Southern Realty Corporation v. McCallum

• Decision Date: 07 July 1933
• Docket Number: No. 6827.,6827.
• Citation: 65 F.2d 934
• Parties: SOUTHERN REALTY CORPORATION et al. v. McCALLUM, Secretary of State of Texas, et al.
• Court: U.S. Court of Appeals — Fifth Circuit

65 F.2d 934 (1933)

SOUTHERN REALTY CORPORATION et al. v. McCALLUM, Secretary of State of Texas, et al.

No. 6827.

Circuit Court of Appeals, Fifth Circuit.

July 7, 1933.

Paul Carrington, of Dallas, Tex., Ben H. Powell, of Austin, Tex., and Robert Sansom, of Fort Worth, Tex., for appellants.

James V. Allred, Atty. Gen., of Texas, and Sidney Benbow and F. O. McKinsey, both of Austin, Tex., for appellees.

Before BRYAN, FOSTER, and SIBLEY, Circuit Judges.

SIBLEY, Circuit Judge.

In 1930 (Acts 1930 5th Called Sess., c. 68) the Texas corporate franchise tax law was amended and eighteen corporations claiming each to represent a class situated similarly to itself united in a bill in the District Court to enjoin the secretary of state, the Attorney General, and the treasurer from enforcing the law because of its conflict with the commerce clause of the Federal Constitution and the due process and equal protection clauses of the Fourteenth Amendment. Each had made the required report of facts for the assessment of its tax, and had paid it under protest into what is called the treasurer's "suspense account" to await determination of its disposition. No interlocutory injunction was asked. The District Judge accordingly heard the case, and in a lucid opinion sustained the law. 1 F. Supp. 614. On this appeal no question is raised of federal jurisdiction or jurisdiction in equity or misjoinder, but the only questions are of the constitutionality of the attacked statute on its face and as applied to the various complainants.

By article 7084 of Rev. Stats. of 1925, as amended in 1930 (Acts 1930 5th Called Sess. c. 68, § 2), with exceptions not now material, every domestic and foreign corporation chartered or authorized to do business in Texas is required on May 1st of each year to pay in advance to the secretary of state a franchise tax for the year following that date "based upon that proportion of the outstanding capital stock, surplus and undivided profits, plus the amount of outstanding bonds, notes and debentures, other than those maturing in less than a year from date of issue, as the gross receipts from its business done in Texas bears to the total gross receipts of the corporation from its entire business." The tax is 60 cents per $1,000 on the first $1,000,000, above that 30 cents per $1,000. The tax is to be computed from the reports required under article 7087 and article 7089 as amended by Acts 1930 5th Called Sess., c. 68, § 3. The latter article requires between January 1st and March 15th a sworn report from the corporation giving the capital stock paid in, the surplus and undivided profits or deficit, if any, the amount of bonds, notes, and debentures not maturing within a year from date, and the total gross receipts from all sources and the gross receipts from business done in Texas the preceding calendar year, which facts are directly necessary to compute the tax; and, in addition, information as to the cash value of all gross assets, the par value of authorized stock, current and short-term indebtedness, dividends paid, and the other countries or states where business is done, which information could be needed only to check the correctness of the main facts. A foreign corporation making its first report is to make it at the end instead of at the beginning of the first year's business, plainly because it could not earlier be known what its annual Texas receipts would be. Article 7087 provides that the secretary of state may require any officer of the corporation to file an affidavit of the facts concerning the amount of surplus and undivided profits, either to determine the amount of the first franchise tax payment or the correctness of any report, and until fully satisfied as to the amount of such surplus and undivided profits he shall not grant articles of incorporation to a domestic corporation or issue a permit to do business to a foreign corporation or accept the franchise tax. Failure to make report or to pay the tax is penalized in money, and after notice, if the full tax is not paid by July 1st, the right to do business in the state is forfeited and a domestic charter may be annulled. Article 7095 contains these provisions: "The Attorney General shall bring suit therefor against any such corporation which may be or become subject to or liable for any franchise tax or penalty under this law," venue being fixed in certain courts; and "such courts shall also have authority to restrain and enjoin a violation of any provision of this chapter."

The tax is not laid on property or on income, though both are regarded in measuring it. It is laid on the privilege granted to the corporation, whether domestic or foreign, to do business for one year in Texas with the capital set-up which it has chosen to use. The tax for this opportunity to do the year's business is directly measured by the business capital about to be used rather than by the income which it may afterwards appear was realized. The origin, form, and location of that capital, whether in or out of the state, is unimportant, provided it is to contribute to the corporation's business power within the state. When the corporation is to do business in other states also, avoidance of a trespass on interstate commerce or on that done beyond the territorial jurisdiction of the taxing state is secured by apportioning the business potency of the corporation represented by its business capital according to the business actually done during the preceding calendar year in the taxing state as indicated by gross receipts, compared with all its business everywhere. Authorized but unissued capital stock which condemned the law as to foreign corporations in Looney v. Crane Co., 245 U. S. 178, 38 S. Ct. 85, 62 L. Ed. 230, is eliminated as a factor in computing the tax, but a novel one has been introduced, to wit, the amount of permanent borrowed capital represented by bonds, notes, or debentures running for a year or more from date. That a state may impose such a franchise or business privilege tax, and may measure it by the capital stock and surplus used by the corporation in its business or by its income therefrom, although business is done in more states than one, without unconstitutional interference with interstate commerce or other federal prerogative and without a taxing of property beyond the jurisdiction of the taxing state, when the capital by which the tax is measured is reasonably apportioned according to the business there done, is settled by many decisions. Educational Films Corporation v. Ward, 282 U. S. 379, 51 S. Ct. 170, 75 L. Ed. 400; Western Cartridge Co. v. Emmerson, 281 U. S. 511, 50 S. Ct. 383, 74 L. Ed. 1004; International Shoe Co. v. Shartel, 279 U. S. 429, 49 S. Ct. 380, 73 L. Ed. 781; National Leather Co. v. Massachusetts, 277 U. S. 413, 48 S. Ct. 534, 72 L. Ed. 935, and cases cited. With respect to the novel inclusion in the measure of the tax of long-time indebtedness, it is here made to appear that corporations had resorted to the device of issuing an insignificant amount of capital stock but a large amount of bonds, thus arranging for a permanent capital which would not increase the tax under the former laws. The Legislature deemed that such capital, equally with that raised by...