People ex rel. Alpha Portland Cement Co. v. Knapp

• Decision Date: 23 November 1920
• Citation: 129 N.E. 202,230 N.Y. 48
• Parties: PEOPLE et rel. ALPHA PORTLAND CEMENT CO. v. KNAPP et al., State Tax Commission.
• Court: New York Court of Appeals Court of Appeals

230 N.Y. 48

129 N.E. 202

PEOPLE et rel. ALPHA PORTLAND CEMENT CO.

v.KNAPP et al., State Tax Commission.

Court of Appeals of New York.

Nov. 23, 1920.

Certiorari by the People of the State of New York, on the relation of the Alpha Portland Cement Company, to review the action of Walter H. Knapp and others, constituting the Tax Commission of the State of New York, in assessing a franchise tax against relator under Tax Law, §§ 208-219 l. From an order of the Appellate Division (191 App. Div. 262,181 N. Y. Supp. 32), which reversed the determination of the Tax Commission, the Commissioners appeal.

Order of the Appellate Division modified, and, in so far as it is set aside the whole tax reversed, and proceeding remanded.

Pound, J., Hiscock, C. J., and Collin, J., dissenting.Appeal from Supreme Court, Appellate Division, Third Department.

Charles D. Newton, Atty. Gen. (C. T. Dawes, of Albany, of counsel), for appellants.

Louis H. Porter and F. Carroll Taylor, both of New York City, for respondent.

CARDOZO, J.

The relator, a corporation organized in New Jersey, manufactures and sells its products here and elsewhere. A tax was assessed against it in 1918 by the tax commission of New York for the privilege of doing business. The validity of the statute which assumes to authorize the tax is the question to be determined.

Article 9-A of Tax Law (Consol. Laws, c. 60), as adopted in 1917 and amended in 1918, establishes a new scheme of taxation for manufacturing and mercantile corporations, both foreign and domestic. Laws 1917, c. 726; Laws 1918, c. 276; Laws 1918, c. 417. Every domestic manufacturing or mercantile corporation is to pay an annual tax for the privilege of exercising its franchise in this state in a corporate or organized capacity. Tax Law, § 209. Every foreign corporation of like nature is to pay an annual tax for the privilege of doing business in this state. Section 209. In each case the tax is to be computed upon the basis of the net income for the year next preceding, which income is declared to be ‘presumably the same as the income upon which such corporation is required to pay a tax to the United States.’ Section 209. If the entire business of the corporation is transacted within the state, the tax is to be based upon the entire net income as reported to the United States Treasury Department, subject to correction for fraud, evasion, or error. Section 214. If the entire business is not transacted within the state, the tax is to be based upon a proportion of net income to be ascertained by the commission in accordance with prescribed rules. Section 214. The net income allocated to this state is to bear the same ratio to the entire net income as the aggregate of certain classes of assets within this state bears to the aggregate of certain classes of assets wherever situated. The real property and the tangible personal property here are to be compared with the like property here and elsewhere. The bills and accounts resulting from manufacturing, sales and services here are to be compared with the like bills and accounts here and elsewhere. The share of stock in other corporations, if found to have a situs here, but not exceeding 10 per cent. of the value of the local realty and the local tangible personalty, are to be compared with the total shares in other corporations, but not exceeding 10 per cent. of all the realty and all the tangible personalty. No assets not included in the enumerated classes are to enter into the ratio. The scheme of allocation takes no heed of investments in bonds and like intangible assets. Sections 208, 214. It takes no heed of investments in shares of other corporations, except within the prescribed limit of 10 per cent. A foreign corporation, investing in railroad bonds or bonds of foreign governments,must pay a tax upon income which includes the interest on such bonds, but may not include the bonds themselves in estimating the proportion of value within the state and elsewhere. A foreign corporation which runs its business through subsidiaries, receiving the bulk of its income through dividends thus collected, must pay a tax upon income which includes the dividends on the shares, but must disregard the shares themselves (beyond the 10 per cent. maximum) in the allocation of its assets. I quote for greater certainty in a foot note the statutory formula.¹

The relator, engaged in both interstate and local commerce, attacks this scheme of allocation as beyond the power of the state. Included in the relator's investments and held at the home office, are bonds of the value of $658,052.30, which yielded $32,407 in interest during the year covered by the assessment. The interest enters into the income on which the tax has been computed; the principal has benn excluded in the allocation of the has been excluded in the allocation of the are shares of stock of the Alpha Portland Cement Company of Pennsylvania of the value of $4,500,000; shares of stock of the Anvil Stone Company of the value of $23,600; and shares of stock of the North American Portland Cement Company of the value of $10,000. The Alpha Portland Cement Company of Pennsylvania holds the title to plants located in that state.

[1] The relator, owning the entire stock, has occupied the plants, rent free, and has operated them directly. If it had operated them indirectly through the management of its subsidiary, and had taken the net income, which was nearly $400,000, in the form of dividends on the shares, this scheme of allocation, if valid, would have included the dividends as income and disregarded the shares in fixing the situs of the assets. ‘The constitutional validity of a law is to be tested, not by what has been done under it, but by what may, by its authority, be done.’ Stuart v. Palmer, 74 N. Y. 183, 188, 30 Am. Rep. 285; Colon v. Lisk, 153 N. Y. 188, 194,47 N. E. 302,60 Am. St. Rep. 609;Coe v. Armour Fertilizer Works, 237 U. S. 413, 424, 35 Sup. Ct. 625, 59 L. Ed. 1027. Dividends from other shares, those of the Anvil Stone Company, are included in the income; the shares themselves do not enter into the terms of the proportion.

[3] 1. I think the statute is invalid, in its application to the relator, in so far as it lays upon income a burden that is irrespective of the situs of the assets by which income is produced. The power of a state to attach conditions to the transaction of intrastate business by foreign corporations is not unlimited to-day, whatever under earlier decisions it may once have seemed to be. The field of law is one where new rules are in the making. Only the Supreme Court of the nation can definitively fix their content. The judgment of a state court can hardly fail, in the meantime, to be tentative and groping. We must shape our path and our progress by such light as we have. No doubt in the earlier cases there was much said, if not decided, that would seem to emancipate the state from all restrictions in conditioning the local business. Horn Silver Mining Co. v. New York, 143 U. S. 305, 12 Sup. Ct. 403, 36 L. Ed. 164;Maine v. Grand Trunk Ry. Co., 142 U. S. 217, 12 Sup. Ct. 121, 35 L. Ed. 994;Home Ins. Co. v. N. Y., 134 U. S. 549, 10 Sup. Cy. 593, 33 L. Ed. 1025;Ashley v. Ryan, 153 U. S. 436, 14 Sup. Ct. 865, 38 L. Ed. 773. Later cases have explained and qualified these judgments, and, to the extent of conflict, overruled them. International Paper Co. v. Mass., 246 U. S. 135, 38 Sup. Ct. 292, 62 L. Ed. 624, Ann. Cas. 1918C, 617;Looney v. Crane Co., 245 U. S. 178, 38 Sup. Ct. 85, 62 L. Ed. 230;Western Union Telegraph Co. v. Kansas, 216 U. S. 1, 30 Sup. Ct. 190, 54 L. Ed. 355;Meyer, Auditor of Oklahoma, v. Wells Fargo & Co., 223 U. S. 298, 32 Sup. Ct. 218, 56 L. Ed. 445;Wallace v. Hines, 253 U. S. 66, 40 Sup. Ct. 435, 64 L. Ed. 782;Powell, Indirect Encroachment on Federal Authority, 31 Harvard Law Review, 721, 774, 932, 942; Powell, The Changing Law of Foreign Corporatons, 33 Political Science Quarterly, 569; Henderson, Foreign Corporations in American Constitutional Law, Harvard University Press, pp. 131, 134, 151, 161.

The rule now is that a foreign corporation may not be required to purchase relief from ouster at the price of a surrender of constitutional immunities. The state may not say that the right to conduct the local business shall be lost if the corporation exercises the privilege of resorting to the federal courts. Donald v. Phila. & Reading Coal & Iron Co., 241 U. S. 329, 36 Sup. Ct. 563, 60 L. Ed. 1027;Harrison v. St. Louis, etc., Ry. Co., 232 U. S. 318, 34 Sup. Ct. 333, 58 L. Ed. 621, L. R. A. 1915F, 1187; Henderson, Foreign Corporations in American Constitutional Law, p. 141. The state may not say that the right to conduct the local business shall be lost if the corporation will not pay a tax upon property which, by reason of its situs elsewhere, is immune from taxation here. Int. Paper Co. v. Mass.; Looney v. Crane Co.; W. U. T. Co. v. Kansas; Meyer, Auditor of Oklahoma, v. Wells Fargo & Co.; Wallace v. Hines, supra; N. Y. Life Ins. Co. v. Head, 234 U. S. 149, 164, 34 Sup. Ct. 879, 58 L. Ed. 1259. This is certainly the law when the business of the corporation embraces interstate as well as local commerce. We are not new required to decide whether it is not equally the law when the business is restricted to local commerce only. Henderson, supra. International Paper Co. v. Mass., supra, puts the modern doctrine in a sentence:

‘That a foreign corporation is partly, or even chiefly, engaged in interstate commerce does not prevent a state in which it has property and is doing a local business from taxing that property and imposing a license fee or excise in respect of that business, but the state cannot require the corporation as the condition of the right to do a local business therein to submit to a tax on its interstate business or on its property outside the state.’ 246 U. S. 141, 38 Sup. Ct. 294, 62 L. Ed. 624, Ann. Cas. 1918C, 617.

In determining whether...