Cleveland-Cliffs Iron Co. v. Michigan Corp. and Securities Commission

• Decision Date: 01 June 1957
• Docket Number: No. 44,CLEVELAND-CLIFFS,44
• Citation: 88 N.W.2d 564,351 Mich. 652
• Parties: TheIRON COMPANY, an Ohio corporation, Plaintiff and Appellant, v. MICHIGAN CORPORATION and SECURITIES COMMISSION, Defendant and Appellee. ,
• Court: Michigan Supreme Court

Page 564

88 N.W.2d 564

351 Mich. 652

The CLEVELAND-CLIFFS IRON COMPANY, an Ohio corporation Plaintiff and Appellant, v. MICHIGAN CORPORATION and SECURITIES COMMISSION, Defendant and Appellee.

No. 44, June Term, 1957.

Supreme Court of Michigan.

March 6, 1958.

Snyder & Loomis, Lansing, Jones, Day, Cockley & Reavis, Cleveland, Ohio, for appellant.

Thomas M. Kavanagh, Atty. Gen., Edmund E. Shepherd, Sol. Gen., Lansing, T. Carl Holbrook, William D. Dexter, Asst. Attys. Gen., for appellee.

Before the Entire Bench.

SMITH, Justice.

The problem before us antedates our statehood. It has not been simplified by the increasing complexities of modern business practices. It relates to a state's jurisdiction to tax a business conducted both within and without its borders.

The corporation before us, the appellant, is an Ohio corporation with its executive offices, its general business and sales offices, and its principal accounting office in Cleveland, Ohio. This corporation, for the years in question, was qualified as a foreign corporation in the states of Illinois, Indiana, Kentucky, Michigan, Minnesota, New York, North Carolina, Pennsylvania, Virginia, West Virginia, Wisconsin, and Tennessee. It operated extensively in this State. Here it owned and operated iron mines which produced approximately 53 per cent. of all iron ore shipped by it, from all sources, in 1951. The general manager of all iron mines of the corporation, both in State and out, was located in Ishpeming, Michigan. The major portion of the corporation's iron ore reserves in 1951 and 1952 were located in the Marquette Range in this State. It also dealt in coal on an extensive basis, purchasing from mines in Kentucky, Pennsylvania, Ohio, Virginia, West Virginia, and Illinois, and selling to buyers in many states, including Michigan, in which State it both made deliveries and maintained (in Detroit) a 'local sales office.' It operated, upon the Great Lakes, an extensive fleet of cargo carrying vessels, by means of which it transported iron ore, grain, and stone from many, including Michigan, ports to other ports, including Detroit. The operations were apparently coordinated. Appellant points out to us that, 'The coal handled, purchased and sold by Cleveland-Cliffs furnished much of the upbound lake cargo for these vessels from Lake Erie ports to ports in Michigan, Wisconsin, Minnesota and Canada, and the iron ore mined or purchased by it in Michigan and Minnesota or purchased by it in Canada furnished much of the down-bound lake cargo for these vessels.' It owned what the appeal board described as 'vast timber and ore lands' within our borders. It had a land and lumbering department office in Negaunee, Michigan. In addition, we find, from stipulated facts, that on December 31, 1951, the corporation had at least 50 per cent. interest in some 11 Michigan corporations, with substantial or minor interests in 3 others, including mining companies, a coal and dock company, a railroad, a chemical company, a power and light company, a hospital, a hotel, and a real estate company. ¹ What we have here is an extensive economic complex, the activities of which transcend state lines as readily as those of businesses of a simpler day crossed the borders of our townships and counties. It does not appear to us that any of appellant's operations is purely interstate in character. In fact appellant admits in its reply brief, that 'The actual 'activities' carried on by Cleveland-Cliffs in Michigan were the mining of iron ore, operation of iron mines, sale of timber, sale of coal and transportation of iron ore and coal on the Great Lakes.' It is stipulated that the vessel-operating department operated a fleet which transported 'coal from Illinois ports on Lake Michigan and Lake Erie ports outside Michigan to ports in Michigan, Wisconsin, Minnesota and Canada and transported iron ore, grain and stone from ports in Canada, Minnesota, Wisconsin and Michigan to lower lake ports in Illinois, Indiana, Ohio and New York, and to Detroit, Michigan.' The appeal board found that 'a substantial part of the overall business activities of the appellant were conducted in the State of Michigan,' and that appellant's steel stocks in its investment portfolio 'were used for its overall business, including its Michigan business.' For the purposes of the franchise privilege tax here under consideration, and in the light of the facts so found and before us, we approach decision from the point of departure that appellant does a mixed business, both interstate and intrastate, and hence we are not concerned with the precedents established for exclusively interstate businesses either under the due process clause, Alpha Portland Cement Co. v. Commonwealth of Massachusetts, 268 U.S. 203, 45 S.Ct. 477, 69 L.Ed. 916, or the commerce clause, Joseph v. Carter & Weekes Stevedoring Co., 330 U.S. 422, 67 S.Ct. 815, 91 L.Ed. 993; Spector Motor Service, Inc., v. O'Connor, 340 U.S. 602, 71 S.Ct. 508, 95 L.Ed. 573.

We must advert at the outset, also, to another aspect of appellant's business. The appeal board found that 'all of appellant's business activities, though departmentalized, ² appear to be otherwise integrated and subject to central supervision, control and management from appellant's officers in Cleveland, Ohio.' The board also stated in its 'opinion and decision,' that 'An examination of the briefs on the argument indicates that Cleveland-Cliffs is a unitary business and not a business multiform in character as is argued by the appellant.'

The tax here under consideration is the annual corporate franchise fee imposed upon 'every cooperative association and every profit corporation organized or doing business under the laws of this state, or having the privilege to do business * * * in this state.' C.L.S.1952, § 450.304 (Stat.Ann.1953 Cum.Supp. § 21.205). For such privilege it is provided that a foreign corporation shall pay a franchise fee computed in accordance with an apportionment formula. Different formulae are used for different corporate activities (e. g., 'carrier by aircraft' formula in section 5a of C.L.S.1956, § 450.305a, Stat.Ann.1955 Cum.Supp. § 21.208 ; 'railroads' formula in 5b, et cetera). As to the corporation before us the defendant commission applied the apportionment formula set forth in section 5 of the act. ³ This is the apportionment formula generally known as the Massachusetts formula, comprising elements of property, payroll, and sales. Each of the factors employed is expressed in fractional form (e. g., local wages over total wages) and the fractions are averaged. Section 5 prescribes that the resultant fraction be then multiplied against the paidup capital and surplus, to which final figure the tax rate is applied.

Against this background we approach the primary issue in the case. Among the items included in the capital and surplus of appellant corporation, upon which the franchise fee was based, were certain steel stocks owned by appellant, the average book value of which was in excess of $27,000,000. ⁴ They comprised some 27 per cent. of the company's total assets. It is the position of the corporation that these steel stocks should be excluded from its assets in determining its book value net worth, thus substantially lowering its tax. 'These securities,' it asserts, 'do not form an integral part of the activities of Cleveland- Cliffs in Michigan and, therefore, allocating a portion of their value to Michigan, in the method adopted by the Commission, does not properly reflect the activity, business, receipts and capital of Cleveland-Cliffs reasonably attributable to Michigan but rather, on this point, insofar as it allocates a portion of their value to Michigan, distorts such activities.' Failure to make such exclusion, appellant asserts, denies it due process and equal protection of the laws in violation of the Constitutions of Michigan (art. 2, §§ 1 and 16) and of the United States (Amendment 14) and violates the commerce clause of the Constitution of the United States (art. 1, § 8).

The facts with respect to these controverted securities were found by the corporation tax appeal board as follows:

'11. That the appellant's investment portfolio, including its investments in steel stocks for the period in question, was used generally in the appellant's business, including the business activities of the appellant carried on within the state of Michigan.

'12. That the record is void of any proof of disassociation of appellant's steel stocks from its business activities in Michigan, with the exception that in the opinion of one of appellant's officers it was not necessary to own the steel stocks for proper disposal of its iron ore in 1951 and 1952, although historically the ownership of steel stocks has been a factor in the sale of iron ore.

'13. That the appellant's steel stocks in its investment portfolio were used for its over-all business, including its Michigan business, in the following specific particulars in 1951-1952: as an asset for general credit purposes; by using the dividend income that went into the general corporate account as working capital; by sales and use of the proceeds of the sales for the years 1951 and 1952 as part of working capital; and by the use of the sale proceeds and dividend income for various capital outlays, including the acquisition of fifty per cent. interest in the Humboldt Mines in Michigan, and the investment in Michigan in additional mining equipment and development regarding low grade ores.'

These findings are binding upon us if supported by competent evidence. Chicago, Duluth & Georgian Bay Transit Co. v. Michigan Corporation & Securities Commission, 319 Mich. 14, 29 N.W.2d 303. In view of appellant's challenges thereto we will examine in detail the record with respect to the principal conclusions in the findings made. Thus the board found that the appellant's steel stocks were used for over-all business...