Pacific Co v. Johnson

Decision Date11 April 1932
Docket NumberNo. 270,270
PartiesPACIFIC CO., Limited, v. JOHNSON, State Treasurer of California. Re
CourtU.S. Supreme Court

[Syllabus from pages 481-483 intentionally omitted] Messrs. Stuart Chevalier, of Washington, D. C., Joseph D. Peeler, of Los Angeles, Cal., and Donald V. Hunter, of Washington, D. C., for appellant.

[Arguments of Counsel from pages 481-484 intentionally omitted] Messrs. U. S. Webb and H. H. Linney, both of San Francisco, Cal. (Frank L. Guerena, of San Francisco, of counsel), for appellee.

[Argument of Counsel from pages 484-487 intentionally omitted] Mr. Justice STONE delivered the opinion of the Court.

This case is here on appeal, Jud. Code § 237 (28 USCA § 344), from a judgment of the Supreme Court of California, denying recovery of a tax paid by appellant, a California corporation, for the privilege of doing business within the state, and exacted under a statute1 alleged to be in contravention of the contract clause, article 1, § 10, of the Federal Constitution. 298 P. 489. The annual tax is, for domestic corporations, a specified percentage of the net income of the corporation for the next preceding fiscal or calendar year. By section 7 of the statute, 'net income' is defined as 'gross income' less certain allowed deductions, and section 6 provides that 'gross income * * * includes * * * all interest received from federal, state, municipal or other bonds. * * *' Section 1 3/4 of article 13, of the Constitution of California, adopted in 1902, provides that bonds issued by political subdivisions of the state and its municipalities 'shall be free and exempt from taxation.'

The state franchise tax commissioner, in assessing appellant's franchise tax for the year 1928, included in its gross income interest derived from improvement district bonds, issued after the adoption of the quoted exemption provision of the Constitution, but before the constitutional amendment and the statute authorizing the tax. The present suit was brought to recover so much of the tax as results from the inclusion in the computation, of the interest received from the tax exempt bonds. Appellant insists that, under the exemption clause of the state Constitution, it acquired a contractual immunity from state taxation of the bonds or their income, and that the later statute, by authorizing the inclusion of the bond interest in the measure of the tax, in effect taxed the income and thus impaired the obligation of the contract.

If, as appellant argues, the exemption from taxation of the bonds is contractual and extends to the income derived from them, the question still remains whether the immunity is broad enough to secure freedom from taxation of a corporate franchise, to the extent that it is measured by tax exempt income. This Court, in answering that question, will, in the absence of applicable state decisions antedating the alleged impairment, be guided by generally accepted principles of construction which have been recognized and acted upon by this Court.

Until the article of the Constitution adopted in 1928, and the statute of 1929, there were no provisions in the Constitution and laws of California for taxing corporate franchises by the present method, and until this case no decision by any court of the state had determined whether the granted immunity extends to a tax upon corporate franchises because tax-free property or income is included in its measure. Long before the adoption of the constitutional exemption, there was a well-recognized distinction between a tax on the privilege of exercising the corporate franchise and a tax on corporate property or income, even though the former was measured by the latter, and tax immunity of the property or income was not deemed to extend to the franchise.

The power of a state to levy a franchise tax measured by net property or income including tax exempt bonds of the United States or their income was upheld by this Court in Society for Savings v. Coite (1867) 6 Wall. 594, 18 L. Ed. 897; Provident Institution v. Massachusetts (1867) 6 Wall. 632, 18 L. Ed. 907; Home Insurance Co. v. New York (1890) 134 U. S. 594, 10 S. Ct. 593, 33 L. Ed. 1025. State laws taxing shareholders of national banks on the full net value of their shares, although the banks own tax exempt federal securities, have also been consistently upheld. Van Allen v. Assessors, 3 Wall. 573, 18 L. Ed. 229; People's National Bank v. Board of Equalization, 260 U. S. 702, 43 S. Ct. 98, 67 L. Ed. 471; Des Moines National Bank v. Fairweather, 263 U. S. 103, 44 S. Ct. 23, 68 L. Ed. 191. Similarly Congress may impose a tax on state banks measured by the average amount of their deposits, although deposits of state funds by state officers are included. Manhattan Co. v. Blake, 148 U. S. 412, 13 S. Ct. 640, 37 L. Ed. 504. The rule that a tax upon a franchise, measured by net income, including that from tax immune property, is not an infringement of the immunity, was re-examined and affirmed in Flint v. Stone Tracy Co., 220 U. S. 107, 31 S. Ct. 342, 55 L. Ed. 389, Ann. Cas. 1912B, 1312, which was accepted as authority in Macallen Co. v. Massachusetts, 279 U. S. 620, 49 S. Ct. 432, 436, 73 L. Ed. 874, and followed in Educational Films Corporation v. Ward, 282 U. S. 379, 51 S. Ct. 170, 75 L. Ed. 400.

This distinction, so often and consistently reaffirmed, is but a recognition that the franchise, the privilege of doing business in corporate form, which is a legitimate subject of taxation, does not cease to be such because it is exercised in the acquisition and enjoyment of nontaxables. The distinction is one of substance, not of form, and has been so recently discussed in Educational Films Corporation v. Ward that it need not be elaborated here. It suffices to say that the tax immunity extended to property qua property does not embrace a special privilege, the corporate franchise, otherwise taxable, merely because the value of the corporate property or net income is included in an equable measure of the enjoyment of the privilege. The owner may enjoy his exempt property free of tax, but if he asks and receives from the state the benefit of a taxable privilege as the implement of that enjoyment, he must bear the burden of the tax which the state exacts as its price.

Petitioner lays no foundation for the assertion that the state court erroneously construed the grant of immunity as limited to taxes imposed on the bonds and their interest, and as not embracing taxes on the franchise measured by the net income of the taxpayer without discrimination as to its source. We cannot say that this construction, with which no judicial decision of the state conflicts, and which is supported by an unbroken line of decisions of this Court, some of them antedating the grant, is erroneous or that the later enactment of the challenged statute, in all respects consistent with it, impairs any contractual right which could be implied from the grant. Even if the construction were doubtful, the doubt, upon familiar principles, must be resolved in favor of the state. Grants of immunity from taxation, in derogation of a sovereign power of the state, are strictly construed. Providence Bank v. Billings, 4 Pet. 514, 561, 7 L. Ed. 939; The Delaware Railroad Tax Case, 18 Wall. 206, 225-226, 21 L. Ed. 888; Jefferson Branch Bank v. Skelly, 1 Black 436, 447, 17 L. Ed. 173; Charles River Bridge v. Warren Bridge, 11 Pet. 420, 9 L. Ed. 773; Yazoo & Mississippi Valley Ry. v. Thomas, 132 U. S. 174, 10 S. Ct. 68, 33 L. Ed. 302; Vicksburg, S. & P. R. Co. v. Dennis, 116 U. S. 665, 6 S. Ct. 625, 29 L. Ed. 770.

But appellant insists that even though the granted exemption is not broad enough to preclude, in every instance, the inclusion of tax exempt income in the measure of the tax, its inclusion by the present statute is not a casual incident to a scheme of taxation of franchises measured by all net income, such as was upheld in Flint v. Stone Tracy Co., supra, but is the result of a fully disclosed legislative purpose to subject to taxation the income of non-taxables, such as was deemed to invalidate the tax in Miller v. Milwaukee, 272 U. S. 713, 47 S. Ct. 280, 71 L. Ed. 487, and in Macallen Co. v. Massachusetts, supra. In support of this contention, petitioner points to the language of the taxing act, specifically including the income from tax exempt bonds in the measure of the tax, and to its legislative history.

The California Constitution was amended and the legislation taxing corporate franchises was enacted shortly after the decisions of this Court in First National Bank v. Hartford, 273 U. S. 548, 47 S. Ct. 462, 71 L. Ed. 767, 59 A. L. R. 1, and Minnesota v. First National Bank of St. Paul, 273 U. S. 561, 47 S. Ct. 468, 71 L. Ed. 774, which held that the requirement of Rev. St. § 5219, of an approximate equality of state taxation of national banks and of moneyed capital competing with them, comprehends the taxation not only of moneyed capital employed by state and private banks, but also that of other corporations in substantial competition with national banks. The state of California had previously imposed a tax on shareholders in banks, based on their proportionate share of the undivided profits, capital, and surplus. Corporations other than banks, public utility, and insurance companies were taxed on the basis of their 'corporate excess,' in the computation of which non-taxable bonds were not included. In 1927 the California Legislature (St. 1927, p. 781) created a commission to prepare a scheme of taxation which would secure the requisite equality. To attain this end the report of the commission of August 10, 1928 (included in the final report of California tax commission of March 5, 1929, State Printing Office, Publication No. 63725, at page 243, et seq.), recommended the adoption of the present corporate franchise tax as comforming to subdivision 4 of Rev. St. § 5219 (12 USCA § 548(4), which...

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