Norfolk Ry Co v. State of North Carolina Maxwell

• Decision Date: 30 March 1936
• Docket Number: No. 610,610
• Citation: 80 L.Ed. 977,56 S.Ct. 625,297 U.S. 682
• Parties: NORFOLK & W. RY. CO. v. STATE OF NORTH CAROLINA ex rel. MAXWELL, Com'r of Revenue
• Court: U.S. Supreme Court

297 U.S. 682

56 S.Ct. 625

80 L.Ed. 977

NORFOLK & W. RY. CO.

v STATE OF NORTH CAROLINA ex rel. MAXWELL, Com'r of Revenue.

No. 610.

Argued March 6, 1936.

Decided March 30, 1936.

Appeal from the Supreme Court of North Carolina.

Mr. F. M. Rivinus, of Roanoke, Va., for appellant.

Mr. A. A. F. Seawell, of Raleigh, N.C., for appellee.

Mr. Justice CARDOZO delivered the opinion of the Court.

The question is whether a statute of North Carolina laying a tax upon the net income of interstate railway companies has been so applied to the appellant as to violate the prohibitions of the Constitution of the United States.

The Norfolk & Western Railway Company, a Virginia corporation, has lines of railway in North Carolina, Virginia, Maryland, West Virginia, Kentucky, and Ohio. Its lines in North Carolina are branches, connecting with the main line at Roanoke, Lynchburg, and Abingdon, and running from those points of junction to Winston-Salem, Durham, and Elkland. For the years 1927, 1928, and 1929, it made return to the Commissioner of Revenue of North Carolina that it had no taxable income. The commissioner notified the company that the returns were erroneous, and made reassessments as follows: For 1927, $29,727.04; for 1928, $27,481.57; and for 1929, $29,213.10; in all $86,421.71. The amount so fixed was paid, and this suit was brought in accordance with an applicable statute to recover back the payment. The superior court of Wake county, refusing to confirm the report of a referee in favor of the taxpayer, gave judgment for the state. The Supreme Court of North Carolina affirmed (Maxwell v. Norfolk & Western R. Co., 208 N.C. 397, 181 S.E. 248); and the case is here upon appeal. Judicial Code, § 237, as amended, 28 U.S.C. § 344 (28 U.S.C.A. § 344).

The net income of interstate railways doing business in North Carolina is taxed in accordance with the following formula (Public Laws 1927, c. 80, § 312; Public Laws 1929, c. 345, § 312): 'And when their business is in part within and in part without the State, their net income within this State shall be ascertained by taking their gross 'operating revenues' within this State, including in their gross 'operating revenues' within this State, the equal mileage proportion within this State of their interstate business, and deducting from their gross 'operating revenues' the proportionate average of 'operating expenses' or 'operating ratio' for their whole business, as shown by the Interstate Commerce Commission standard classification of accounts.' The formula thus adopted is not void upon its face. Pittsburgh, C.C. & St. Louis R. Co. v. Backus, 154 U.S. 421, 430, 431, 14 S.Ct. 1114, 38 L.Ed. 1031; State Railroad Tax Cases, 92 U.S. 575, 608, 611, 23 L.Ed. 663; Louisville Board of Trade v. Indianapolis, C. & S. Traction Co., 34 I.C.C. 640, 642; Low Moor Iron Co. of Va. v. Chesapeake & Ohio R. Co., 42 I.C.C. 221, 227; cf. Atlantic Coast Line R. Co. v. Doughton, 262 U.S. 413, 43 S.Ct. 620, 67 L.Ed. 1051. A division of revenues and costs in accordance with state lines can never be made for a unitary business with more than approximate correctness. There is a tendency, none the less, for rates to be so adjusted to expenses over different portions of a system as to produce, when averages are considered, a uniformity of net return, or a fair approach thereto.¹ Thus mileage may have at times a relation to a tax upon net income which it may not bear to a property tax or even to one upon the value of a franchise. Cf. Rowley v. Chicago & N.W.R. Co., 293 U.S. 102, 111, 55 S.Ct. 55, 79 L.Ed. 222; Wallace v. Hines, 253 U.S. 66, 69, 40 S.Ct. 435, 64 L.Ed. 782. Taxpayer and state would be swamped with administrative difficulties if left to struggle through every case without the aid of a formula of ready application. In the perplexities besetting the process of assessment the statute is the outcome of a reasonable endeavor to arrive at a proportion of general validity. Pittsburgh, C.C. & St. Louis R. Co. v. Backus, supra. No contention to the contrary is made by the appellant. ²

This is not to say that the tax is valid as imposed. A formula not arbitrary on its face or in its general operation may be unworkable or unfair when applied to a particular railway in particular conditions. Cf. Hans Rees' Sons v. North Carolina, 283 U.S. 123, 129, 132, 51 S.Ct. 385, 75 L.Ed. 879; Southern Railway Co. v. Kentucky, 274 U.S. 76, 83, 88, 47 S.Ct. 542, 71 L.Ed. 934. A segment of the line may operate under handicaps resulting from the nature of the traffic, the topography of the country, the maladjustment or inadequacy of passenger or freight tariffs in one district or another. As applied to such a segment the average mileage prorate of the entire railway system may be an arbitrary test of the relation between revenue and expenses. Cf. Northern Pacific Ry. Co. v. Department of Public Works, 268 U.S. 39, 44, 45 S.Ct. 412, 69 L.Ed. 836; Low Moor Iron Co. of Va. v. Chesapeake & Ohio R. Co., supra. If this is made to appear with an ensuing burden on the taxpayer grossly in excess of the results of a more accurate apportionment, the statute to that extent is an unconstitutional endeavor to tax the income of a business in another jurisdiction. Hans Rees' Sons v. North Carolina, supra.

Appellant now insists, as it insisted in the courts below, that the operating expenses for its North Carolina branches were far in excess of those allowed by the commissioner, who refused to depart from the statutory formula. There is evidence in the record giving support to that position, though its weight is contested by counsel for the state. If the evidence be accepted, the higher cost may be attributed to the mountainous terrain and the low density of traffic as well as to other causes which it is needless to develop. Up to that point the railway took upon itself the burden of making out a case for the rejection of the formula. There, however, it stopped, declining to g farther. From the testimony of its witnesses we learn that actual expenses were greater in North Carolina than the average expenses apportioned to that state on the basis of the ratio between state and system mileage. We learn nothing from these witnesses as to the ratio between revenues, average and actual. For all that appears in the case developed by the railway, actual gross revenues in North Carolina may have been so far in excess of average gross revenues computed under the statute as to neutralize the discrepancy between actual and average costs of operation. If such a counterbalance exists, appellant has not been injured through the application of the formula.

The state took up the case where the railway put it down. Witnesses for the state maintain that through the application of the formula the gross revenues of operation are underestimated to a greater extent than operating costs. They tell us that the effect of the rejection of the formula will be to allocate to the state 159 per cent. of the revenues produced by applying it. In support of that conclusion they make elaborate studies and analyses which are exhibits in the case. From their testimony it appears that the general level of rates in territory classified as Southern is higher than that in territory classified as Northern or 'Official.' Cf. Sloss-Sheffield Steel & Iron Co. v. Louisville & N.R. Co., 35 I.C.C. 460, 467; Corporation Commission v. Norfolk & Western R. Co., 19 I.C.C. 303, 311; Southern Class Rate Investigation, 100 I.C.C. 513, 520, 645, 671...