Benner-Coryell Lumber Co. v. Indiana Unemployment Compensation Bd.

• Decision Date: 08 November 1940
• Docket Number: 27429.
• Citation: 29 N.E.2d 776,218 Ind. 20
• Parties: BENNER-CORYELL LUMBER CO., Inc., v. INDIANA UNEMPLOYMENT COMPENSATION BOARD.
• Court: Indiana Supreme Court

29 N.E.2d 776

218 Ind. 20

BENNER-CORYELL LUMBER CO., Inc., v. INDIANA UNEMPLOYMENT COMPENSATION BOARD.

No. 27429.

Supreme Court of Indiana

November 8, 1940

Appeal from Wabash Circuit Court; Byron C. Kennedy, Judge.

John R. Browne, John O. Campbell, Robert A. Gemmill, and John R Browne, Jr., all of Marion, for appellant.

Samuel D. Jackson, Atty. Gen., Joseph P. McNamara, Deputy Atty Gen., and Thomas M. Quinn, Jr., Chief Counsel, Un. Comp. Div., and Charles W. Grubb, Atty., Un. Comp. Div both of Indianapolis, for appellee.

SHAKE Judge.

This case calls into question the validity of § 2(g)(4) of the Indiana Unemployment Compensation Law. Acts of 1939, ch. 121, § 1 amending § 2(g)(4), § 52-1502(g)(4) Burns' 1933, Pocket Supp., § 10168-2(g)(4) Baldwin's, 1939 Supp. Said section provides that the term 'employer' in said act means: 'Any employing unit which together with one (1) or more other employing units, is owned or controlled directly or indirectly by the same interests, or which owns or controls one or more other employing units, and which, if treated as a single unit with such other employing units or interests, or both, would be an employer under paragraph (1) of this subsection.' The language used is to be construed in connection with § 2(g)(1) of said act, by which an employer is further defined as a unit having in its employ eight or more persons.

The appellant is an Indiana corporation, with its office and principal place of business in the town of LaFontaine, Wabash County. It is engaged in the retail lumber business and employs less than eight persons. Its capital stock is represented by 90 shares, 60 of which are owned by Bertha J. Coryell. Said Bertha J. Coryell also owns 185 out of 300 shares of the common stock of the Fairmount Lumber Company, a domestic corporation engaged in the lumber business at Fairmount, in Grant County, and which likewise employs less than eight persons. Together, said corporations employ more than eight persons. The minority stockholders of the respective corporations are not the same persons. The state assessed unemployment compensation taxes against the appellant, which it paid under protest. It then brought this suit for a refund. The state answered, reciting the above facts; the appellant demurred to the answer; the trial court overruled the demurrer; the appellant refused to plead further; and judgment was rendered in favor of the state. The error relied on is presented by the ruling on said demurrer.

The appellant contends that the section of the Unemployment Compensation Law quoted above is unconstitutional when applied to the facts admitted by the pleadings. It asserts that the corporations concerned are separate and distinct legal entities, and that their classification for taxing purposes on the basis of the combined number of their employees violates § 1 of article 10 of the Constitution of Indiana, which provides for a uniform and equal rate of assessment and taxation, and the provision of the Fourteenth Amendment to the federal Constitution which guarantees to citizens (including corporations) equal protection of the laws. It is to be noted that no elements of fraud or intentional tax evasion are involved in this case, nor is there any showing of joint management of the two corporations or any other relationship between them beyond the fact that Bertha J. Coryell owns a controlling interest in the common stock of each. It is urged that to hold the statute valid as it is sought to be applied here, would unjustly penalize minority stockholders of corporations, who have no control over the transfer of stock not held by them, and are therefore powerless to prevent a majority of such stock from gravitating into the hands of one person who may at the same time own, or thereafter acquire, a controlling interest in another corporation, thereby subjecting, indirectly, said minority holders to the burden of taxes not imposed upon corporations otherwise situated.

The taxes imposed by the Indiana Unemployment Compensation Law are excise and not property taxes. Carmichael v. Southern Coal & Coke Co., 1937, 301 U.S. 495, 57 S.Ct. 868, 81 L.Ed. 1245, 109 A.L.R. 1327; Charles C. Steward Mach. Co. v. Davis, 1937, 301 U.S. 548, 57 S.Ct. 883, 81 L.Ed. 1279, 109 A.L.R. 1293. Section 1 of article 10 of the Constitution of Indiana, which provides for a uniform and equal rate of assessment and taxation and forbids exempting propery except for specific purposes, applies only to property taxes under a general levy. Miles v. Dept. of Treasury, 1935, 209 Ind. 172, 199 N.E. 372, 101 A.L.R. 1359.

The question which we are called upon to answer is therefore reduced to this: Do the owners of a majority of the stock of a corporation have such control thereof as to make their ownership or control the basis of classification for the purpose of imposing excise taxes on such corporations in the manner prescribed by the act under consideration? That a corporation is a legal entity separate and distinct from its stockholders, individually or collectively considered, is not open to debate. It is equally well established that a majority of the stockholders have the right to manage and control the corporation, under certain limitations, and that those who acquire such stock are deemed to know that fact and to take it subject to that right. Enterprise, etc., Pub. Co. v. Craig, 1924, 195 Ind. 302, 144 N.E. 542, 145 N.E. 309; Barnes v. Brown, 1880, 80 N.Y. 527; First Nat. Bank v. Fireproof S. B. Co., 1925, 199 Iowa 1285, 202 N.W. 14.

Ownership of corporate stock is recognized as a proper basis of classification under some circumstances. Thus it has been held that the federal government might require consolidated income tax returns of two brothers who owned 94.4 per cent. of the stock of one corporation and 99.6 per cent. of another. This was upon the theory that the corporations were affiliated within the meaning of a statute which provided that: "For the purpose of this section two or more domestic corporations shall be deemed to be affiliated * * * (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests." United States v. Whyel, D.C., 1927, 19 F.2d 260, 261. This was a District Court case, thereafter affirmed on other grounds by the Circuit Court of Appeals. United States v. Whyel, 3 Cir., 1928, 28 F.2d 30. Certiorari was denied by the Supreme Court. United States v. Whyel, 1929, 278 U.S. 664, 49 S.Ct. 178, 73 L.Ed. 570. So, also, statutes imposing license fees according to the number of establishments "under the same general management, supervision or ownership," have been sustained. State Board of Tax Commissioners v. Jackson, 1931, 283 U.S. 527, 531, 51 S.Ct. 540, 75 L.Ed. 1248, 73 A.L.R. 1464, 75 A.L.R. 1536; Fox v. Standard Oil Co., 1935, 294 U.S. 87, 55 S.Ct. 333, 79 L.Ed. 780. None of the above cases considered the subject of discrimination against a corporation where the imposition of a tax was dependent upon the ownership of a mere controlling interest of its stock. The only case that we have found where the precise question here presented was before a court of last resort is Independent Gasoline Co. v. Bureau of U. Compensation, Ga.Sup., 1940, 10 S.E.2d 58, 59. The Georgia statute provides: "Any employing unit, which together with one or more other employing units, is owned or controlled (by legally enforceable means or otherwise) directly or indirectly by the same interests, * * * and which, if treated as a single unit with such other employing units, * * * would be an employer under Paragraph (1) of this subsection." The case is so nearly like the one we are called upon to decide, that we quote liberally from it. In the majority opinion, the court said: 'But it is contended that the legislature was authorized to place this defendant in a classification different from similar corporations and individuals, because of the fact that the owner of a majority of its stock owns a majority of the stock of another corporation, and that the two corporations are...