Atlantic Coast Line Co v. Doughton Norfolk Southern Co v. Same Seaboard Air Line Ry Co v. Same Southern Ry Co v. Same
| Decision Date | 04 June 1923 |
| Docket Number | No. 744,No. 724,No. 756,No. 727,724,727,744,756 |
| Citation | 43 S.Ct. 620,67 L.Ed. 1051,262 U.S. 413 |
| Parties | ATLANTIC COAST LINE R. CO. v. DOUGHTON, Commissioner of Revenue, et al. NORFOLK SOUTHERN R. CO. v. SAME. SEABOARD AIR LINE RY. CO. v. SAME. SOUTHERN RY. CO. v. SAME |
| Court | U.S. Supreme Court |
Mr. Thomas W. Davis, of Wilmington, N. C., for appellant Atlantic Coast Line R. Co.
[Argument of Counsel from page 414 intentionally omitted] Mr. W. B. Rodman, of Norfolk, Va., for appellant Norfolk Southern R. Co.
Mr. Murray Allen, of Raleigh, N. C., for Seaboard Air Line Ry. Co.
Mr. S. R. Prince, of Washington, D. C., for appellant Southern Ry. Co.
Messrs. Geo. H. Brown, of Washington, N. C., and Wm. P. Bynum, of Greensboro, N. C., for appellees.
The Constitution of North Carolina () authorizes the General Assembly to tax incomes at a rate not exceeding 6 per cent. The Income Tax Act of March 8, 1921 (Revenue Act, c. 34, schedule D, §§ 100-904, chapter 35, Public Laws 1921), laid upon corporations a tax equal to 3 per cent. of the entire net income as therein defined and upon individuals a progressive tax not exceeding that percentage. For the purpose of ascertaining the taxable income, the statute divides taxpayers into three classes—individuals, ordinary corporations, and public service corporations (including railroads). The statute, in terms, taxes only net income. For railroads and other public service corporations required to keep accounts according to the method established by the Interstate Commerce Commission, it makes those accounts the basis for determining the 'net operating income' (section 202 as amended), and it directs that, in order to ascertain the 'net income,' there shall be deducted from the net operating income (a) uncollectible revenue; (b) taxes for the income year, other than income taxes, and war profits and excess profits taxes; (c) amounts paid for car hire. Whether the statute is unconstitutional, ecause it fails to include among the deductions from income allowed public service corporations the capital charges, including other rentals paid, is the main question for decision.
The first year's tax under the act was payable in 1922, with respect to the net income received during the calendar year 1921. To enjoin its enforcement these four corporations brought suit in the federal court for the Eastern district of North Carolina against the commissioner of revenue and others. Each plaintiff owns and operates a line of railroad within the state, and is an interstate carrier. Each assails the statute on the grounds that it violates the commerce clause, the Fourteenth Amendment, and the state Constitution, and only on these grounds. Each case was heard upon the merits, and in each a final decree was entered dismissing the bill. Appeals were taken under section 238 of the Judicial Code (Comp. St. § 1215), and orders of the District Court stayed collection of the taxes pending the determination of the appeals. Since the cases are properly here on federal questions, all questions presented by the record, whether involving federal law or state law, must be considered. Southern Railway Co v. Watts, 260 U. S. 519, 43 Sup. Ct. 192, 67 L. Ed. ——.
It is conceded by appellants that taxation of the net income of an interstate carrier does not violate the commerce clause, United States Glue Co. v. Oak Creek, 247 U. S. 321, 38 Sup. Ct. 499, 62 L. Ed. 1135, Ann. Cas. 1918E, 748; Shaffer v. Carter, 252 U. S. 37, 57, 40 Sup. Ct. 221, 64 L. Ed. 445; Underwood Typewriter Co. v. Chamberlain, 254 U. S. 113, 41 Sup. Ct. 45, 65 L. Ed. 165; and by the state, that taxation of gross receipts would be void as burdening interstate commerce, Galveston, Harrisburg & San Antonio Ry. Co. v. Texas, 210 U. S. 217, 28 Sup. Ct. 638, 52 L. Ed. 1031. It is conceded by appellants that classification of public service corporations, and specifically of railroads, for purposes of taxation does not violate the Fourteenth Amendment Bell's Gap Railroad Co. v. Pennsylvania, 134 U. S. 232, 237, 10 Sup. Ct. 533, 33 L. Ed. 892: Southern Railway Co. v. Watts, 260 U. S. 519, 43 Sup. Ct. 192, 67 L. Ed. ——; and by the state, that an arbitrary classification is obnoxious to the equal protection clause, Southern Ry. Co. v. Greene, 216 U. S. 400, 30 Sup. Ct. 287, 54 L. Ed. 536, 17 Ann. Cas. 1247. The contentions are that the statute, in fact, taxes gross income; that the classification as made by it is unreasonable; and that for these and other reasons it violates both the federal and the state Constitution. All the contentions are, in our opinion, unsound. To appreciate the objections urged, and to present the reasons for holding them groundless, it is necessary to show the incidence of the tax. This may be done by examining how the assessment of $13,133.09 made upon the Seaboard Air Line, and here assailed, was calculated.
The Seaboard being an interstate carrier, the accounts were kept as required by the Interstate Commerce Commission. Interstate business was apportioned, as customary, according to mileage. The results of operations within the state calculated according to the statute were these:
Operating revenues............... $8,457,328 52
Operating expenses................ 7,308,823 29
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Net operating income........... $1,148,505 23
From the net operating income were deducted:
Uncollectible revenue............... $ 6,342 32
Taxes paid.......................... 410,043 38
Car hire............................ 294,350 02
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Additional deductions............. $710,735 71
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Net taxable income................ $437,769 52
Tax on $437,769.52,
at 3 per cent................... $13,133.09
Thus, about 1/20 of the operating revenues of the Seaboard was subjected to taxation. To this one-twentieth the 3 per cent. income tax was applied. The tax assessed ($13,133.09) is about 1/650 of the total operating revenues $8,457,328.52.
That the calculation is correct, in accordance with the statute, is not disputed; that s, the net income earned, in 1921, by the Seaboard's lines in North Carolina was as calculated $437,769.52. The Seaboard insists that it had no net income taxable in North Carolina, but, on the contrary, a loss, of which $254,290.22 was apportionable to North Carolina. The loss is figured in this way:
Net income as calculated 33
under the statutes................. $437,769 52
Non-operating income—not
taken into account under the
statute1................ 539,643 30
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Total net income $977,412 82
From which deduct:
Capital charges (including rents paid)
not taken into account under the
statute2............. $1,231,703 04
------------
Net loss or deficit........... $ 254,290 223
Thus the state takes, as the entity to be taxed, the railroad property operated by the Seaboard within the state. Therefore it takes, as the primary basis for the tax, only operating revenues; that is, the gross receipts from operating such property. The Seaboard, on the other hand, assumes, as the entity which should be taxed, the company in respect to its North Carolina interests. Therefore the Seaboard takes, as the primary basis for the tax, in addition to the operating revenues of the lines within the state, North Carolina's proportion of the nonoperating income of the company derived from other property owned by it, wherever situated. For the Seaboard, like most other railroad systems, is, to some extent, a holding company, as well as an operating company, and, as holding company, receives dividends from other concerns, interest on bonds of other concerns, and rental from property owned but not operated. As the state treats the operated property as the entity, it does not concern itself with interest charges and the rentals paid, just as it does not concern itself with a mortgage upon the real estate when it lays the ad valorem tax. On the other hand, as the Seaboard treats the company—the person—as the entity to be taxed, it undertakes to ascertain the net income of the company. This includes as gross income, a proportion of the receipts from property not within the state and includes among the deductions from the gross income of the company, the capital charges.
That a state may, consistently with the federal Constitution, impose a tax upon the net income of property, as distinguished from the net income of him who owns or operates it, although the property is used in interstate commerce, was settled in Shaffer v. Carter, 252 U. S. 37, 44, 52, 40 Sup. Ct. 221, 64 L. Ed. 445. There an Oklahoma statute was sustained which laid the tax upon the net income of Oklahoma oil property owned by a citizen and resident of Illinois. The federal Constitution which permits to be taxed the net income of property owned by an individual although a citizen of another state, obviously does not preclude such a tax where the property is owned or operated by a corporation. It is a common provision in state income tax laws to tax the net income of property within the state which is owned, or operated, by nonresidents.4 The differences between the parties arise, in the main, not from difference in the method of determining what is net income, but from difference as to what is the subject of the tax. In other words, they differ as to the thing of which the net income is to be ascertained. This will appear from an examination of the several grounds on which the validity of the statute is assailed.
First. The contention that the statute is obnoxious to the commerce...
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