Piedmont & N. Ry. Co. v. Query

• Decision Date: 02 February 1932
• Citation: 56 F.2d 172
• Court: U.S. District Court — District of South Carolina
• Parties: PIEDMONT & N. RY. CO. v. QUERY et al.

56 F.2d 172 (1932)

PIEDMONT & N. RY. CO. v. QUERY et al.

District Court, E. D. South Carolina.

February 2, 1932.

J. C. McGowan, of Charlotte, N. C. (Haynsworth & Haynsworth, of Greenville, S. C., and W. S. O'B. Robinson and J. H. Marion, both of Charlotte, N. C., on the brief), for complainant.

John M. Daniel, Atty. Gen., of South Carolina, and J. Fraser Lyon, of Columbia, S. C., for defendants.

Before PARKER, Circuit Judge, and ERNEST F. COCHRAN and GLENN, District Judges.

PARKER, Circuit Judge.

This is a suit instituted by the Piedmont & Northern Railway Company against the members of the South Carolina tax commission to enjoin the enforcement of an assessment of additional income taxes for the years 1926, 1927, 1928, and 1929, amounting in all to $35,426.21, against the railway company. Complainant is a South Carolina corporation. It owns two entirely disconnected lines of railroad, one entirely in South Carolina extending from Spartanburg to Greenwood, a distance of 101 miles; and the other entirely in North Carolina extending from Charlotte to Gastonia, a distance of 26 miles. These lines of railroad are 56 miles apart at the nearest point and are separately operated except as to certain expenses for general management. During the years in question complainant paid tax under the South Carolina statute on the entire net income of the railroad in South Carolina, including its earnings from interstate as well as from intrastate commerce. It paid no tax, however, on the income of the railroad in North Carolina. The defendants contend that complainant should be taxed on the net income of the intrastate traffic of the South Carolina road plus a mileage proportion of the combined net income from interstate commerce of the two roads; and the additional taxes were assessed on this basis. This results in an increased tax due to the fact that the South Carolina road is much longer than the North Carolina road, whereas the income of the South Carolina road from interstate traffic is not correspondingly greater. Its effect is to levy the increase in the tax upon the income from interstate commerce of the North Carolina road.

The statute under which the defendants are proceeding is the South Carolina Income Tax Act of 1926 as amended (Act April 22, 1927, 35 St. at Large, p. 362); and the portions thereof pertinent to this controversy are as follows:

"§ 4. (a) Tax on corporations. — Every corporation organized under the laws of this State shall pay annually an income tax, with respect to carrying on or doing business equivalent to four per cent. of the entire net income of such corporation, as herein defined, received by such corporation during the income years; and every foreign corporation doing business within the jurisdiction of this state shall pay annually an income tax equivalent to four per cent. of a proportion of its entire net income, to be determined as hereinafter provided in this Act.

"(b) Railroads and public service corporations: basis of ascertaining net income. — The basis of ascertaining the net income of every corporation engaged in the business of operating a steam or electric railroad, express service, telephone or telegraph business, or other form of public service, when such company is required to keep records according to the standard classification of accounting of the Interstate Commerce Commission, shall be the `net operating income' of such corporation as shown by their records kept in accordance with that standard classification of accounts, when their business is wholly within the jurisdiction of this state, and when their business is in part within and in part without the State their net income within the jurisdiction of this State shall be ascertained by taking their gross `operating revenues' within this State, including in this gross `operating revenues' within the jurisdiction of this State the equal mileage proportion within the jurisdiction of this State of their interstate business and deducting from their gross `operating revenues' the proportionate average of `operating expenses,' or `operating ratio,' for their whole business, as shown by the Interstate Commerce Commission standard classification of accounts. From the net operating income thus ascertained shall be deducted `uncollectible revenue,' and taxes paid in this State for the income year, other than income taxes, and the balance shall be deemed to be their net income taxable under this Act: Provided, That interest paid or accrued and rentals may be deducted from gross operating revenues in the event that they have not been deducted by the above provisions.

"(c) Car hire considered. — In determining the taxable income of a corporation engaged in the business of operating a railroad under the preceding section (Section (b), in the case of a railroad located entirely within the jurisdiction of this State, the net income shall be increased or decreased to the extent of any credit balance received or paid, as the case may be, on account of car hire; and when a railroad is located partly within and partly without the jurisdiction of this State, then said net operating income shall be increased or decreased to the extent of an equal mileage proportion within the jurisdiction of this State of any credit or debit balance received or paid, as the case may be, on account of car hire. * * *

"§ 13. Deductions. — In computing net income there shall be allowed as deductions: * * *

"(9) Resident individuals and corporations having an established business in another State, or investment in property in another State, may deduct the net income from such business or investment. The deduction authorized in this subsection shall in no case extend to any part of the income of resident individuals and corporations from personal services, or mortgages, stocks, bonds, securities, and deposits." Act S. C. Oct. 12, 1926 (35 St. at Large, pp. 3, 9), §§ 4 (a-c), 13 (9).

Defendants contend that, as complainant is a South Carolina corporation, that state has a right to levy an income tax upon its entire net income whether derived from interstate commerce or not; that the method followed in making the additional assessment is the one provided for assessing the income of railway corporations part of whose business is within and part without the state; that the fact that this method differs from the method adopted for taxing the income of other domestic corporations is no objection to its validity, as the state has the right to place railway corporations in a special class for the purpose of taxation; and that the fact that this method taxes a part of the interstate revenue of the North Carolina line of complainant without taxing its intrastate revenue is not a matter of which complainant can complain, as it is within the power of the state to tax its entire revenue. Complainant, on the other hand, contends that the statute when properly construed does not authorize the imposition of the tax on any part of the revenue of the line lying entirely beyond the state and not operated as a part of a system with a line within the state, but that, if construed as authorizing the imposition of such a tax, it infringes the constitutional rights of complainant; that the order of the commission imposing the tax violates the equal protection clause of the Fourteenth Amendment, in that it arbitrarily discriminates between domestic and foreign railroad corporations and also between railroad and other corporations; and that the order violates the commerce clause of the Constitution, in that it discriminates against interstate commerce in taxing the income of the North Carolina line derived from interstate commerce without taxing its income derived from intrastate commerce.

The bill of complaint presents not merely the question as to the constitutionality of the statute, but also the question as to the constitutionality of the action of the South Carolina Tax Commission. Judicial Code § 266 (28 USCA § 380); Oklahoma Natural Gas Co. v. Russell, 261 U. S. 290, 43 S. Ct. 353, 67 L. Ed. 659; Southern R. Co. v. Query (D. C.) 21 F.(2d) 333, 337. And if either of these is a substantial question under the Constitution, we must proceed with the consideration of the other questions presented; for in such case the jurisdiction of the court extends to every question involved, whether of federal or state law, even though the court may not find it necessary to decide the federal question. Greene v. Louisville & Interurban R. Co., 244 U. S. 499, 37 S. Ct. 673, 61 L. Ed. 1280, Ann. Cas. 1917E, 88; Louisville & N. R. Co. v. Greene, 244 U. S. 522, 37 S. Ct. 683, 61 L. Ed. 1291, Ann. Cas. 1917E, 97; Davis v. Wallace, 257 U. S. 478, 482, 42 S. Ct. 164, 66 L. Ed. 325; Atlantic Coast Line R. Co. v. Doughton, 262 U. S. 413, 416, 43 S. Ct. 620, 67 L. Ed. 1051. We think it clear that the constitutional questions so presented are substantial.

As to the questions of classification raised under the Fourteenth Amendment, it is undoubtedly well settled that a state may classify railroad corporations separately from other corporations for purposes of taxation; but, of course, such classification must have reasonable relation to some proper legislative purpose. A classification which subjects the net interstate income of a railroad maintaining an interstate system to taxation on the mileage proportion basis clearly has such relation under ordinary circumstances; but we must consider same not in vacuo but as it affects the business of complainant, and when applying the mileage proportion basis to interstate income results in taxing the income of a line of railroad operated independently in another state, an entirely different aspect is placed upon the matter. It is hard to see any reasonable basis for taxing a railroad corporation upon business done entirely in another state while exempting other domestic corporations on out of state business. Where a line of railroad runs into other...