assessed for 1940. Plaintiff's total receipts for that year were $1,723,510.65, of which $587,975.59 arose in Connecticut; while its net income was $426,291.01. But application of the formula gave an allocation mean of .157508, resulting in an allocation to state business of $67,304.24 net income, with a 2 per cent tax thus amounting to $1,346.08. 139 F.2d 809, 812.

Before proceeding to the merits of the issue before us, we must consider the contention of the Tax Commissioner that the federal courts no longer have jurisdiction to decide this issue. 28 U.S.C.A. § 1340 provides: "The district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State." When we considered this case before, our independent examination confirmed the conclusion reached below and agreed to by both parties that this prohibition did not apply, since we found doubt as to the nature of a state remedy. 139 F.2d 809, 819-822. In this the Supreme Court specifically agreed, holding that the district court had jurisdiction to give whatever relief was appropriate, despite the statute, "because of the uncertainty surrounding the adequacy of the Connecticut remedy." 323 U.S. 101, 105, 106, 65 S.Ct. 152, 154, 89 L.Ed. 101. In our decision we were at pains to point out that the Connecticut Supreme Court of Errors had it within its power to clarify the situation; and this it has now done in its opinion in this case by pointing out the availability locally of an action for a declaratory judgment or an injunction. 135 Conn. 37, 61 A.2d 89, 92. Its action has led to the new contention of the defendant that plaintiff must now be dismissed to start all over in another tribunal.

We do not think that this present determination that Connecticut does offer a remedy ousts us of our jurisdiction. The Supreme Court held, per Mr. Justice Brandeis, in Dawson v. Kentucky Distilleries Co., 255 U.S. 288, 41 S.Ct. 272, 65 L.Ed. 638, that where no adequate state remedy could be clearly seen at the time an action was instituted in the federal courts, federal jurisdiction was not defeated by a subsequent opinion of the state supreme court pointing out an available remedy. See also American Life Ins. Co. v. Stewart, 300 U.S. 203, 215, 57 S.Ct. 377, 81 L.Ed. 605, 111 A.L.R. 1268. This is not to deny the possibility that the parties might have brought a swifter end to these overlengthy proceedings by petitioning for certiorari from the decision of the Connecticut Supreme Court of Errors. Indeed the refusal of that court to consider the federal question has been the subject of critical comment. 1 Stanford L. Rev. 551. But since that course was not taken and since the federal court had proper jurisdiction when this action was begun, we hold that it continues until a final determination of the important issue involved.

When we had this case before us six years ago we expressed the view that earlier decisions, of which Alpha Portland Cement Co. v. Commonwealth of Massachusetts, 268 U.S. 203, 45 S.Ct. 477, 69 L.Ed. 916, 44 A.L.R. 1219, was the principal authority, were against the validity of a state tax levied upon even net income of a corporation engaged solely in interstate commerce. But on examination of the broad trends in favor of the state-taxing power shown by the Supreme Court, we concluded that the Alpha Portland Cement case and its progeny were no longer controlling and that as of that date the validity of such a tax as this would be sustained. We are now called upon to re-examine our conclusions to see if, as indeed the learned trial judge thought, later developments show that we were in error.

Before embarking upon this task, we think it needful that we redefine what we conceive to be our functions as judges of a constitutionally inferior court; for it seems to have been thought in some quarters that our previous attempt to study doctrinal trends as to the fate of state taxation in interstate commerce was only an endeavor to guess the votes of Supreme Court jus...