Educational Films Corporation of America v. Ward

Decision Date12 January 1931
Docket NumberNo. 350,350
Citation71 A.L.R. 1226,282 U.S. 379,75 L.Ed. 400,51 S.Ct. 170
PartiesEDUCATIONAL FILMS CORPORATION OF AMERICA v. WARD, Attorney General of New York, et al
CourtU.S. Supreme Court

[Argument of Counsel from pages 379-381 intentionally omitted] Messrs. Roger Hinds and Benjamin P. De Witt, both of New York City, for appellant.

[Argument of Counsel from pages 381-383 intentionally omitted] Mr. Wendell P. Brown, of Albany, N. Y., for appellees.

Mr. Justice STONE delivered the opinion of the Court.

This is an appeal under section 238 of the Judicial Code (28 USCA § 345) from a decree of a DistrictCou rt of three judges for Southern New York, 41 F.(2d) 395, which dismissed. on the merits, the bill of complaint by which appellant, a New York corporation, sought to restrain appellees, the New York State Tax Commission, from the collection of a tax, on the ground that the taxing statute, as applied, infringes the Federal Constitution.

Section 2091 of article 9-A of the New York Tax Law (Consol. Laws, c. 60) lays an annual tax on every domestic corporation of certain classes 'for the privilege of exercising its franchise in this state in a corporate or organized capacity.' The tax is payable in advance for each year beginning November 1st, and is at the rate of 4 1/2 per cent. of so much of the corporation's entire net income for its preceding fiscal year as is, under other sections, allocated to the business carried on within the state. By section 209 the net income embraces 'income from any source,' and 'is presumably the same as the entire net income' reported for income taxation to the United States, 'plus * * * dividends on stocks or any interest received on bonds of any character.' Subdivision 3 of section 208 provides: 'The term 'entire net income' means the total net income, including all dividends received on stocks and all interest received from federal, state, municipal or other bonds. * * *' Appellant's bill of complaint sets up that during its fiscal year ending June 30, 1929, it was the owner of copyrights granted by the United States upon motion picture films, and had received royalties from the licensing of them. It challenges the tax assessed against it under the statute, for the year beginning November 1, 1929, so far as it is measured by the amount of the royalties.

Appellant's contention is based on two propositions, both essential to its conclusion that the tax is invalid. They are, first, that the copyrights and all income derived from them are immune from state taxation since they, like patents, are instrumentalities of the federal government, taxation of which the Constitution impliedly forbids (see Long v. Rockwood, 277 U. S. 142, 48 S. Ct. 463, 72 L. Ed. 824); and, secon, t hat the present tax, measured by net income, is void, so far as the measure includes income from the copyrights, because a tax on federal instrumentalities.2

For present purposes it is enough if we direct our attention to the second proposition. At the outset appellant contends that the tax, although stated in the Taxing Act to be on corporate franchises, is in reality a tax on income, and as such falls within the class of taxes which concededly may not be directly imposed on federal instrumentalities. In support of the contention, it points to the language of the statute (sections 214-A and 214(8), dealing with the computation of the tax), and to an opinion of the New York Court of Appeals (People ex rel. Alpha Portland Cement Co. v. Knapp, 230 N. Y. 48, 57, 129 N. E. 202), which refer to the tax as one 'upon income.'

So far as these considerations are of weight, they are counterbalanced by the later pronouncement of the same court in People ex rel. Bass, Ratcliff & Gretton v. State Tax Commission, 232 N. Y. 42, 46, 133 N. E. 122: '* * * Although we have said in another connection (People ex rel. Alpha P. C. Co. v. Knapp, supra, 230 N. Y. 57, 129 N. E. 205) that 'the tax imposed upon this franchise must be held in practical operation to be a tax upon the income. * * * This tax is equivalent to a tax upon relator's income,' it is primarily a tax levied for the privilege of doing business in the state.'

But the nature of a tax must be determined by its operation rather than by particular descriptive language which may have been applied to it. As was said in Macallen Co. v. Massachusetts, 279 U. S. 620, 625, 626, 49 S. Ct. 432, 434, 73 L. Ed. 874, '* * * neither state courts nor Legislatures by giving the tax a particular name, or by using some form of words, can take away our duty to consider its nature and effect. * * * This court must determine for itself by independent inquiry whether the tax here is what, in form and by the decision of the state court, it is declared to be. * * *' On appeal from the state court in People ex rel. Bass, Ratcliff & Gretton v. State Tax Commission, supra, this court upheld the tax and defined its nature, saying, 266 U. S. 271, 280, 45 S. Ct. 82, 83, 69 L. Ed. 282: 'It is not a direct tax upon the allocated income of the corporation in a given year, but a tax for the privilege of doing business in one year measured by the allocated income accruing from the business in the preceding year. See New York v. Jersawit, 263 U. S. 493, 496, 44 S. Ct. 167, 68 L. Ed. 405.' See, also, Home Insurance Co. v. New York, 134 U. S. 594, 10 S. Ct. 593, 33 L. Ed. 1025; People ex rel. United States Aluminum Printing Plate Co. v. Knight, 174 N. Y. 475, 67 N. E. 65, 63 A. L. R. 87; Anderson v. Forty-two Broadway Co., 239 U. S. 69, 36 S. Ct. 17, 60 L. Ed. 152.

If we look to the operation of the present statute, it is plain that it can have no application independent of the corporation's enjoyment of the privilege of exercising its franchise. If appellant had ceased to do businss before November 1, 1929, it would not have been subject to any tax under this statute, although it had received, during its preceding fiscal year, income which the statute makes the measure of the tax. Since it can be levied only when the corporation both seeks or exercises the privilege of doing business in one year and has been in receipt of net income during its preceding fiscal year, the tax, whatever descriptive terms are properly applicable to it, obviously is not exclusively on income apart from the franchise. Hence we pass to the chief objection urged against it, that such a tax, however described, and even though deemed to be a tax on franchises, is invalid so far as it is measured by income derived from a federal instrumentality.

Under the Constitution the privilege of exercising the corporate franchise is the legitimate object, and the immunity of federal instrumentalities from taxation, a legitimate restriction, of the state power to tax. To give both to the power and to the immunity such a practical construction as will not unduly restrict the power of the government imposing the tax, or the exercise of the func- tions of the government which may be affected by it, is the problem necessarily involved in determining the extent of the immunity. See Metcalf & Eddy v. Mitchell, 269 U. S. 514, 523, 524, 46 S. Ct. 172, 70 L. Ed. 384. So far as it concerns the power of a state to impose a tax on corporate franchises, the problem has long since ceased to be novel. While this court, since McCulloch v. Maryland, 4 Wheat. 316, 4 L. Ed. 579, has consistently held that the instrumentalities of either government, or the income derived from them, may not be made the direct object of taxation by the other, Weston v. City Council of Charleston, 2 Pet. 449, 7 L. Ed. 481; Dobbins v. Commissioners of Erie County, 16 Pet. 435, 10 L. Ed. 1022; Home Savings Bank v. Des Moines, 205 U. S. 503, 27 S. Ct. 571, 51 L. Ed. 901; Indian Territory Illuminating Oil Co. v. Oklahoma, 240 U. S. 522, 36 S. Ct. 453, 60 L. Ed. 779; Federal Land Bank v. Crosland, 261 U. S. 374, 43 S. Ct. 385, 67 L. Ed. 703, 29 A. L. R. 1, it has held with like consistency that the privilege of exercising the corporate franchise is no less an appropriate object of taxation by one government merely because the corporate property or net income, which is made the measure of the tax, may chance to include the obligations of the other, or the income derived from them. The constitutional power of one government to reach this permissible object of taxation may not be curtailed because of the indirect effect which the tax may have upon the other.

The precise question now presented was definitely answered in Flint v. Stone Tracy Co., 220 U. S. 107, 162, et seq., 31 S. Ct. 342, 55 L. Ed. 389, Ann. Cas. 1912B, 1312, which upheld a federal tax, levied upon a corporate franchise granted by a state, but measured by the entire corporate income, including, in that case, income from tax exempt municipal bonds. In reaching this conclusion, the court reaffirmed the distinction, repeatedly made in earlier decisions, between a tax, invalid because laid directly on governmental instrumentalities or income derived from them, and an excise which is valid because imposed on corporate franchises, even though the corporate property or income which is the measure of the tax embraces tax exempt securities or their income. See Society for Savings v. Coite, 6 Wall. 594, 18 L. Ed. 897; Provident Institution v. Massachusetts, 6 Wall. 611, 18 L. Ed. 907; Hamilton Mfg. Co. v. Massachusetts, 6 Wall. 632, 18 L. Ed. 904; Home Insurance Co. v. New York, supra.

Upon a like principle other forms of excise tax have been upheld, although the statutory measure of the tax included securities constitutionally immune from any form of direct taxation. A state inheritance or legacy tax is valid, although measured by the value of United States bonds which are transmitted. Plummer v. Coler, 178 U. S. 115, 20 S. Ct. 829, 44 L. Ed. 998. See, also, Orr v. Gilman, 183 U. . 2 78, 22 S. Ct. 213, 46 L. Ed. 196: Blodgett v. Silberman, 277 U. S. 1, 48 S. Ct. 410, 72 L. Ed. 749. Cf. Greiner v. Lewellyn, 258 U. S. 384, 42 S....

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