Gorham Mfg. Co. v. Travis

• Decision Date: 11 August 1921
• Docket Number: E 16-232.
• Citation: 274 F. 975
• Parties: GORHAM MFG. CO. v. TRAVIS, State Comptroller of New York, et al.
• Court: U.S. District Court — Southern District of New York

274 F. 975

GORHAM MFG. CO. v. TRAVIS, State Comptroller of New York, et al.

No. E 16-232.

United States District Court, S.D. New York.

August 11, 1921

Robert C. Beatty, of New York City, for plaintiff.

C. T Dawes, of Albany, N.Y., for defendants.

LEARNED HAND, District Judge (after stating the facts as above).

The first question is of jurisdiction in equity. I should have thought the provisions for revision by the Tax Commission and certiorari to the Supreme Court adequate remedies at law Indiana Mfg. Co. v. Koehne, 188 U.S. 681, 23 Sup.Ct 452, 47 L.Ed. 651; Boise, etc., Co. v. Boise, 213 U.S. 276, 29 Sup.Ct 426, 63 L.Ed. 796; Dalton Machine Co. v. Virginia, 236 U.S. 699, 35 Sup.Ct. 480, 59 L.Ed. 797, except for one thing. Before applying for the writ, the taxpayer must 'deposit' the tax with the State Comptroller (section 219), and there is no provision for getting it back. It is indeed a little strange that there should be doubt about this, but the only reported case, In re Waterman, 33 Misc.Rep. 569, 68 N.Y.Supp. 892, is flatly against any recovery. That was decided 20 years ago, and in spite of the suggestion there contained the Legislature has never seen fit to give power to a court to direct the Comptroller to pay back the money. The defendants say that the Appellate Divisions have frequently so decided, but they cite no cases. When a tax statute expressly directs the Comptroller to refund, it is true that the courts will compel him to do so, People ex rel. Millard v. Chapin, 104 N.Y. 100, 10 N.E. 141; People ex rel. Ostrander v. Chapin, 109 N.Y. 177, 16 N.E. 331, and such an act is constitutional, People ex rel. Evans v. Chapin, 101 N.Y. 682, but here there is no act. The matter at best rests in inference. The situation is therefore closely analogous to Dawson v. Kentucky, etc., Co., 255 U.S. . . ., 41 Sup.Ct. 272, 65 L.Ed. . . ., Supreme Court, February 28, 1921, where indeed there was a statute directing a refund, though the state authorities were ambiguous. That case I think rules, and shows that here an adequate remedy at law is not clear enough.

The second question is whether the statute is itself constitutional. It is now settled that a state, under the guise of granting to a foreign corporation the privilege of doing an intrastate business, may not as a condition impose upon it taxes which in fact though not in name are levied upon assets outside the state. That doctrine is generally assumed to take its origin from West. Un. Tel. Co. v. Kansas, 216 U.S. 1, 30 Sup.Ct. 190, 54 L.Ed. 355, which at one time was apparently thought to have been overruled in Baltic Mining Co. v. Mass., 231 U.S. 68, 34 Sup.Ct. 15, 58 L.Ed. 127, and Kansas City, etc., Co. v. Kansas, 240 U.S. 227, 36 Sup.Ct. 261, 60 L.Ed. 617. These cases were later distinguished in International Paper Co. v. Mass., 246 U.S. 135, 38 Sup.Ct. 292, 62 L.Ed. 624, Ann. Cas. 1918C, 617, and Cheney Bros. Co. v. Mass., 246 U.S. 147, 38 Sup.Ct. 295, 62 L.Ed. 632, because they imposed only license taxes with reasonable maxima; the calculation being merely a way of grading corporations within that limit. Kansas City, etc., R.R. v. Stiles, 242 U.S. 111, 37 Sup.Ct. 58, 61 L.Ed. 176, involved a domestic corporation, and while some of the language may seem to assimilate the two classes, it is clear that that distinction was thought controlling.

The doctrine has been illustrated in various ways. In International Paper Co. v. Mass., supra, as in Western Union Tel. Co. v. Kansas, supra, the tax was levied upon the whole capital stock of the corporation without any limit, and this was bad. In Looney v. Crane Co., 245 U.S. 178, 38 Sup.Ct. 85, 62 L.Ed. 230, the corporate surplus was to be added to the stock. Again, in Union Tank Line Co. v. Wright, 249 U.S. 275, 39 Sup.Ct. 276, 63 L.Ed. 602, an allocation of tank cars was based only on the mileage of the roads on which they traveled, and was held bad, as in Wallace v. Hines, 253 U.S. 66, 40 Sup.Ct. 435, 64 L.Ed. 782, where the local value of a railroad in North Dakota having valuable terminals outside the state was allocated on the basis of its track mileage within that state. The allocation was in each case held to include assets outside the state. In general it may be said that a state in taxing local revenue or local property may not include anything outside the state, which cannot be said to contribute any part of its value to local assets. Meyer v. Wells, Fargo & Co., 223 U.S. 298, 32 Sup.Ct. 218, 56 L.Ed. 445; Fargo v. Hart, 193 U.S. 490, 24 Sup.Ct. 498, 48 L.Ed. 761. Galveston, H., etc., Ry. v. Texas, 210 U.S. 217, 28 Sup.Ct. 638, 52 L.Ed. 1031, is to be understood as depending upon this rule. The only reason for regarding property without the state at all is in order to find the true value of the local assets, not as junk but as parts of an integral industrial unit. That is, I take it, the final test, as applicable since Western Union Tel. Co. v. Kansas, 216 U.S. 1, 30 Sup.Ct. 190, 54 L.Ed. 355, to franchise taxes as to taxes directly on revenue or on principal.

With all deference when applied to corporations having business in several states, any effort at allocation must be more or less arbitrary and fictitious, as is indeed shown by the record at bar. The truth is that in a business which is a unity, it is impossible to break up the parts and satisfactorily to assign to any piece a corresponding part of the income. Take as an instance the record here. Much of the personal property of the plaintiff in New York consists of sample pieces of silverware kept for display, by which goods elsewhere are sold, some of which never come into New York at all. A foreign customer may see such samples and order from them, but the goods may be shipped from Rhode Island to Pennsylvania or Connecticut. Yet it would be an obvious error not to assign any part of the resulting income to the New York samples. No one could possibly say whether the sale would have been made without them. The case in this aspect presents the not wholly unfamiliar difficulty of trying to apportion quantitatively the effect of a number of factors each of which is an absolute condition to the result. In such a case there is no rational solution which will bear scrutiny, and one must proceed by a more or less rough division not too shocking to preconceived assumptions. Underwood Typewriter Co. v. Chamberlain, 254 U.S. 113, 41 Sup.Ct. 45, 65 L.Ed. . . ., Supreme Court, November 15, 1920, presented for example the very converse of the case at bar. There the taxpayer manufactured its goods in Connecticut, the taxing state, but sold few of them there. It argued that its Connecticut income should be measured by its Connecticut sales. But the court said that manufacture was an essential step in making profits and that part of the profits were 'made' where the goods were produced. Therefore it sustained a statute which apportioned income by tangible property. The plaintiff here argues that the sales in New York should not be taken as all due to New York assets, because the manufacture took place in Rhode Island. That is quite true, but it is also true, as I have just said, that it is impossible to say how far sales made elsewhere are created by the shops and stock in New York. Any rule must therefore be largely conventional.

In the case of railroads an allocation of cars and other property according to mileage was supported in State R.R. Tax Cases, 92 U.S. 575, 23 L.Ed. 663, and Pullman's Car Co. v. Pa., 141 U.S. 18, 11 Sup.Ct. 876, 35 L.Ed. 613, and in the case of a telegraph company in Western Union Tel. Co. v. Attorney General, 125 U.S. 530, 8 Sup.Ct. 961, 31 L.Ed. 790, and in Western Union Tel. Co. v. Taggart, 163 U.S. 1, 16 Sup.Ct. 1054, 41 L.Ed. 49. I do not understand that Union Tank Line Co. v. Wright, supra, or Wallace v. Hines, supra, overrule those cases so far as the prima facie rule is concerned. They do hold that when the rule is shown in a given instance to result in the taxation of foreign assets, it is invalid. Prima facie it remains a sound rule, as I understand it. In the case of manufacturing companies I know of no similar statute which the Supreme Court has passed on except that in Underwood Typewriter Co. v. Chamberlain, supra. In that case the allocation was made merely upon the proportion of tangibles. While it was not in form an excise, that point was disregarded, and the decision there seems to me to support the defendants here. The income of such a company is created by the use of its economic capital in the hands of those who make and sell its goods. The statute at bar allocates that income upon the basis of capital, real and personal, and of accounts receivable. These last are divided into sales and pay for 'services.' Sales are some measure of the work of production and marketing. Of course, they are not a certain measure, but nothing is. If all the business of the corporation is done upon the same term of credit, accounts receivable on sales furnish a tolerable measure by which to apportion such work. Capital, the other element, is included directly. If either were omitted, an argument might be made against the propriety of the formula, for each is regarded as a factor in production.

This is indeed a rough rule and may in application work unevenly, but every rule must. Even if each transaction were analyzed, the result would be, as one of the plaintiff's own witnesses put it, 'a series of arbitrary decisions which would not be based on the facts at all. ' The consequence is not as the plaintiff's argument would have it, to deprive the state of all power to tax, but to require no more, at least as a presumptive rule, than an honest allocation which shall avoid gross inequities. Perhaps the taxpayer must have the right to show...