South Porto Rico Sugar Co. v. Buscaglia

• Decision Date: 06 March 1946
• Docket Number: No. 4091.,4091.
• Parties: SOUTH PORTO RICO SUGAR CO. v. BUSCAGLIA, Treasurer of Puerto Rico, et al.
• Court: U.S. Court of Appeals — First Circuit

154 F.2d 96 (1946)

SOUTH PORTO RICO SUGAR CO. v. BUSCAGLIA, Treasurer of Puerto Rico, et al.

No. 4091.

Circuit Court of Appeals, First Circuit.

March 6, 1946.

R. Castro Fernandez, of San Juan, P. R. (James R. Beverley and Jose Lopez Baralt, both of San Juan, P. R., of counsel), for appellants.

I. Henry Kutz, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., Sewall Key and J. Louis Monarch, Sp. Assts. to Atty. Gen., and Fowler Harper and Warner Gardner, Sols., and Irwin W. Silverman, Chief Counsel, Division of Territories and Island Possessions, Department of Labor, all of Washington, D. C., of counsel), for appellees.

William J. Hession, of Boston, Mass., for Central Aguirre Associates, amicus curiae.

Before ALBERT LEE STEPHENS, MAHONEY, and WOODBURY, Circuit Judges.

MAHONEY, Circuit Judge.

This case comes before us on appeal from the Supreme Court of Puerto Rico which reversed a decision of the Tax Court of Puerto Rico in favor of the appellant. It is submitted on an agreed statement of facts which will be briefly summarized.

The appellant, South Porto Rico Sugar Company, hereinafter referred to as the Sugar Company, is a corporation organized under the laws of the State of New Jersey and not registered in nor doing business in Puerto Rico. It filed its income tax return for the fiscal year beginning October 1, 1941, showing a gross income of $1,424,000 consisting of dividends received from a Puerto Rican corporation, and calculated and paid the tax on its net taxable income on the basis of the same rate of tax as was applicable to domestic corporations under the tax laws of Puerto Rico.¹ This statute purported to tax foreign corporations at a rate 2% higher than that levied on domestic corporations. The Treasurer of Puerto Rico, in view of the fact that the Sugar Company was a foreign corporation, calculated the tax on it at the higher rate, and notified the company of a deficiency of $28,480, with interest at 6% per annum from the date prescribed for the payment of the tax.

The Sugar Company did not allege that it was registered in or doing business in Puerto Rico and the agreed statement of the case, on which the issue is presented to us, states that the company is "not registered in nor doing business in Puerto Rico". However, the agreed statement also asserts that the Sugar Company is the same corporation which was held by the Supreme Court of Puerto Rico to be within the jurisdiction of Puerto Rico for service of summons in the case of People of Puerto Rico v. South Porto Rico Sugar Company, 56 P.R.R. 633, and at all times since that determination it has been engaged in the same business and to the same extent in Puerto Rico as it was at the time of the commencement of that case. But this fact did not appear in the pleadings on which the case was submitted to the trial court or the Supreme Court. It appears for the first time in the agreed statement of the case filed in the record on appeal to this court.

The Sugar Company appealed to the Tax Court from the assessment of the deficiency by the Treasurer, alleging that the 2% discrimination against foreign corporations was void and unconstitutional. The Treasurer filed a general demurrer to the allegations of the taxpayer contending that the statute was valid and constitutional. The Tax Court entered a decision in favor of the company holding that it was doing business in Puerto Rico and therefore was within the jurisdiction of Puerto Rico, and thus was entitled to the benefits of the equal protection clause of the Organic Act; and that the imposition of a tax upon foreign corporations and partnerships which are within the jurisdiction of Puerto Rico at a rate higher than that imposed on domestic corporations and partnerships was a violation of the equal protection clause and uniformity provision of the Organic Act of Puerto Rico.²

The Supreme Court of Puerto Rico granted the Treasurer's petition for certiorari and entered judgment reversing the decision of the Tax Court. The Supreme Court, in upholding the statute as applied to the Sugar Company reasoned that: "The question of the constitutionality of the statute must be divided into two parts: (1) as to its application to foreign corporations which have obtained licenses to do business in Puerto Rico; and (2) as to its application to foreign corporations which have not complied with that requisite." Because it did not appear in the record that the Sugar Company was authorized to do or was doing business in Puerto Rico, the Supreme Court concluded that it was not within the jurisdiction of the Island and hence was not entitled to the equal protection of the laws as provided by Section 2 of the Organic Act of Puerto Rico because that Act affords such protection only to persons within the jurisdiction of Puerto Rico. It also decided that the imposition of the higher rate on foreign corporations authorized to do business in the Island was invalid as a violation of the equal protection clause. The taxpayer's motion for reconsideration on the ground that it was protected by the uniformity provision of the Organic Act was denied by the Supreme Court which stated that the distinction which it had made between the two types of foreign corporations was a reasonable classification "and should be upheld as a lawful exercise of the legislative power to classify taxpayers and to impose upon them different tax rates."

The distinction made by the Supreme Court between the two types of foreign corporations: (1) Those authorized to do business in Puerto Rico, and (2) those not so authorized, has been challenged as an exercise of judicial legislation. There is no question of judicial legislation in this case. The separation of foreign corporations into the two classes above designated was made in order to determine the constitutionality of the statute as applied to each class. The question of the separability of the statute does, however, involve a question of local law. But we cannot say that the determination by the Supreme Court of Puerto Rico that the statute may be separately applied to the foreign corporation not doing business in Puerto Rico was "inescapably wrong". De Castro v. Board of Commissioners of San Juan, 322 U.S. 451, 64 S.Ct. 1121, 88 L.Ed. 1384; Puerto Rico v. Rubert Hermanos Co., 315 U.S. 637, 646, 62 S.Ct. 771, 86 L.Ed. 1081; Bonet v. Texas Co., 308 U.S. 463, 60 S.Ct. 349, 84 L.Ed. 401. The Legislature of Puerto Rico might have intended the application of the 2% discrimination to those foreign corporations not authorized to do business in Puerto Rico had it foreseen the invalidity of the statute as applied to foreign corporations so authorized, Ballester-Ripoll v. Court of Tax Appeals of Puerto Rico, 1 Cir., 1944, 142 F.2d 11, 19, in order to secure as much revenue as possible by virtue of the enforcement of the statute to the extent that it could be validly applied.

The issues presented to us are whether the statute under consideration, as applied to the Sugar Company, violates the equal protection clause, the uniformity rule, or the due process clause of the Organic Act, and the Fourteenth Amendment to the Federal Constitution. We will consider these questions separately.

The Supreme Court held that since the Sugar Company was not authorized to do nor doing business in Puerto Rico that it was not within the jurisdiction of Puerto Rico and not entitled to the equal protection of the laws. With this holding, we agree. This case was presented before both the Tax Court and the Supreme Court on the pleadings. The appellant did not allege that it was authorized to do or was doing business in Puerto Rico. In fact, as pointed out above, the agreed statement of the case contains the opposite information. The appellant, however, urges that it is within the jurisdiction of Puerto Rico because cause the Supreme Court of Puerto Rico has once so held. People of Puerto Rico v. South Porto Rico Sugar Company, supra. However, the facts on which that case was decided are different from those presented by the pleadings in the instant case. In the earlier case the Court decided that the Sugar Company was doing business in Puerto Rico and hence subject to service there. In the case at bar, the appellant has agreed that it is not authorized to do and is not doing business in Puerto Rico. In view of this agreement and the pleadings we cannot say that the Sugar Company is doing business in Puerto Rico, for to draw such a conclusion would be to render the agreed statement and the pleadings of the case a nullity. There is no other evidence in the record that the appellant is within the jurisdiction of the Island. It did not send its agents there for the purpose of reacquiring its property as was the case in Kentucky Finance Corp. v. Paramount Auto Exchange Corp., 262 U.S. 544, 43 S.Ct. 636, 67 L.Ed. 1112, nor does it appear that it had agents in Puerto Rico for any purpose. We cannot conceive of any basis for finding that the appellant was subject to service in or within the jurisdiction of Puerto Rico on the facts here presented. Therefore, we are concerned only with the question of whether a corporation not authorized to do business and not doing business in Puerto Rico is entitled to the equal protection of its laws. When Congress by the Organic Act enacted for Puerto Rico provisions similar to those contained in our "Bill of Rights" it intended them to have the same purport as the like...