Kingan & Co. v. Smith

• Decision Date: 10 December 1936
• Docket Number: No. 1851.,1851.
• Court: U.S. District Court — Southern District of Indiana
• Parties: KINGAN & CO., Inc., v. SMITH.

17 F. Supp. 217

KINGAN & CO., Inc., v. SMITH.

No. 1851.

District Court, S. D. Indiana, Indianapolis Division.

December 10, 1936.

Thompson, Rabb & Stevenson, of Indianapolis, Ind., for complainant.

Val Nolan, U. S. Atty., of Indianapolis, Ind., Robert H. Jackson, Asst. Atty. Gen., and Andrew D. Sharpe and Frederic G. Rita, Sp. Assts. to Atty. Gen., for defendant.

BALTZELL, District Judge.

This is an action in which the complainant challenges the validity of certain provisions of the Revenue Act of 1936 (49 Stat. 1652). The provisions of the act thus challenged, and the only provisions with which we are here concerned, are found in title 3, section 501 (26 U.S.C.A. § 345), and are as follows:

"Sec. 501. Tax on Net Income from Certain Sources

"(a) The following taxes shall be levied, collected, and paid for each taxable year (in addition to any other tax on net income), upon the net income of every person which arises from the sources specified below:

"(1) A tax equal to 80 per centum of that portion of the net income from the sale of articles with respect to which a Federal excise tax was imposed on such person but not paid which is attributable to shifting to others to any extent the burden of such Federal excise tax and which does not exceed such person's net income for the entire taxable year from the sale of articles with respect to which such Federal excise tax was imposed."

The provisions of this act apply only to taxable years ended in the calendar year 1935 and thereafter. One of the taxable years of complainant ended on October 26, 1935, and the other ended on October 31, 1936.

There are twenty-four cases pending in this court challenging the validity of this act. While the facts in each case may be somewhat different, yet the law, as construed in this case, shall be applicable to each case, and this opinion, while filed in the instant case, shall be equally applicable to each.

The bill of complaint was filed on the 6th day of August, 1936. On the 25th day of August, the defendant filed a motion to dismiss the bill upon the ground "that this court is without jurisdiction of the subject matter of this suit. * * *" The motion was briefed by both parties and argued orally. Although the complainant presented briefly the question of the validity of the act in its oral argument, the defendant neither briefed nor argued that question. The court, at the time, was of the opinion that it was not necessary to determine the validity of the act in passing upon the motion to dismiss and suggested that argument be confined to the jurisdictional question presented by such motion. In other words, the question presented by such motion was, in addition to that of complainant having an adequate remedy at law, primarily, whether or not the allegations contained in the bill were sufficient to take the case outside of the statute prohibiting the maintenance of a suit for the purpose of restraining the assessment and collection of a federal tax (26 U.S.C.A. § 1543) and thus confer jurisdiction upon a court of equity. The court, on the 30th day of September, overruled the motion to dismiss, thereby holding that a court of equity has jurisdiction of the subject-matter in this suit. (D.C.) 16 F.Supp. 549. The question of the validity of the act was not considered in that ruling, and, if any of the language contained in the written memorandum filed upon that date can be so construed, it was not so intended. An examination of the allegations contained in the bill clearly discloses jurisdiction in a court of equity. See E. C. Atkins & Company v. Dunn (C.C.A.) 28 F.(2d) 5; Hart v. Keith Vaudeville Exchange, 262 U.S. 271, 43 S.Ct. 540, 67 L.Ed. 977; Binderup v. Pathe Exchange, 263 U.S. 291, 44 S.Ct. 96, 68 L.Ed. 308.

After the overruling of the motion to dismiss, the defendant refused to answer, and consequently, in accordance with Equity Rule 29 (28 U.S.C.A. following section 723), an order pro confesso was entered on the 27th day of October. More than thirty days having elapsed since the entry of such order, complainant is now entitled to a final decree. There remains, however, one question for the court to determine before the entry of such decree, and that is whether or not the challenged act is valid. The nature of the decree depends upon the answer to that question. As was said in the case of Huston, Collector, v. Iowa Soap Company, a corporation, 85 F.(2d) 649, 652 (C.C.A.8): "A court of equity will not grant an injunction in the face of the statute unless there exists simultaneously an illegal tax and some such `special and extraordinary circumstances.' If either element is lacking, injunctive relief will be denied." In its ruling upon the motion to dismiss in the instant case, the court determined only that the allegations contained in the bill of complaint disclosed "circumstances which are rather exceptional and extraordinary" and sufficient to justify a court of equity in assuming jurisdiction. The other element, that is, the validity of the challenged act, must now be determined.

Pursuant to Equity Rule 70½ (28 U.S. C.A. following section 723), the court has filed its special findings of fact and conclusions of law.

The complainant is a New Jersey corporation organized under the laws of that state, but having its principal place of business in the city of Indianapolis, Ind., in which state it is admitted to do business. The defendant is the collector of internal revenue for Indiana, and is required, under the law, to collect all taxes imposed by virtue of the challenged act. Complainant is a first processor of hogs and has been since the 12th day of May, 1933, the date of the enactment of the Agricultural Adjustment Act (48 Stat. 31), under which act it was liable for the payment of certain taxes as therein provided. It paid such taxes until the early part of the year 1935, at which time it refused to make further payments, and on the 15th day of June of that year it filed suit in this court to enjoin their further collection. An injunction was issued enjoining temporarily the collection of further taxes thereunder, upon condition, however, that complainant deposit in designated banks the amount of such taxes as they became due, such sum thus deposited to be returned to it in the event such act was finally declared invalid, but to be paid to defendant in the event its validity was upheld. Shortly following the decision of the Supreme Court of the United States, in the case of United States v. Butler et al., 297 U.S. 1, 56 S.Ct. 312, 80 L.Ed. 477, 102 A.L.R. 914, declaring such act invalid, there was returned to complainant, by order of this court, the entire amount thus deposited in the total sum of $2,543,832.30. This sum represents the amount of processing taxes which complainant refused to pay under the Agricultural Adjustment Act, and for which it would have been liable had that act been held valid.

It is complainant's contention that the proposed levy under title 3, section 501 (a) (1) of the act in question (26 U.S.C.A. § 345 (a) (1), is not a true tax, but is an arbitrary and capricious exaction amounting to confiscation of its property; that its property will be taken by virtue of the provisions of the act without due process of law and for a public use without just compensation. It further contends that the exaction is in the nature of a penalty to be inflicted upon it because of its successful opposition to the payment of the taxes levied by virtue of the provisions of the Agricultural Adjustment Act; that it is, in effect, an attempt to nullify its relief from the payment of the processing tax and to validate that tax to the extent of the amount to be levied and collected by virtue of the challenged act; that it provides for an invalid classification of taxpayers and incomes, exempting processors who paid the processing tax and their incomes, and taxing processors who successfully resisted payment and their incomes because of such resistance. If the proposed levy is a tax, it is contended, it is not an income tax because of the arbitrary method in which it is to be calculated, having no relation to income, although limited thereby. If a tax, it is a direct tax and void for lack of apportionment, as required by article 1, section 2, clause 3, and section 9, clause 4, of the Constitution of the United States.

It is to be noted that the provisions of the act in question apply to "that portion of the net income from the sale of articles with respect to which a Federal excise tax was imposed on such person but not paid which is attributable to shifting to others to any extent the burden of such Federal excise tax." 26 U.S.C.A. § 345 (a) (1). The excise tax contemplated in this act, in so far as processors of hogs, grain, etc., are concerned, has reference to the tax created by the invalidated Agricultural Adjustment Act, and the persons affected thereby are such processors as refused to pay such taxes, or were reimbursed therefor, but, nevertheless, to some extent, shifted their burden to others. In other words, the act is intended to levy a tax upon the income of processors which was derived from a collection of such excise tax from others, retained by the processors and not paid in accordance with the provisions of the Agricultural Adjustment Act. This places in the same class all persons who derived and retained a net income from that source and seeks to tax that income at a higher rate than the ordinary income received by such persons. Persons may be engaged in the same line of business, that is, in the processing of meat, and yet be in a different class for the purpose of determining their taxing status. See State Board of Tax Commissioners et al. v. Jackson, 283 U.S. 527, 51 S.Ct. 540, 543, 75 L.Ed. 1248, 73 A.L.R. 1248.

The Sixteenth Amendment to the Constitution grants to Congress the "power to lay and collect taxes on incomes, from whatever source derived, without apportionment among...