Chestnut Securities Co. v. Oklahoma Tax Commission

• Decision Date: 13 April 1942
• Docket Number: No. 2289.,2289.
• Citation: 125 F.2d 571
• Parties: CHESTNUT SECURITIES CO. v. OKLAHOMA TAX COMMISSION.
• Court: U.S. Court of Appeals — Tenth Circuit

125 F.2d 571 (1942)

CHESTNUT SECURITIES CO. v. OKLAHOMA TAX COMMISSION.

No. 2289.

Circuit Court of Appeals, Tenth Circuit.

January 16, 1942.

Writ of Certiorari Denied April 13, 1942.

Richard B. McDermott, of Tulsa, Okl. (Charles A. Coakley and G. Ellis Gable, both of Tulsa, Okl., on the brief), for appellant.

F. M. Dudley, of Oklahoma City, Okl. (A. L. Herr and C. D. Stinchecum, both of Oklahoma City, Okl., on the brief), for appellee.

Before PHILLIPS, MURRAH, and WILLIAMS, Circuit Judges.

Writ of Certiorari Denied April 13, 1942. See 62 S.Ct. 1035, 86 L.Ed. ___.

MURRAH, Circuit Judge.

The State of Oklahoma assessed and collected the statutory tax on the income from certain intangible securities owned by the taxpayer, the Chestnut Securities Company, a Delaware corporation, licensed and doing business in the State of Oklahoma, for the taxable years 1936, 1937 and 1938. The intangible securities in question and the income therefrom have at all times remained physically outside of the State of Oklahoma.

This suit is for recovery of the tax and jurisdiction is based on diversity of citizenship and the requisite amount in controversy. The trial court held that by reason of the nature and extent of the business carried on or transacted in the State of Oklahoma by the taxpayer, the intangible property acquired a taxable or business situs in the State, as a consequence of which the income therefrom was subject to the income tax laws of the State of Oklahoma. The taxpayer has appealed.

The questions for decision are (1) does the nature and extent of the business carried on or transacted within the State of Oklahoma bring its income within the scope of the taxing act, and (2) if the taxpayer and its income falls within the scope of the act, does the asserted power to tax contravene the "Due Process" and "Equal Protection" clauses of the Fourteenth Amendment to the Constitution.

"Taxable situs" or jurisdiction to tax depends upon our answer to the stated propositions.

In 1935, the State of Oklahoma enacted a new and comprehensive tax law, Title 68, Okl.St.Ann. §§ 871 to 913, incl. Laws of 1935, page 286, House Bill No. 192, effective April 23, 1935. Section 6 of the said Act, Sec. 876, Okl.St.Ann. § 68, provides: "(a) A tax is hereby levied upon every person as defined in Section 4(b), 68 Okl.St.Ann. § 874(b) The term "person" means an individual, a trust or estate, a partnership or a corporation, which tax shall be collected and paid, for each taxable year, upon, and with respect to, the entire net income of such person, which is derived from all property owned and/or business transacted within this State. * * *" Section 5(a) of the said Act, Sec. 875(a), Title 68, Okl.St.Ann., provides: "The term `property owned', as used in Section 6, shall, for the purpose of this Act, include the classes of property hereinafter enumerated in this Section, and a taxable situs within the State of Oklahoma is hereby declared to exist with respect to the following: * * * (2) All unsecured obligations (or other evidences of debt), all obligations or debts secured by mortgages or liens upon property located here or elsewhere, all stocks in any corporation and bonds of any State or municipal or political subdivision thereof.

"(b) The term `resident,' as herein used, refers not only to a resident individual, as defined in Section 4(j),¹ but, in addition, refers to and includes any corporation whose principal business is carried on or transacted in Oklahoma. Such a corporation shall be deemed to be a resident of this State, for income tax purposes, and its income shall be determined, and the tax thereon collected and paid, as if it were incorporated under the laws of Oklahoma, notwithstanding its corporate domicile is elsewhere."

Manifestly, it was the legislative purpose to provide a uniform system of taxation with respect to and upon income from all sources within the realm of its jurisdiction. The purpose and effect of Section 4(j) (See Note 1) is to bring any individual who maintains a place of abode within the State and spends in the aggregate more than seven months of the taxable year there, within the scope of the taxing Act, regardless of the fact that such individual person may have declared his domicile to be elsewhere. Likewise, the purpose and effect of Section 5(b) is to bring any corporation whose principal business is carried on or transacted in Oklahoma within the scope of the taxing Act, notwithstanding its corporate domicile is designated elsewhere.

This brings us to the question of whether the activities of the taxpayer within the State of Oklahoma bring them within the category of those corporations carrying on or transacting their principal business within the State. The facts are not materially in dispute, but their legal effect, when measured by the definitive provisions of Section 5(b), is in controversy.

The taxpayer corporation was chartered by the State of Delaware on December 2, 1931, and licensed to do business in the State of Oklahoma on December 28, 1931. Consistent with its declared corporate purposes, soon after its incorporation it acquired certain intangible securities consisting of stocks, bonds and notes. It also acquired a small office building located in Tulsa, Oklahoma. Wilmington, Delaware, was designated as the principal place of business in the corporate charter, however all of its stockholders and directors resided at Tulsa, Oklahoma, and all of the meetings of the Board of Directors, at which was formulated and adopted the business policies of the corporation, were at all times held in Tulsa.

On January 31, 1932, the taxpayer sold the small office building located in Oklahoma and permitted its license to do business in the state to lapse as of July 21, 1933. Thereafter it was not licensed to do business within the State of Oklahoma until October 1936, when it acquired a nonoperating interest in oil and gas properties within the State, whereupon it renewed its license to do business within the State on October 21, 1936, and was at all times during the taxable years in question duly licensed to do business within the State of Oklahoma.

During this time, the corporate affairs were managed and controlled by the Board of Directors at their meetings in Tulsa, Oklahoma. No person outside of the State of Oklahoma had authority to transact any business for and on behalf of the company except as ordered by the Board of Directors at Tulsa, Oklahoma. It maintained an office in Delaware, apparently through a corporation service company, as permitted by the laws of that State. The office was in charge of a part-time employee, designated as Assistant Secretary, who received a salary of $25 per month. The Assistant Secretary, in the performance of his duties, received the income from the intangible investments of the corporation and from other sources, depositing the same in a bank at Wilmington to the credit of the corporation. He was also custodian of the physical evidence of certain intangible investments of the corporation, and it was his duty to make delivery of the intangibles when sold or to receive the same when purchased, to keep books of account, and transmit duplicates to the secretary and treasurer who resided at Tulsa, Oklahoma. He had no authority to draw checks on the bank account or to purchase any securities or properties of any kind, or to dispose of any assets of the corporation, except at the direction of the Board of Directors, or managing officers at Tulsa, Oklahoma.

The taxpayer employed the Union Trust Company of Pittsburgh, Pennsylvania, as its agent in handling certain of its intangible investments. This agency held certain of the funds of the corporation as well as the physical evidence of the intangible assets. It received the income from the same and disposed of it only at the direction of the Board of Directors or managing officers at Tulsa, Oklahoma.

A part of the intangible investments and the income therefrom was in the custody of the Missouri Valley Trust Company of St. Louis, Missouri, who exercised like functions at the direction of the corporate officers in Tulsa, Oklahoma. The intangible securities were purchased or sold upon the New York Stock Exchange. When sold or purchased, delivery and payment therefor was made in New York City. No person or corporation outside of the State of Oklahoma had authority to buy, sell, or exchange the intangible assets of the corporation, or to issue any check for the payment of same, except the corporate officers in Tulsa, Oklahoma.

In reality, the taxpayer is a corporation organized under the laws of Delaware, its corporate officers and stockholders reside at Tulsa, Oklahoma. Primarily it is engaged in the business of acquiring and holding intangible securities for investment purposes. A small part of the income from the intangible securities is invested in mineral properties located in Texas and Oklahoma, but it does not operate these properties and their ownership there is of but little consequence in the consideration of the question presented. The corporate officers determine the business policies of the company at Tulsa, Oklahoma; the nerve center of all business and of all transactions is located there; no transaction is consummated unless and until the directors, residing in Tulsa first determine upon the action to be taken. For purposes of convenience, all of the intangible assets of the company are located outside of the State of Oklahoma, and the mechanical acts by which the assets are purchased and sold, and the income realized thereon, are performed outside of the State of Oklahoma, yet the determinative acts by which the intangible assets are acquired, and the income realized, are performed in the State. After the Board of Directors at Tulsa, Oklahoma determine to purchase or sell a particular security, they notify their broker at Pittsburgh, St. Louis, or elsewhere, to purchase or sell the same, as ...