Schlosser v. Welsh

• Decision Date: 19 February 1934
• Docket Number: No. 66.,66.
• Citation: 5 F. Supp. 993
• Parties: SCHLOSSER et al. v. WELSH, Director of Taxation for South Dakota.
• Court: U.S. District Court — District of South Dakota

5 F. Supp. 993

SCHLOSSER et al. v. WELSH, Director of Taxation for South Dakota.

No. 66.

District Court, D. South Dakota, Central Division.

February 19, 1934.

Olaf Eidem and E. D. Barron, of Sioux Falls, S. D., for plaintiffs.

R. F. Drewry, Asst. Atty. Gen. (Walter Conway, Atty. Gen., on the brief), for defendant.

Before GARDNER and SANBORN, Circuit Judges, and WYMAN, District Judge.

GARDNER, Circuit Judge.

This is a suit in equity by which plaintiffs seek to enjoin defendant as director of taxation for the state of South Dakota from enforcing against them the provisions of chapter 184, Session Laws of South Dakota 1933.

The plaintiff B. P. Schlosser is a postal clerk, employed in the United States post office at Sioux Falls, S. D., with an annual salary of $2,100; the plaintiff John A. Scotney is regional attorney for the United States Veterans' Administration in Sioux Falls, S. D., with an annual salary of $3,200; and the plaintiff Archie Wells is a stockman upon an Indian reservation in South Dakota, receiving an annual salary of $1,980, all being highly trained and experienced in and especially fitted for their respective positions, having been duly appointed thereto and serving therein under the laws of the United States and the rules and regulations of the Civil Service Commission, and having served in such capacity for more than ten years last past.

Chapter 184 of the South Dakota Session Laws for 1933, approved March 3, 1933, provides for a tax upon gross income received after July 1, 1933. The statute classifies incomes, but it is necessary to consider here subdivision (d) of section 2 which fixes the tax "where the gross income is represented by a compensation in the form of wages or salaries," at a rate of 1 per cent. of such income up to $2,000, 1½ per cent. on all such income in excess of $2,000 and up to $5,000, and 2 per cent. on all income in excess of $5,000. The tax is payable in quarterly installments. Section 4, subd. (f), provides: "The term `gross income' does not include the following items, which shall be exempt from taxation under this Chapter: * * * (f) Salaries, wages and other compensation received from the United States by officers or employees thereof, and pensions and compensations received from the United States, where the same is specifically exempted from taxation by law."

Section 21 provides that the act shall expire and stand repealed on the 30th day of June, 1935.

Plaintiffs challenge the right of the state taxing authorities to impose such a tax on them on the ground that they are instrumentalities or part of instrumentalities or agencies of the federal government, and necessary and indispensable in their respective capacities to the proper operation and functioning of these instrumentalities or agencies. It is alleged in the bill of complaint that plaintiffs, by refusing to pay the tax, have rendered themselves liable under the act to arrest, fine, and imprisonment, and that the defendant, in construing and enforcing the law, has determined that officers of the United States are exempt from taxation under the act, but that employees of the United States are not; that liens will be filed in the office of the register of deeds of the counties in which plaintiffs reside, and effort made to collect the taxes with penalty by distraint and sale, by suit, or other procedure.

In defense, it is contended that plaintiffs are not entitled to relief in this court because (1) the amount in controversy does not exceed, exclusive of interest and costs, the sum or amount of $3,000; (2) plaintiffs have an adequate and complete remedy at law, and hence cannot obtain relief in a court of equity; and (3) plaintiffs, in any event, are not exempt from taxation under the questioned statute.

1. The amount of the tax upon each of plaintiffs' salaries for the two years is confessedly less than $3,000, and for that reason defendant contends that this court is without jurisdiction. Plaintiffs do not claim the right to join their separate demands, and, if joined, the jurisdictional amount, if measured by the tax to be paid, would be insufficient. While the suit was commenced as a class suit, plaintiffs have abandoned that contention, and it is clear that claims of this kind cannot be aggregated for the purpose of conferring jurisdiction. Elliott v. Board of Trustees (C. C. A. 5) 53 F.(2d) 845; Vicksburg, etc., Ry. Co. v. Nattin (C. C. A. 5) 58 F.(2d) 979; Odgen City v. Armstrong, 168 U. S. 233, 18 S. Ct. 98, 42 L. Ed. 444.

The bill of complaint alleges that the value of the rights which it is sought to protect is more than $3,000, exclusive of interest and costs. For jurisdictional purposes, the amount in good faith claimed in the pleading of the plaintiff governs. Barnebey v. Barron G. Collier, Inc. (C. C. A. 8) 65 F.(2d) 864. Plaintiffs assert that, if the jurisdictional amount of $3,000, exclusive of interest and costs, is required, it is involved, or at least in good faith claimed, because the amount involved is not the amount of the tax in dispute, but the value of the right of each plaintiff to continue in his employment free from any impairment of emoluments by the use of the power of taxation by the state of South Dakota. Plaintiffs rely upon Berryman v. Whitman College, 222 U. S. 334, 32 S. Ct. 147, 150, 56 L. Ed. 225; Deposit Bank v. Frankfort, 191 U. S. 499, 24 S. Ct. 154, 48 L. Ed. 276; and New Orleans v. Citizens' Bank, 167 U. S. 371, 17 S. Ct. 905, 42 L. Ed. 202. The teaching of these cases is that, when there is an impairment of the obligation of a contract of exemption from taxation, the jurisdictional amount is not measured by the amount of the particular tax, but by the value of the contract right. Thus, in Berryman v. Whitman College, supra, it is said: "We state in the margin the cases principally relied upon to support the contention as to the want of jurisdiction. It would suffice to say of these cases that if they supported the proposition which they are cited to maintain, they have been qualified and restricted by the cases which we have just reviewed."

The question was before the Circuit Court of Appeals of the Fifth Circuit in Vicksburg, S. & P. Ry. Co. v. Nattin (C. C. A. 5) 58 F. (2d) 979, 980. There the bill alleged that, in order to pay the interest and retire the bonds, plaintiff would each year be assessed such an amount so that it would in the aggregate, through the twenty-five years (the period of time in which taxes would be assessed to pay certain bonds), be compelled to pay a sum in excess of $5,000; $406.80 of the tax was then due. The District Court 51 F.(2d) 1061 had held that it was without jurisdiction, and in affirming the judgment the Circuit Court of Appeals said: "Only prophetic ken of a rare order could forecast what will ensue. Jurisdiction is based on actuality, not prophecy, the pressure of a grievance immediately felt and presently measureable in money of the jurisdictional amount. Speculative anticipation that conditions, from which present ills, not now sufficient in amount to give jurisdiction, flow, may in time aggregate the necessary amount, will not support jurisdiction."

In Holt v. Indiana Manufacturing Co., 176 U. S. 68, 20 S. Ct. 272, 273, 44 L. Ed. 374, the Supreme Court said: "Treating this bill as setting up a case arising under the Constitution or laws of the United States on the ground that the laws of Indiana authorized the taxation in question, and were therefore void because patent rights granted by the United States could not be subjected to state taxation, or because the obligation of the contract existing between the inventor and the general public would be thereby impaired, or for any other reason, the difficulty is that the pecuniary limitation of over $2,000 applied, and the taxes in question did not reach that amount. And the effect on future taxation of a decision that the particular taxation is invalid cannot be availed of to add to the sum or value of the matter in dispute." See, also, City of Clay Center v. Farmers' Loan & Trust Co., 145 U. S. 224, 12 S. Ct. 817, 36 L. Ed. 685; New England Mortgage Security Co. v. Gay, 145 U. S. 123, 12 S. Ct. 815, 36 L. Ed. 646; Colvin v. City of Jacksonville, 158 U. S. 456, 15 S. Ct. 866, 39 L. Ed. 1053.

In view of the fact that the statute, by its express terms, expires June 30, 1935, thereby limiting the tax to two years, and of the small amount of tax on each plaintiff's salary, it seems clear that the amount is not sufficiently shown by the bill of complaint. Cohn v. Cities Service Co. (C. C. A. 2) 45 F. (2d) 687; Swan Island Club v. Ansell (C. C. A. 4) 51 F.(2d) 337.

Plaintiffs contend, however, that this court has jurisdiction irrespective of the amount in controversy, basing their claim upon title 28 USCA § 41 (14), Rev. St. § 563, par. 12, § 629, par. 16, which confers jurisdiction "of all suits at law or in equity authorized by law to be brought by any person to redress the deprivation, under color of any law, statute, ordinance, regulation, custom, or usage, of any State, of any right, privilege, or immunity, secured by the Constitution of the United States, or of any right secured by any law of the United States providing for equal rights of citizens of the United States, or of all persons within the jurisdiction of the United States."

The bill of complaint alleges that defendant, as director of taxation of the state of South Dakota, has construed subdivision (f) of section 4 of the act to exempt from taxation salaries, wages, and other compensation received from the United States of America, by officers thereof, but that employees of the United States of America are not so exempt from the tax; "that such claim on the part of said defendant is an unlawful and unjust discrimination between officers and employees of the United States of America in that said Gross Income Tax Law by its provisions exempts from the tax provided for by said law, salaries,...