Stanley Works v. Hackett

• Decision Date: 04 March 1937
• Citation: 190 A. 743,122 Conn. 547
• Parties: STANLEY WORKS v. HACKETT, Tax Com'r.
• Court: Connecticut Supreme Court

190 A. 743

122 Conn. 547

STANLEY WORKS v. HACKETT, Tax Com'r.

Supreme Court of Errors of Connecticut.

March 4, 1937

Case Reserved from Superior court, Hartford County; John Rufus Booth, Judge.

Action by the Stanley Works against William H. Hackett, Tax Commissioner. From the imposition of an additional tax on plaintiff by defendant under the Corporation Business Tax Act, plaintiff appealed to the superior court, which reserved two questions for the advice of the Supreme Court of Errors.

First question answered in the affirmative.

James W. Cooper, of New Haven (Arthur L. Corbin, Jr., of New Haven on the brief), for appellant.

Richard F. Corkey, Asst. Atty. Gen. (Edward J Daly, Atty. Gen., and Charles J. McLaughlin, Deputy Atty Gen., on the brief), for appellee.

Argued before MALTBIE, C.J., and HINMAN, BANKS, AVERY, and BROWN JJ.

MALTBIE, Chief Justice.

The plaintiff a corporation organized under the laws of this state and having its principal office and place of business in New Britain. It is engaged in manufacturing, buying, selling, and otherwise dealing in metal and hardware in this and several other states in the United States. It is authorized under its charter and the General Statutes to buy, sell, and hold stock in other corporations, and in the year 1935 it did hold the stock of three Canadian corporations. It is liable to pay the state a corporation business tax under the provisions of chapter 66b of the Cumulative Supplement of the General Statutes 1935 (section 416c et seq.). In March, 1936, it made the required return to the tax commissioner for the fiscal year of 1935. This showed that it had made a profit during the year such that it was liable for more than the minimum tax provided in the chapter. In the return it stated that it had received the sum of $720,975 in dividends upon the stock held by it in the Canadian corporations, but it did not include this sum in computing the amount of the tax payable. The tax commissioner overruled the plaintiff's claim that this amount should not be included in the computation of the tax and imposed an additional tax of $14,168.99 on account of this item, which was paid by the plaintiff, under protest. Our advice is requested upon two questions, but it is only necessary to consider the first: Whether the tax commissioner erred in including in the computation of the tax the dividends received by the plaintiff upon the stock owned by it in the Canadian corporations.

The plaintiff is the sole owner of the stock of the three Canadian corporations. They are under the active management of managers resident in Canada. They carry on no trade or business in the United States, but they do carry on in Canada a business of similar type to that of the plaintiff in this country. Part of the dividends in question were paid from earnings of the corporations in 1935, but the larger portion represented surplus or undivided profits earned during the period from 1919 to the end of 1934. The Canadian corporations paid substantial income taxes to the Dominion of Canada based upon the income from which the dividends were paid, and the plaintiff has not received the benefit of any tax allocation outside the state on account of the business done by them.

Chapter 66b of the Cumulative Supplement of 1935, as far as applicable to the case before us, requires every corporation within its scope to pay annually " a tax or excise upon its franchise for the privilege of carrying on or doing business within the state, such tax to be measured by the entire net income as herein defined received by such corporation or association from business transacted within the state during the income year." Section 418c. It is provided that there shall be deducted from the corporation's gross income all items deductible under the federal corporation net income tax law in force on the last day of the income year, with certain exceptions not relevant to our discussion, and also interest or rent paid by the corporation during the year. Section 419c. Section 420c beings with the statement: " If the trade or business of the taxpayer shall be carried on partly without the state, the business tax shall be imposed on a base which reasonably represents the proportion of the trade or business carried on within the state." The section then establishes a basis upon which corporate income shall be allocated when a corporation does business outside the State. The section is divided into three parts. The first deals with " interest, dividends, royalties and gains from sales of intangible assets," and as we shall quote this provision later, it is sufficient now to point out that where the corporation has its principal place of business within the state, these items are to be allocated to the state, but where it has its principal place of business without the state they are to be allocated without the state, with a proviso that they shall be allocated within or without the state according as they clearly appear to have been received in connection with business within or without it. The second part of the section deals with gains from the sale or rental of tangible capital assets not in the regular course of business, and the basis of allocation is the actual situation of the property within or without the state. The third part gives the basis of computing the tax in the case of income derived from business other than the manufacture, sale, or use of tangible personal or real property, the allocation to be made under rules established by the tax commissioner, and also in the case of income derived from the manufacture, sale, or use of tangible personal or real property; and as to this last it is provided that the amount of the income allocated to this state shall be determined upon the basis of three factors, the proportionate value of the tangible property within the state, the proportionate amount of salaries and wages paid from offices or places of business within the state, and the proportion of gross receipts from sales or other sources assignable to offices, agencies, or places of business within the state.

Section 421c and 422c provide a minimum tax payable where the amount of such minimum determined as provided in the statute would be larger than that imposed under the preceding section. This tax is based, not on income but in general upon the capital stock, interest-bearing indebtedness, and surplus and undivided profits, with a provision for an allocation to this state of a proportion of the value of the assets based upon tax situs of the property within or without the state, but excluding from the computation the amount of any holding of stock of private corporations. Section 423c provides that the tax commissioner, when he concludes that the method of allocation prescribed is inapplicable and inequitable as regards any corporation, shall redetermine the tax base by such other method of allocation and apportionment " as shall seem best calculated to assign to the state for taxation the portion of the business reasonably attributable to the state."

The tax established in this chapter is " in the nature of an excise tax levied against domestic and foreign corporations alike for the privilege of doing business in a corporate capacity within this state." Underwood Typewriter Co. v. Chamberlain, 94, Conn. 47, 55, 108 A. 154, 157; Bass, Ratcliff & Gretton v. Tax Commission, 266 U.S 271, 280, 45...