Macallen Co v. Commonwealth of Massachusetts, No. 578

• Court: United States Supreme Court
• Writing for the Court: SUTHERLAND
• Citation: 73 L.Ed. 874,279 U.S. 620,49 S.Ct. 432,65 A.L.R. 866
• Decision Date: 27 May 1929
• Docket Number: No. 578
• Parties: MACALLEN CO. v. COMMONWEALTH OF MASSACHUSETTS

279 U.S. 620 49 S.Ct. 432 73 L.Ed. 874 MACALLEN CO.

v.

COMMONWEALTH OF MASSACHUSETTS.

No. 578. Argued April 25, 1929. Decided May 27, 1929.

Page 621

Messrs. Thomas Allen, of Boston, Mass., and Richard H. Wiswall, of Salem, Mass., for appellant.

Messrs. R. Ammi Cutter, Joseph E. Warner, and F. Delano Putnam, all of Boston, Mass., for the Commonwealth of Massachusetts.

[Argument of Counsel from page 621 intentionally omitted]

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Mr. Seth T. Cole, of Albany, as amicus curiae for Tax Commission of new york.

Mr. Justice SUTHERLAND delivered the opinion of the Court.

A statute of Massachusetts, G. L. c. 63, § 32, as amended by St. 1923, c. 424, § 1, provides:

'Except as otherwise provided in sections thirty-four and thirty-four A, every domestic business corporation shall pay annually, with respect to the carrying on or doing of business by it, an excise equal to the sum of the following, provided that every such corporation shall pay annually a total excise, not less in amount than one twentieth of one per cent. of the fair cash value of all the shares constituting its capital stock on the first day of April when the return called for by section thirty-five is due:

'(1) An amount equal to five dollars per thousand upon the value of its corporate excess.

'(2) An amount equal to two and one half per cent. of that part of its net income, as defined in this chapter, which is derived from business carried on within the commonwealth.'

By G. L. c. 63, § 30, par. 5, as amended by St. 1925, c. 343, § 1A, 'net income' is defined:

"Net income,' except as otherwise provided in sections thirty-four and thirty-nine, the net income for the taxable year as required to be returned by the corporation to the federal government under the federal Revenue Act applicable for the period, adding thereto any net losses as defined in said federal Revenue Act that have been deducted, and all interest and dividends not so required to be returned as net income except dividends on shares of stock of corporations organized under the laws of the commonwealth and dividends in liquidation paid from capital.'

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Before this amendment, the definition embodied in G. L. c. 63, § 30, par. 5, as amended, shortly before the passage of the last-quoted amendment, by Stat. 1925, c. 265, § 1, provided:

"Net income,' except as otherwise provided in sections thirty-four and thirty-nine, the net income for the taxable year as required to be returned by the corporation to the federal government under the federal Revenue Act applicable to the period, adding thereto any net losses as defined by said federal Revenue Act that have been deducted, and, in the case of a domestic business corporation, such interest and dividends, not so required to be returned as net income, as would be taxable if received by an inhabitant of this commonwealth; less, both in the case of a domestic business corporation and of a foreign corporation, interest, so required to be returned, which is received upon bonds, notes and certificates of indebtedness of the United States.'

Thus, under the original definition of net income, there was expressly excluded from the net income taxable at 2 1/2 per cent. all interest received upon bonds, notes, and certificates of indebtedness of the United States. And the definition had the effect of excluding, in the same respect, interest on state, county, and municipal bonds.

Appellant, a business corporation organized under the laws of Massachusetts, owned a large number of United States Liberty bonds and Federal Farm Loan bonds. The Liberty bonds by statute of the United States are expressly made exempt from all taxation imposed by any state, except estate or inheritance taxes. Chapter 56, 40 Stat. 288, 291, § 7 (31 USCA § 747). Federal Farm Loan bonds are issued under authority of chapter 245, 39 Stat. 360 (12 USCA § 641 et seq.), and by section 26, p. 380 (12 USCA § 931), declared to be instrumentalities of the United States and both as to principal and income exempt from all state taxa-

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tion. The corporation also owned a large number of bonds of Massachusetts counties and municipalities which, when issued and acquired by the corporation, were exempt from taxation by the terms of a state statute. G. L. c. 59, § 5, par. 25. Of course, in respect of United States securities, the statutory exemption is superfluous. A state tax, however small, upon such securities or interest derived therefrom, interferes or tends to interfere with the constitutional power of the general government to borrow money on the credit of the United States, and constitutes a burden upon the operations of government, and carried far enough would prove destructive. The principle set forth a century ago in Weston v. Charleston, 2 Pet. 449, 468 (7 L. Ed. 481), has never since been departed from by this court:

'The right to tax the contract to any extent, when made, must operate upon the power to borrow, before it is exercised, and have a sensible influence on the contract. The extent of this influence depends on the will of a distinct government; to any extent, however inconsiderable, it is a burden on the operations of government. It may be carried to an extent which shall arrest them entirely.' Home Savings Bank v. Des Moines, 205 U. S. 503, 513, 27 S. Ct. 571, 51 L. Ed. 901.

The taxing authorities of the state assessed against appellant, for the year 1926, a tax under the provisions of the then existing statute as first above quoted, adding, for the purpose of computing the assessment, to the amount of the net income of appellant as determined by the federal income tax returns of appellant, all sums of interest received by appellant from the foregoing United States, Farm Loan, and county and municipal bonds. Without this addition, and under the original definition of net income, the amount of the tax assessed would have been materially less.

Appellant paid the amount assessed under protest and brought a petition for abatement of the tax under the provisions of the state law, setting forth the foregoing facts

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and alleging the unconstitutionality, under the federal Constitution, of the statute in so far as it was held to include interest derived from the tax-exempt securities: (1) As impairing the obligation of contracts; (2) as an attempt to impose a tax upon income derived from securities and instrumentalities of the United States; (3) as depriving petitioner of its property without due process of law and denying it the equal protection of the law in violation of the Fourteenth Amendment; (4) as an impairment and in derogation of the power of Congress to borrow money on the credit of the United States; and for other reasons not necessary for present purpose to be set forth.

A justice of the Supreme Judicial Court sustained a demurrer to the petition. On appeal, this was affirmed by the full court, and the petition dismissed. (Mass.) 163 N. E. 75. That court, through its Chief Justice, delivered a carefully drawn opinion, reviewing numerous decisions of this court bearing upon the question involved. The tax was held to be not a tax on income, but an excise 'with respect to the carrying on or doing of business,' as the statute itself in form declares. While it was plain that the tax was larger than it would have been if the income from the tax-exempt securities had not been added to the other items in making up the factor of 'net income,' the court held that the income was not taxed, but simply employed together with the other items in ascertaining the measure for computing the excise.

The words of the act and the opinion of the state court as to the nature of the tax are to be given consideration and weight; but they are not conclusive. As it many times has been decided neither state courts nor Legislatures, by giving the tax a particular name, or by using some form of words, can take away our duty to consider its nature and effect. Choctaw, O. & Gulf R. R. v. Harrison, 235 U. S. 292, 298, 35 S. Ct. 27, 59 L. Ed. 234; Galveston, Harrisburg, etc., Ry. Co. v.

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Texas, 210 U. S. 217, 227, 28 S. Ct. 638, 52 L. Ed. 1031. And this court must determine for itself by independent inquiry whether the tax here is what, in form and by the decision of the state court, it is declared to be, namely, an excise tax on the privilege of doing business, or, under the guise of that designation, is in substance and reality a tax on the income derived from tax-exempt securities. If by varying the form-that is to say, if, by using one name for a tax instead of another, or imposing a tax in terms upon one subject when another is in reality aimed at-the substance and effect of the imposition may be changed, constitutional limitations upon powers of taxation would come to naught. The rule is otherwise. To this effect, the following cases may be cited as illustrative:

A tax laid in terms on the occupation of an importer is in effect a tax on imports. Brown v. Maryland, 12 Wheat. 419, 444 (6 L. Ed. 678). Answering the contention that a state may tax an occupation, and that this tax was nothing more, Chief Justice Marshall said:

'It is impossible to conceal from ourselves, that this is varying the form, without varying the substance. It is treating a prohibition, which is general, as if it were confined to a particular mode of doing the forbidden thing. All must perceive, that a tax on the sale of an article, imported only for sale, is a tax on the article itself. * * * So, a tax on the occupation of an importer is, in like manner, a tax on importation. It must add to the price of the article, and be paid by the consumer, or by the importer himself, in like manner as a direct duty on the article itself would be made. This the state has not a right to do, because it is prohibited by the Constitution.'

A tax on the income of an office is a tax on the office itself, and cannot be laid in that form if the...