Southern Ry. Co. v. Query

• Citation: 21 F.2d 333
• Decision Date: 27 June 1927
• Docket Number: No. 410.,410.
• Court: U.S. District Court — District of South Carolina
• Parties: SOUTHERN RY. CO. v. QUERY et al., South Carolina Tax Commission.

21 F.2d 333 (1927)

SOUTHERN RY. CO. v. QUERY et al., South Carolina Tax Commission.

No. 410.

District Court, E. D. South Carolina.

March 31, 1927.

On Rehearing June 27, 1927.

S. R. Prince and John B. Hyde, both of Washington, D. C., F. G. Tompkins, of Columbia, S. C., and Nath B. Barnwell, of Charleston, S. C., for plaintiff.

J. Fraser Lyon, of Columbia, S. C., J. M. Daniel, Atty. Gen., of South Carolina, and Cordie Page, Asst. Atty. Gen., of South Carolina, for defendants.

Before PARKER, Circuit Judge, and WATKINS and ERNEST F. COCHRAN, District Judges.

ERNEST F. COCHRAN, District Judge.

The plaintiff brought this suit against the South Carolina tax commission to enjoin the collection of additional income tax assessed by the commission against the plaintiff for the years 1921 to 1925, inclusive. A restraining order was granted pending the hearing of an application for an interlocutory injunction before three judges, as required by section 266 of the Judicial Code (28 USCA § 380 Comp. St. § 1243). Thereupon a court composed of three judges convened and heard the application for an interlocutory injunction upon the bill of complaint, return, and answer of the defendants, and a number of affidavits of expert accountants both on behalf of the plaintiff and of the defendants, and the propriety of granting the interlocutory injunction is now to be decided.

The amount of the tax assessed, with interest, is in excess of $350,000, and the income upon which it is assessed is admittedly income derived from interstate commerce. No question is involved as to the income of the railway company on purely intrastate business. That income has been determined, and the tax paid thereon is satisfactory. The tax involved in this suit is additional tax levied upon the income derived from interstate commerce which the state tax commission contends was not correctly computed for the years involved.

The facts with respect to the original taxation of the income derived from interstate commerce in South Carolina for the years involved are as follows:

In 1922, the Legislature of South Carolina passed an act known as the Income Tax Act of 1922 (Acts of the General Assembly of South Carolina 1922, p. 896). This act made a radical departure from previous income tax acts. The nature and purposes of this act and its proper construction and interpretation are admirably and comprehensively set forth by Mr. Justice Marion of the Supreme Court of South Carolina in Santee Mills v. Query et al., 122 S. C. 158, 115 S. E. 202; and it is unnecessary to restate them here. It is sufficient for the purposes of this case to say that the act as construed and interpreted in that case contemplates taxing the income of persons and corporations in this state at a rate equal to one-third of the amount required to be paid to the United States government on net taxable income; the effect of the act being to adopt for the state of South Carolina the federal income tax law, namely, the Act of Congress approved November 23, 1921 (42 Stat. 227 Comp. St. §§ 6336 1/8a-6336 1/8zzz), and the department regulations thereunder, with a tax rate equal to one-third of that imposed by the federal government.

For the year 1921, the company's business showed no net income, but a deficit, for the system taken as a whole, and no income on interstate business was returned for taxation in South Carolina for that year. For 1922, the tax was arrived at by determining the percentage of the mileage operated by the railway in the state of South Carolina in comparison with its total mileage and allocating to the state of South Carolina a like percentage of the net income as returned to the federal government in the railway company's consolidated return. For the years 1923, 1924, and 1925, the income was computed on the ton mileage basis; that is to say, the interstate freight revenue as a whole was determined, together with the actual ton miles of interstate freight traffic, the total ton miles of interstate freight was then divided into the total interstate freight revenue, and the average rate per ton per mile was thus secured. The number of ton miles of interstate freight in the state was then multiplied by the average rate per ton per mile for the system as a whole, and the result thus obtained was reported as the income from interstate traffic taxable by the state of South Carolina.

The state tax commission, in reassessing the income, has ascertained the interstate revenue by computing the revenue earned on interstate traffic actually moving within the state of South Carolina. The commission has ascertained the ton miles of traffic actually moving within the state, and has multiplied this by the revenue per ton mile, as determined for the system in the year 1917, plus the increase in the revenue per ton mile since 1917, and deducting therefrom the expenses actually incurred in the state of South Carolina in connection with interstate traffic. The railway contends that the method pursued by the commission is unfair, in that it fails to take account of the general expenses of the railway, such as cost of administration, maintenance of terminals, etc., in that the nature of the traffic in South Carolina has greatly changed since 1917 so that the revenue derived from the traffic during the years in controversy cannot be ascertained by reference to the 1917 figures, and in that the commission, in its computations, has ignored interest and discount on bonds on certain lines leased within the state of South Carolina. The argument as to the methods adopted is lengthy and complicated, but it is established that the railway system as a whole, during the year 1921, showed a deficit instead of a taxable net income, but that the method adopted by the state tax commission shows income earned within the state of South Carolina of $835,326.35, subject to tax amounting to $27,844.21. In 1922, when the company had a net income from the whole system of $857,249.16, the income assessed by the tax commission as being taxable by South Carolina was $2,698,539.66, upon which a tax was assessed of $112,439.15. While the discrepancy for the years 1923, 1924, and 1925 is not so startling, it shows that the revenue assessed as taxable by the tax commission is large in proportion to the mileage of the railway company within the state of South Carolina.

The contention of the railway company is that the net income on interstate commerce should be determined on the ton mileage basis, and, if this is adopted, no additional tax whatever is due by the company. The company makes the further contention that, if the ton mileage basis be not adopted, then the income should be apportioned on the actual mileage basis, as approved in Pittsburgh, C., C. & St. L. R. Co. v. Baccus, 154 U. S. 421, 14 S. Ct. 1114, 38 L. Ed. 1031, and that, if this mode of division be adopted, the company would be liable for only about $20,000 additional tax. It contends that the assessment made by the tax commission violates the Constitution of the United States (1) in that it operates as a burden upon interstate commerce; (2) in that it denies to the railway company the equal protection of the laws, by taxing income from property within the state on the basis of income earned without the state, whereas other corporations doing an interstate business in South Carolina are not so taxed; and (3) in that the assessment was made without notice, and therefore violates the due process clause of the Fourteenth Amendment.

At the threshold, we are met with the objection on the part of the defendants that this court has no jurisdiction because it is alleged the plaintiff has become domesticated under the laws of South Carolina and there is therefore no diversity of citizenship. The constitutional provisions and acts of the Legislature of South Carolina under which the plaintiff became domesticated and the nature of its domestication are fully set forth in State ex rel. Southern R. Co. v. Tompkins, 48 S. C. 49, 25 S. E. 982. It is unnecessary to enter into any extensive discussion of this point. We deem the matter settled by the decisions of the Supreme Court of the state and of the United States that the domestication of the Southern Railway Company under the laws of South Carolina does not deprive it of the right to invoke the jurisdiction of the federal courts on the ground of diversity of citizenship. Southern R. Co. v. Allison, 190 U. S. 326, 23 S. Ct. 713, 47 L. Ed. 1078; Wilson v. Southern R. Co., 64 S. C. 162, 36 S. E. 701, 41 S. E. 971; Calvert v. Southern R. Co., 64 S. C. 139, 36 S. E. 750, 41 S. E. 963.

But, even if it be considered that the domestication of the Southern Railway under the South Carolina statutes removes the requisite diversity of citizenship, nevertheless the United States court still has jurisdiction in the present case. Section 24 of the Judicial Code (28 USCA § 41 Comp. St. § 991) provides that the District Court shall have jurisdiction of all suits of a civil nature at common law or in equity where the matter in controversy exceeds, exclusive of interest and costs, the sum or value of $3,000, and arises under the Constitution or laws of the United States. It is unnecessary to cite the numerous decisions which show that the case presented by this bill is a case arising under the Constitution and laws of the United States, and, the jurisdictional amount being present, this court has jurisdiction of the cause.

The next question presented is whether the application for an interlocutory injunction should be heard by the District Judge alone, or by three judges, pursuant to the provisions of section 266 of the Judicial Code. The defendants allege that the claim that the suit arises under the Constitution of the United States is not even colorable, but is wholly pretentious and fictitious, and that they do not claim the right to lay any burden upon interstate commerce either directly or indirectly, and have not...