District of Columbia v. General Motors Corporation

• Decision Date: 13 February 1964
• Docket Number: No. 17017,17018.,17017
• Parties: DISTRICT OF COLUMBIA, Petitioner, v. GENERAL MOTORS CORPORATION, Respondent.
• Court: U.S. Court of Appeals — District of Columbia Circuit

336 F.2d 885 (1964)

DISTRICT OF COLUMBIA, Petitioner, v. GENERAL MOTORS CORPORATION, Respondent.

Nos. 17017, 17018.

United States Court of Appeals District of Columbia Circuit.

Reargued May 15, 1963.

Decided February 13, 1964.

On Petition for Modification of Judgment May 7, 1964.

Certiorari Granted October 26, 1964.

Mr. Henry E. Wixon, Asst. Corp. Counsel for the District of Columbia, with whom Messrs. Chester H. Gray, Corp. Counsel, Milton D. Korman, Principal Asst. Corp. Counsel, and Robert E. McCally, Asst. Corp. Counsel, were on the brief, for petitioner.

Mr. Donald K. Barnes, Detroit, Mich., of the bar of the Supreme Court of Michigan, pro hac vice, by special leave of court, with whom Messrs. Seymour S. Mintz and William T. Plumb, Jr., Washington, D. C., were on the brief, for respondent. Mr. Frank F. Roberson, Washington, D. C., also entered an appearance for respondent.

Before BAZELON, Chief Judge, WILBUR K. MILLER, FAHY, WASHINGTON, DANAHER, BASTIAN, BURGER, WRIGHT and McGOWAN, Circuit Judges sitting en banc.

Certiorari Granted October 26, 1964. See 85 S.Ct. 156.

McGOWAN, Circuit Judge, with whom Chief Judge BAZELON and Circuit Judges FAHY, WASHINGTON and WRIGHT join:

These petitions for review from the District of Columbia Tax Court involve the propriety of assessments under the District's Income and Franchise Tax Act against General Motors Corporation for the years 1957 and 1958. The tax is levied on the net income of General Motors for the privilege of carrying on business within the District; and, as such, is similar to taxes levied by many of the States. The question before this court concerns the legally permissible formula for determining that portion of the net income of a unitary multi-state business which is properly taxable by the District of Columbia. The Tax Court ruled that the District's single-factor formula of apportionment was not permitted by the statute; and, on its own initiative, substituted a three-factor formula. A division of this court, one judge dissenting, affirmed the Tax Court. Because of the importance of the problem to the administration of local taxes, we granted the District's petition for rehearing en banc. We now decide that the decisions of the Tax Court must be reversed.

I

The District of Columbia Code imposes a "franchise tax upon every corporation * * * for the privilege of carrying on or engaging in any trade or business within the District and of receiving such other income as is derived from sources within the District," to be measured by "that portion of the net income of the corporation * * * as is fairly attributable" to that business.¹ Where the business "is carried on or engaged in both within and without the District, the net income derived therefrom shall * * be deemed to be income from sources within and without the District," and the portion subject to tax shall be determined by regulations prescribed by the District Commissioners.²

Under regulations promulgated August 6, 1953, the formula for determining the tax of a sales corporation engaged in business "partly within and partly without the District" is based on a sales factor. The portion taxed by the District is the percentage of the corporation's total net income (determined under other sections of the District Code not here in direct controversy) that its "District sales made during such taxable year bear to the total sales made everywhere during such taxable year."³

For the taxable years 1957 and 1958, General Motors paid a small tax on the theory that only that portion of its income which was derived from business conducted through a District office of one of its divisions constituted "District sales" which were "fairly attributable" to business done within the District. General Motors contended that other sales to dealers in the District did not constitute "trade or business" within the District. The District refused to accept the returns for either year, and in 1959 mailed notices of tax deficiencies. The District's theory was that income derived from sales of automobiles, other vehicles, and parts to dealers in the District was income from a "trade or business" carried on "partly within and partly without the District," and hence subject to apportionment for the purpose of determining the tax owed to the District. General Motors duly protested the notices of proposed deficiencies. After a hearing, the District Finance Officer rejected the protests and on February 4, 1960, a formal assessment of taxes due was mailed to the company.

General Motors paid the assessment under protest, and appealed to the Tax Court. In that court, two primary arguments were urged as to the invalidity of the assessed deficiencies: one, that the numerator of the sales formula was too broad, in that it included sales which were not "District sales"; and, two, that use of the single-factor apportionment formula itself was permitted neither by the District Code nor by the Constitution. General Motors requested that all of the additionally assessed tax be refunded.

The Tax Court reversed the assessment, but not to the extent prayed for by General Motors. That court held the single-factor sales formula unauthorized by the District Code, and, in its place, substituted a three-factor formula of property, payroll and sales, each factor receiving equal weight.⁴ The result was a tax substantially less than the District's assessment, but also substantially in excess of the amount originally paid by the taxpayer.

Only the District has appealed from the decisions of the Tax Court. General Motors has not, by an appeal of its own, pressed its original request to have the entire additional assessment refunded. For purposes of this appeal, it appears to concede the correctness of the figures found by the Tax Court as representing "District sales." The controversy before us, therefore, does not relate to the definition of what sales by General Motors properly may be taken to be "District sales," made in the course of a business activity which is carried on both within and without the District. It relates, rather, to the formula to be used for apportioning to the District that part of General Motors entire net income attributable to its "District sales." The District, of course, contends that the single-factor formula is valid. In addition, the District presents an alternative argument which was not made in the Tax Court, namely, that sales to dealers is "other income * * * derived from sources within the District." General Motors argues, first, that the District Code does not permit a formula based only on the sales factor; and, second, that such a formula, if authorized by the statute and as applied to it, is barred by the due process and commerce clauses of the Constitution. The Tax Court did not reach the constitutional issues.

II

Although not critical to a determination of this appeal in its present posture, some analysis of General Motors' operations in the District enlarges understanding of the issue we do face. The company's principal business is the manufacture and sale of automobiles, trucks and other vehicles, and parts and accessories. No manufacturing or assembly is conducted within the District, but takes place primarily in Michigan, Delaware, and Maryland as to products sold in the District. Orders from dealers are received and filled, and title passes, outside the District.

In addition to a central management staff located primarily in Detroit, Michigan, General Motors is organized into divisions, which operate substantially independently of each other. Of the five Car Divisions, four (Pontiac, Buick, Oldsmobile, and Chevrolet) have substantially identical operations throughout the country. Within the District in 1957 and 1958, Pontiac and Buick had four dealers each, Oldsmobile and Chevrolet five each. Subject to certain exceptions immaterial here, these divisions sold their products only to authorized dealers.

Each dealer operated under a "Dealer Selling Agreement" which contained a detailed recitation of the parties' obligations. Besides dealing with price (to the dealer, who was not obligated to resell the product at a particular price) and delivery terms, the agreement required the dealer to maintain a satisfactory place of business. Once the dealer was established in facilities and at a location mutually satisfactory to himself and the division, he agreed not to move to or establish a new or different location, branch sales office, branch service station, or place of business, including any used car lot or location, without the prior written approval of the division. Each dealer agreed to maintain specified standards for capital and net worth. He was required to use a uniform accounting system and submit 90-day sales projections, monthly financial and operating statements, and 10-day reports of sales and inventories; and to permit the company to examine his accounts and records when requested. Each agreement required satisfactory sales performance and service to purchasers, and an adequate staff and inventory of parts and accessories. The dealer was also required to erect certain specified signs necessary to advertise the company's products on a mutually satisfactory basis. Finally, the company could terminate the agreement for failure of the dealer to comply with its terms, and a dealer could terminate with or without cause by giving thirty days' notice.

The company's Motors Holding Division, with an office in the District, provided temporary financial assistance for the establishment, reorganization, or expansion of dealerships. In 1957 and 1958, four of the eighteen dealers in the District were receiving this financial aid. Under the program, the dealer provided at least twenty-five per cent of the required capital, and Motors Holding provided the remainder, in return for voting control. The dealer was required to buy Motors Holdings' interest under a formula geared to operating...