315 U.S. 501 (1942), 283, Butler Brothers v. McColgan

Docket Nº:No. 283
Citation:315 U.S. 501, 62 S.Ct. 701, 86 L.Ed. 991
Party Name:Butler Brothers v. McColgan
Case Date:March 02, 1942
Court:United States Supreme Court

Page 501

315 U.S. 501 (1942)

62 S.Ct. 701, 86 L.Ed. 991

Butler Brothers



No. 283

United States Supreme Court

March 2, 1942

Argued February 12, 1942



1. In the application of a state statute imposing on corporations doing business within and without the State a franchise tax measured by a percentage of the net income derived from business within the State, a formula which is "fairly calculated" to allocate to the State that portion of the net income "reasonably attributable" to the business done there satisfies the requirements of the Fourteenth Amendment. P. 506.

2. One who attacks a formula for determining, under a taxing statute, the amount of net income allocable to the State has the burden of showing by clear and cogent evidence that it results in extraterritorial values' being taxed. P. 507.

3. A wholesale merchandise corporation operated, as a unitary business, stores in several States, including one in California. It maintained a central buying division which served all the stores.

Page 502

In 1935, it had a substantial profit, although the California store, on a separate accounting basis, showed a loss. The tax commissioner of California allocated to that State a percentage of the net income, and based thereon a tax under the state Bank and Corporation Franchise Tax Act. That percentage was determined by averaging the percentages which (a) value of real and tangible personal property, (b) wages, salaries, commissions and other compensation of employees, and (c) gross sales, less returns and allowances, attributable to the California store bore to the corresponding items of all the stores.


(1) That the formula of apportionment did not violate the Fourteenth Amendment. P. 506.

(2) The fact that the accounting system of the California branch attributed no net income to that State did not prove that the tax was on extraterritorial values, since accounting practices for income statements may vary considerably according to the problem at hand, and a particular accounting system, though useful or necessary as a business aid, may not fit the different requirements when a State seeks to tax values created by business within its borders. P. 507.

4. The ruling in Saunders v. Shaw, 244 U.S. 317, relative to lack of due process where a state supreme court finally disposed of a case on a new point against which the defeated party had had no opportunity or occasion to make defense held inapplicable to the situation in the case at bar, in which it was claimed that the appellate court departed from provisions of the stipulation of fact upon which the case was tried. P. 510.

17 Cal.2d 664, 111 P.2d 334, affirmed.

Appeal from the affirmance of a judgment against the appellant in a suit to recover the amount of a state tax.

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DOUGLAS, J., lead opinion

MR. JUSTICE DOUGLAS delivered the opinion of the Court.

This is an appeal (Judicial Code § 237(a), 28 U.S.C. § 344(a)) from a final judgment of the Supreme Court of California sustaining the validity of a statute of California against the claim that, as construed and applied to appellant, it violated the Fourteenth Amendment. 17 Cal.2d 664, 111 P.2d 334. The statute in question is the Bank and Corporation Franchise Tax Act. 2 Gen.Laws 1937, Act 8488, p. 3851; Stat. 1929, p. 19, amended, Stat. 1931, p. 2226, Stat. 1935, p. 965, St.1937, p. 2324. Sec. 4(3) of that Act provides for an annual corporate franchise tax payable by a corporation doing business within the State. The tax is measured by the corporation's net income, and is at the rate of four percent "upon the basis of its net income" for the preceding year. The minimum annual tax is $25. Sec. 10 prescribes the method for computing the net income on which the tax is laid. It provides in part:

If the entire business of the bank or corporation is done within this State, the tax shall be according to or measured by its entire net income, and if the entire business of such bank or corporation is not done within this State, the tax shall be according to or measured by that portion thereof which is derived from business done within this State. The portion of net income derived from business done within this State shall be determined by an allocation upon the basis of sales, purchases, expenses of manufacturer, payroll, value and situs of tangible property, [62 S.Ct. 703] or by reference to these or other factors, or by such other method of allocation as is fairly calculated to assign to the State the portion of net income reasonably attributable to the business done within this State and to avoid subjecting the taxpayer to double taxation.

The tax in dispute is for the calendar year 1936. Appellant paid the minimum tax of $25, asserting that it operated

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in California during 1935 at a loss of $82,851. The tax commissioner made an additional assessment of $3,798.43, which appellant paid, together with interest, under protest. This suit was brought to recover back the amount so paid on the theory that the method of allocation employed by the tax commissioner attributed to California income derived wholly from business done without that State.

The facts are stipulated, and show the following. Appellant is an Illinois corporation qualified to do business in California. Its home office is in Chicago, Illinois. It is engaged in the wholesale dry goods and general merchandise business, purchasing from manufacturers and others and selling to retailers only. It has wholesale distributing houses in seven states, including one at San Francisco, California. Each of its houses in the seven states maintains stocks of goods, serves a separate territory, has its own sales force, handles its own sales and all solicitation, credit and collection arrangements in connection therewith, and keeps its own books of account. For the period in question, all receipts from sales in California were credited to the San Francisco house. Appellant maintains a central buying division through which goods for resale are ordered, the goods being shipped by manufacturers to the houses for which they are ordered. All purchases made by appellant for sale at its various houses are made through that central buying division. The cost of the goods and the transportation charges are entered on the books of the house which receives the goods. No charges are made against any house for the benefit of appellant or any of its other houses by reason of the centralized purchasing. But the actual cost of operating the centralized buying division is allocated among the houses. The greater part of appellant's other operating expenses is incurred directly and exclusively at the respective houses. Certain items of expense are incurred and paid by appellant

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for the benefit of all the houses and allocated to them. No question exists as to the accuracy of the amounts of such expense or the method of allocation. The latter admittedly followed...

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