Smoot Sand and Gravel Corp. v. District of Columbia

Decision Date26 November 1958
Docket NumberNo. 14290-14294.,14290-14294.
Citation261 F.2d 758,104 US App. DC 292
CourtU.S. Court of Appeals — District of Columbia Circuit


Mr. David R. Shelton, Washington, D. C., for petitioner.

Mr. Henry E. Wixon, Asst. Corp. Counsel for the District of Columbia, with whom Messrs. Chester H. Gray, Corp. Counsel, and Milton D. Korman, Principal Asst. Corp. Counsel, were on the brief, for respondent.

Before EDGERTON, BAZELON and WASHINGTON, Circuit Judges.

Petition for Rehearing In Banc Denied December 19, 1958.

WASHINGTON, Circuit Judge.

The Smoot Sand and Gravel Corporation petitions for review of decisions of the District of Columbia Tax Court determining that deficiencies in franchise taxes assessed against the petitioner and paid to the District for the years 1948 to 1954, inclusive, were correctly assessed. The appeal questions the validity of regulations promulgated by the Commissioners to govern the apportionment to the District for franchise tax purposes of a part of the net income of petitioner's business, which was carried on partly within and partly without the District. The controlling statute is the District of Columbia Income and Franchise Tax Act, D.C.Code §§ 47-1571, 47-1571a, 47-1580, and 47-1580a (1951).

The petitioner is a Delaware corporation having its principal office in the District of Columbia. It removes, washes, and grades sand and gravel along the shores of the Potomac River and its tributaries in Maryland and Virginia and transports the processed material in scows by tugboat to three "plants" in the District of Columbia where the products are stored and sold. During the taxable years in question approximately 95% of the sand and gravel was disposed of in the District of Columbia through sales effected at the three District plants, and the remaining 5% was sold in Alexandria, Virginia. The Assessor for the District assessed and collected taxes on approximately 95% of petitioner's net income for each of the taxable years pursuant to regulations issued by the Commissioners requiring, in the case of a business consisting of the manufacture and sale of tangible personal property carried on partly within and partly without the District, that the portion of the net income to be apportioned to the District for franchise tax purposes shall be the percentage that sales made in the District during the taxable year bear to total sales everywhere during that year.1 The Tax Court affirmed the assessments, taking the view that this court had upheld the validity of this regulation in Lever Bros. Co. v. District of Columbia, 1953, 92 U.S.App.D.C. 147, 153, 204 F.2d 39, 45, and District of Columbia v. Radio Corporation of America, supra, note 1. See also Eastman Kodak Co. v. District of Columbia, 1942, 76 U.S.App. D.C. 339, 131 F.2d 347, and Panitz v. District of Columbia, 1941, 74 App.D.C. 284, 122 F.2d 61.

The petitioner apparently agrees that it "manufactures" and sells sand and gravel and that it falls within the reach of the regulation.2 Its contentions here are that, under the language of the governing statute, its net income must be apportioned by a formula which takes into account its property values and operating costs, as well as sales; that the regulation is invalid because it directs the apportionment of net income by considering only sales; and that this issue was not raised or decided in the Lever Bros. and RCA cases.

We agree that in Lever Bros. and RCA we were not called on specifically to decide whether the District statute required the Commissioners' regulations to provide for apportionment of net income on the basis of sales, property values, and operating costs, instead of exclusively on sales within the District. But we stated in Lever Bros.:

"Certainly the due process clause does not require apportionment of part of the gross receipts from sales to the jurisdiction of manufacture. Citing cases We conclude, therefore, that the regulation prescribed by the Commissioners for the year 1948 and applied by the Assessor was valid under the Act * * *." 92 U.S.App.D.C. at page 153, 204 F.2d at page 45.

And in the Panitz and Eastman Kodak cases we ruled, under earlier tax statutes, that an apportionment formula based solely on sales may validly be applied to multi-state business enterprises, even though production of the article sold occurred outside the District. Nevertheless, we will consider here the precise contentions petitioner makes.

The statute involved in this case imposes, for the privilege of carrying on or engaging in any trade or business within the District, a franchise tax at the rate of 5% upon the net income of every corporation which is derived from sources within the District. D.C.Code §§ 47-1571, 47-1571a, and 47-1580 (1951). Section 47-1580 provides that the measure of the tax "shall be that portion of the net income of the corporation * * * as is fairly attributable to any trade or business carried on or engaged in within the District." In addition, Section 47-1580a of the Code provides:

"If the trade or business of any corporation * * * is carried on or engaged in both within and without the District, the net income derived therefrom shall, for the purposes of this article, be deemed to be income from sources within and without the District. Where the net income of a corporation * * * is derived from sources both within and without the District, the portion thereof subject to tax under this article shall be determined under regulation or regulations prescribed by the Commissioners."

It will immediately be noted that the statute does not direct the Commissioners to give weight to any particular factors in prescribing a formula to determine the portion of net income which is fairly attributable to the business carried on within the District. Thus the regulation in issue, which relies on sales as the determinative factor, does not violate a specific statutory provision as to the factors to be taken into account. Nor does the regulation violate the statutory direction that where a business is carried on both within and without the District, the net income therefrom shall be deemed to be income from sources within and without the District. The regulation in terms prescribes a formula for apportionment of income in the situation where sales are in fact made outside the District as well as within it, and we read it as being so limited in application. The regulation thus will inevitably apportion or divide the net income, on the basis of sales, between the District and other taxing jurisdictions where sales are made.

Nor is there any basis for reading into the statute an implied prohibition against use of the sales factor alone in making apportionment. The present statute was enacted in 1947. This was some years after this court had upheld — in Eastman Kodak and Panitz — the use of the formula here in question under earlier statutes. Although for the first time the present statute used the words "fairly attributable," and included the provision that the net income of a multistate business shall be deemed to be income from sources within and without the District, Congress delegated to the Commissioners the task of making the rules to determine the part of the net income which is to be considered to be derived from sources within the District — and it did this in the light of the established regulation. If Congress had thought that the part of the net income which was fairly attributable to the District in the case of a manufacturing and selling business could not properly be determined by an apportionment formula which took into account the sole factor of sales in the District as compared with total sales, it could easily have so stated. In the circumstances its failure to do so is significant, not only eliminating any basis to infer disapproval of the rule, but giving some basis to infer approval.

Petitioner urges that the inclusion of these new provisions in the present statute was brought about by certain Supreme Court decisions and that Congress necessarily intended to require the use of a three-factor apportionment formula based on sales, manufacturing costs, and property values. Of the five cases relied on by petitioner, three — Underwood Typewriter Co. v. Chamberlain, 1920, 254 U.S. 113, 41 S.Ct. 45, 65 L.Ed. 165; Bass, Ratcliff & Gretton, Ltd. v. State Tax Commission, 1924, 266 U.S. 271, 45 S.Ct. 82, 69 L.Ed. 282; National Leather Co. v. Massachusetts, 1928, 277 U.S. 413, 48 S.Ct. 534, 72 L.Ed. 935 — sustained use of a one-factor formula under the proof adduced. One — Hans Rees' Sons v. North Carolina, 1931, 283 U.S. 123, 51 S.Ct. 385, 75 L.Ed. 879 — held, under the proof, that the statutory one-factor formula involved, based on property values rather than sales, achieved an arbitrary and unreasonable result in respect of the taxpayer before it. The fifth case — Butler Bros. v. McColgan, 1942, 315 U.S. 501, 62 S.Ct. 701, 86 L.Ed. 991 — involved a three-factor formula, but not a formula identical with the formula contended for by petitioner here. We find nothing in these decisions to support an inference that in the District statute Congress intended to direct the use of any particular formula, much less the particular three-factor formula urged by the petitioner.

A somewhat comparable provision of the Federal income tax law provides little assistance here. Section 119(e) of the Internal Revenue Code of 1939, 53 Stat. 55, 26 U.S.C. § 119(e),3 provides, for Federal income tax purposes, that income

"(2) from the sale of personal property produced (in whole or in part) by the taxpayer within and sold without the United States, or produced (in whole or in part) by the taxpayer without and sold within the United States, shall be treated as derived partly

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    ...v. General Motors Corporation, 118 U.S.App.D.C. 381, 336 F.2d 885, 902-904 (1964); see also Smoot Sand and Gravel Corp. v. District of Columbia, 104 U.S.App.D.C. 292, 261 F.2d 758, 763 (1958) (" 'And the gross receipts formula has been in operation too long and upheld in the courts too freq......
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