In re Ajax Dress Co., Inc.

• Decision Date: 09 April 1923
• Docket Number: 234.
• Citation: 290 F. 950
• Parties: In re AJAX DRESS CO., Inc.
• Court: U.S. Court of Appeals — Second Circuit

290 F. 950

In re AJAX DRESS CO., Inc.

No. 234.

United States Court of Appeals, Second Circuit.

April 9, 1923

Carl Sherman, Atty. Gen., of New York (Robert P. Beyer, Deputy Atty. Gen., of New York, of counsel), for appellants.

Moses &amp Singer, of New York City (Henry B. Singer, of New York City of counsel), for trustee in bankruptcy.

Certiorari granted 43 Sup.Ct. 706, 67 L.Ed. . . . .

Appeal from an order in bankruptcy entered in the District Court for the Southern District of New York. The petition against the above named bankrupt was filed December 22, 1920, and adjudication duly followed. Against the estate the state tax department filed a claim for a 'franchise tax, for period ending October 31, 1921'; the amount claimed being

For tax	$448.34
'Penal interest, etc.'	87.03
Total . . .	$535.37

The bankrupt was a manufacturing or mercantile corporation of the state of New York. The tax claimed arises under section 209 of the Tax Law of New York, which, so far as material, reads thus:

'Franchise Tax on Corporations Based on Net Income. For the privilege of exercising its franchises in this state in a corporate or organized capacity, every domestic manufacturing and every domestic mercantile corporation

* * * shall annually pay in advance for the year beginning November 1st next preceding an annual franchises tax,' etc.

The bankrupt ceased actual business on the day of petition filed, so that it exercised its franchise something less than 2 months out of the 12 months for which the tax was levied and leviable.

The court below apportioned the tax, and allowed of the claim a fraction which represented the portion of the year during which the bankrupt exercised its franchise. As Ajax Company had not complied with the statute and paid the tax, the state claimed under section 219-c of said Tax Law:

'In addition to the amount of such tax, ten per centum of such amount, plus one per centum for each month the tax remained unpaid.'

The court below denied this claim, treating it as a penalty, but allowed 6 per cent. interest on the apportioned tax to the day of the date of actual payment by the trustee. From the order embodying this decision the present appeal was taken.

Before HOUGH, MANTON, and MAYER, Circuit Judges.

HOUGH Circuit Judge (after stating the facts as above).

The question whether that which the state calls a tax is a tax, and a proper tax, produces a federal question, under the Bankruptcy Act. New Jersey v. Anderson, 203 U.S. 483, 27 Sup.Ct. 137, 51 L.Ed. 284. Yet, under familiar rulings, the construction of a state statute and the definition of its terms are matters on which we should ordinarily follow the authority of the highest state court. Therefore we regard the first branch of this case as raising only the question whether it is or is not governed by People ex rel. Mutual Trust Co. v. Miller, 177 N.Y. 51, 69 N.E. 124. In that case the operative words of the statute were that the said trust company, being incorporated under the law of New York, 'shall pay to the state annually for the privilege of exercising its corporate franchise or carrying on its business in such corporate or organized capacity, an annual tax,' etc.

The Trust Company organized on June 6, 1901, and opened for business on June 24th. A tax was levied for the year ending June 30, 1901, and the state demanded that for the privilege of transacting business for 6 days it should pay the same tax that it would have paid for doing business 365 days. Vann J., pointed out that the demand was for 'an 'annual' tax, imposed 'annually,"' and for the privilege of 'exercising not of possessing, a corporate franchise; ' further, that it could not 'exercise its franchise for the entire year, because the state did not bring it into existence until the year...