Keeney v. Dominion Coal Co.

• Decision Date: 26 January 1915
• Docket Number: 6791.
• Parties: KEENEY v. DOMINION COAL CO.
• Court: U.S. District Court — Southern District of Ohio

225 F. 625

KEENEY v. DOMINION COAL CO.

No. 6791.

United States District Court, S.D. Ohio, Western Division.

January 26, 1915

John A Deasy, of Cincinnati, Ohio, for State of Ohio.

Aaron A. Ferris, of Cincinnati, Ohio, for receiver.

HOLLISTER District Judge.

This action is in equity for the appointment of a receiver and other relief. The bill was filed November 8, 1911, and a receiver was appointed the same day. The corporation was insolvent. The assets applicable to the payment of the claims of general creditors are, even with the addition of the sums collected by the receiver on unpaid subscriptions to capital stock, sufficient to pay only a small percentage of the debts.

By intervention, the state of Ohio seeks to charge the fund in the hands of the receiver arising from the conversion of the assets of the corporation into money, with the excise or franchise tax imposed by an act of the Legislature of Ohio known as the 'Willis Law,' originally entitled 'An act to require corporations to file annual reports with the Secretary of State and to pay annual fees therefor,' and now found under sections 5495 to 5521 of the General Code of Ohio. The assets of the corporation are still in process of administration by this court.

It is admitted by the receiver that the tax for 1911 was payable by the corporation before his appointment, and that the state is entitled to recover the tax for that year, although not in the amount of the state's claim that the statutory percentage of three-twentieths of one per cent. applies to the authorized capital stock; the receiver's contention being that the percentage should be figured on only the amount of the capital stock paid in.

The substantial controversy arises upon the denial of the receiver of the right of the state to impose the tax for the years 1912 and 1913 and indefinitely thereafter, upon him as receiver, or upon the insolvent corporation's assets in his hands for distribution to creditors.

It would serve no useful purpose to set out at length the several sections of the act, but, generally, it may be said to impose a franchise tax and, as a basis for its imposition the duty upon corporations for profit to report to the tax commission of Ohio a sworn statement by a designated officer of the corporation, containing certain information, including (section 5497, par. 7) 'The nature and kind of business in which the corporation is engaged and its place or places of business. ' If the corporation fails or neglects to make the required report, a penalty of $10 for each day's omission is inflicted upon it.

In my judgment the claim of the state is untenable on several grounds:

1. The tax is not imposed on a receiver, nor is any duty required of him to make reports or do any of the things which in turn the statute requires the corporation 'doing business' to do. The only reference to a receiver is found in section 5506, which provides:

'The fees, taxes and penalties, required to be paid by this act, shall be the first and best lien on all property of the public utility or corporation, whether such property is employed by the public utility or corporation in the prosecution of its business or is in the hands of an assignee, trustee or receiver for the benefit of the creditors and stockholders thereof.'

Experience shows that when a corporation is hopelessly insolvent, as is this corporation, and goes into the hands of a receiver, its business ceases, and, practically at least, the active duties of the corporation itself, and of the officers through which it acts, come to an end. All that is left is a name and a naked right to be a corporation for the purpose of engaging in the business its charter authorizes it to do. As a corporation, it may be said to be in existence, since none of the steps authorized by the laws of Ohio to dissolve it or wind it up have been taken, and it has not been declared a bankrupt under the bankruptcy act; but its assets and its business are no longer of any value to it. Its right to be a corporation to do an authorized business is no longer worth anything to it, its stockholders, or its creditors. Its assets are in the custody of a court of equity to be distributed to its creditors.

The state cannot compel the receiver to make reports. The penalties for failure to make them are not inflicted upon him. If the corporation must continue to make reports and, on failure, be subjected to penalty, then, if the receiver must pay this tax, he must also pay the penalty; but a penalty of this character could surely not be collected from a receiver if it were not imposed.

These considerations suggest another reason why the state cannot maintain its claim:

2. The Legislature of Ohio did not intend the receiver to pay the 'fees, taxes, and penalties,' because section 5506 refers to fees, taxes, and penalties required to be paid only by the corporation doing business, and the purpose of this section is to fix a lien for the payment of the tax by the corporation required to pay it, upon the property employed in the prosecution of its business or in the hands of a receiver, if the property has gone into the custody of a court of equity through its receiver. Hence it is that the receiver in this case recognizes the lien of the state upon the assets in his hands for the tax of 1911, imposed upon the corporation when it was doing business. Section 5506 must be construed with the other sections in order to ascertain the purpose of the act, which requires the payment of a tax by the corporation for the privilege of doing business as a corporation. The construction contended for by the state results in the absurdity of imposing a tax when the reasons for the tax and its only justification no longer exist. On the other hand, the reconcilement of section 5506 with the other sections, which the court is bound to effect if possible, brings about a result not only quite reasonable and just, but also in consonance with the clear intention of the Legislature to impose a tax upon the right granted by the state to be a corporation and to continue to do business as such.

3. The Constitution of the United States forbids the collection of this tax under the circumstances of this case. The assets in the receiver's hands do not belong to the corporation. They belong to the creditors. Its assets are in the hands of the court for distribution to creditors as their respective interests may appear. The assets have become impressed, even by a...