Shaffer v. Howard

• Decision Date: 04 February 1918
• Docket Number: 2444.
• Citation: 250 F. 873
• Parties: SHAFFER v. HOWARD, State Auditor, et al.
• Court: U.S. District Court — Eastern District of Oklahoma

250 F. 873

SHAFFER v. HOWARD, State Auditor, et al.

No. 2444.

United States District Court, E.D. Oklahoma.

February 4, 1918

Ramsey De Meules, Rosser, Martin & King, of Tulsa, Okl., for plaintiff.

S.P Freeling, Atty. Gen., for defendants.

STONE Circuit Judge.

This case is an injunction brought by a nonresident of the state of Oklahoma, seeking to enjoin as invalid the enforcement of the state income law taxing that portion of the income of nonresidents which is derived from sources within the state. The instant decision arises upon an application for a preliminary injunction.

That state statute (Session Laws 1915, p. 232) provides in section 1 that:

'Each and every person in this state shall be liable to an annual tax upon the entire net income of such person arising or accruing from all sources during the preceding calender year, and a like tax shall be levied, assessed, collected and paid annually upon the entire net income from all property owned, and of every business, trade or profession carried on in this state by persons residing elsewhere."

The tax here involved was imposed under authority of the latter part of this section upon the income derived by the plaintiff from the production of certain oil wells operated under an oil lease. The plaintiff lives in Chicago, Ill., from which place he directs this business.

At the threshold of the case is the claim of want of equity because of an adequate legal remedy. This point is not well taken. Also the petition raised a point that the later gross production tax law of the state had displaced the income tax law in so far as incomes from oil properties. This point was not pressed at the hearing, and, presuming it abandoned, we pass it by.

This leaves the question of the validity of the law. This is based on the claims that an income tax is a kind of taxation differing in its basic principles from all other taxation; and, as such, being a tax levied against the person who receives the income, is invalid because he is a nonresident; or, if levied against the income, is still void because the income is made up from two inseparable elements--the property and the owner's management or intelligence--and the latter of these is outside the state.

It is claimed that income taxation is a generic kind of taxation, different from all other taxation, and resting upon an entirely different basis. That income taxation is a separate and distinct form of exercising the sovereign power of taxation is evident. That the right to its employment rests upon a basis different from that of other modes of raising revenue does not follow. Laying aside political considerations, such as gave rise to the War of the Revolution, there is but one theory of right to tax underlying all taxation--that of protection or benefit rendered by the state to persons, property, or business. Union Refrigerator Transit Co. v. Kentucky, 199 U.S. 194, 202, 26 Sup.Ct. 36, 50 L.Ed. 150, 4 Ann.Cas. 493; Cleveland, P. & A.R. Co. v. Pennsylvania, 15 Wall. 300, 319, 21 L.Ed. 179. Within constitutional limits, the choice of any particular form of taxation is a practical legislative problem. Certain classes of taxation have adherents who urge certain consideration, based upon their ideas of just and practical results in taxation. One such class is income taxes, and its sponsors urge its employment on the theory that it places the burden of government upon those most able to bear it. This may be a reason why the Legislature should choose income taxation as a revenue-raising method. It forms no new basis for a right of taxation itself. It refers solely to a choice of methods, all of which rest upon a common basis. The right to tax an income rests upon the protection or benefit given that income by the state.

The next contentions of plaintiff are related in thought, and will be considered together. They are based upon the idea that the entire income, or at least a material, inseparable, component part thereof (the directing or managing intelligence), is without the jurisdiction of the state of Oklahoma. The income here involved arose solely from production of oil wells and appliances within the state of Oklahoma, managed by plaintiff from his city of residence, Chicago, Ill. Unless the state has given protection or benefit to this income, it has no reason or right to ask contribution therefrom. McCulloch v. Maryland, 4 Wheat. 316, 429, 4 L.Ed. 579; Cleveland, P. & A.R. Co. v. Pennsylvania, 15 Wall. 300, 319, 21 L.Ed. 179; Union Refrigerator Transit Co. v. Kentucky, 199 U.S. 194, 202, 26 Sup.Ct. 36, 50 L.Ed. 150, 4 Ann.Cas. 493.

Plaintiff says no such protection has here been given because the levy is 'a tax on this plaintiff because of his income." In one sense all taxes might be said to be a tax on the taxpayer because of his land or of his personalty or of his business or of some privilege. But what the plaintiff means, as he says further in his brief, is that 'the tax is directed against the individual and not against the property." By way of further elucidation, he quotes with approval from State ex rel. Sallie F. Moon Co. v. Wisconsin Tax Commission (Wis.) 163 N.W. 639, a portion of which is that:

'It is the recipient of the income [tax] that is taxed, not his property. * * * The tax is upon the right or ability to produce, create, receive, and enjoy, and not upon specific property."

It does not necessarily follow from this definition that the plaintiff is subject to income tax only in the state of his residence. It means, rather, that he is subject to income taxation only in those jurisdictions which protect him in the production, creation, receipt, and enjoyment of his income. If he lives in Illinois, and has in Oklahoma the property or the business from which his income flows, does not the latter state truly protect him in the privilege of producing, creating, receiving, and enjoying that income when it permits and protects his business from which the income flows? How is that affected by his residence? Both the property in Oklahoma and the intelligence in Illinois contributed to this income. Each was necessary to the result. Each had protection from the state in which it was. It is impossible to separate the two elements for taxation purposes. It is impossible, if material, to determine which was most potent in the result. Can either state be told it cannot be compensated for its protection of a necessary component element of this income, or that it cannot measure such compensation by that income? If, through accident or design, an individual dwells in one state, while his business is in part or wholly located in other states, so that he needs, commands, and receives the protection of several states, can his income therefrom escape imposition? It may be true that the state which protects the person of the one who creates, receives, or enjoys an income may require of him therefor a tax measured by his ability to pay from his entire income. That is no reason why the state which protects the business which contributes to his income may not also demand, as pay for that protection, a tax measured by that part of his income which came from that business. If in the one case the state of residence can tax the right to create, receive, and enjoy an income, why cannot another state tax his right to create and receive an income from business within its borders?

A tax upon an income of the instant character (from a business) is directed at neither the person who receives nor the property from which the income arises, but at the privilege of making, producing, creating, receiving, and enjoying the income itself. The right to lay such tax depends upon the protection of the person who receives or of the business which helps create that income.

There is nothing new in this conception of a nonresident being taxed for rights or privileges he exercises under the protection of another state. Inheritance taxes are illustrations. Mager v. Grima, 8 How. 490, 12 L.Ed. 1168; Scholey v. Rew, 23 Wall. 331, 23 L.Ed. 99. Such a tax is levied against the nonresident as well as the resident because of his inheritance--the state protects him in that privilege. Occupation or business taxes are also illustrative. And this would be so because the state of Oklahoma permits him to carry on his business within the state, and protects him therein, irrespective of whether he lives within or without the state, or manages the business from within or without the state. When he can be properly taxed for the privilege of inheriting the property or carrying on a business within another state, why cannot he be taxed upon an income he derives from business within the state, when a tax upon such an income as this is a levy on the privilege of producing, creating, receiving, and enjoying an income? It is true the tax on the income is not upon the business conducted, but it is also true that the income springs therefrom, and, following the situs thereof, as the child takes legally the residence of the parent, it carries the right of taxation with it.

Such an income of a nonresident is taxable not only because it fits in with the theory of the right of all taxation, i.e protection, but for another reason. The situs of things and choses in action and legal rights rests in many cases upon a legal fiction. The necessity of avoiding confusion, inconvenience, or injustice arises in some instance, and the law settles upon a so-called situs. Familiar illustrations are: A married woman ordinarily partakes of her husband's nationality and domicile; the law of the domicile controls the descent of personalty; and many others to be found in the realm of private international law. These questions arise where there are conflicting claims of jurisdiction. ...