State of Ohio v. Harris

• Decision Date: 04 January 1916
• Docket Number: 2739,2737,2816.
• Parties: STATE OF OHIO v. HARRIS. SAME v. CLUM. SAME v. FERRIS.
• Court: U.S. Court of Appeals — Sixth Circuit

229 F. 892

STATE OF OHIO v. HARRIS.

SAME v. CLUM.

SAME v. FERRIS.

Nos. 2737, 2739, 2816.

United States Court of Appeals, Sixth Circuit.

January 4, 1916

These appeals are from decrees entered in three intervention suits brought by the state of Ohio. The first and second interventions were commenced in bankruptcy proceedings, one in the matter of the Smokeless Heat & Power Company bankrupt, and the other in that of the Georgian Bay Company bankrupt; and the third was begun in an equity suit commenced by George H. Keeney against the Dominion Coal Company, in which an order was at the same time entered appointing a receiver and placing the property of defendant in possession of the receiver. The companies mentioned had been organized as Ohio corporations, though for different purposes; and at the commencement of the bankruptcy proceedings and the suit involving receivership, each company was in possession and control of its property and business. The object of the interventions was to recover certain franchise fees or taxes which were claimed to have accrued against the respective companies and ripened into a lien upon the corporate property; and, moreover, enforcement of the alleged liens was asked through orders, one against each of the trustees in bankruptcy and another against the receiver, requiring the officer to pay the tax out of the funds of the estate in his hands.

The first intervention concerned the tax for 1910, 1911, and 1912; and the trustee was ordered to pay, subject to the cost of administration, the tax that accrued in 1910, with interest, though without penalty. The second intervention related to the tax for 1904 to 1913, inclusive; and recovery was granted, in the form of preferred tax claims, for 1905 to 1910, inclusive, with interest, but without penalty. The third intervention had reference to the tax for 1911, 1912 and 1913; and the receiver was ordered to pay as a preferred claim, out of the funds in his possession, the tax that accrued in the year 1911, without penalty. The adjudication in bankruptcy involved in the first intervention took place November 23, 1910, and in the second on the 9th of that month; but the appointment of the receiver did not occur until November 3, 1911. It will thus be seen that the recoveries allowed were for such unpaid franchise taxes as had accrued before, and also in, the year (a) of the adjudications in bankruptcy and (b) of the appointment of the receiver and that the recoveries denied related to each of the subsequent years, when the trustees and the receiver, not the corporations, were in possession and control of the corporate assets and engaged exclusively in applying them toward payment of the corporate debts.

The state appeals from the decree, and also files petition to revise in matter of law, in the first of the interventions, but simply appeals from the decrees in the second and third. The assignments of error, however, are confined to the denials of recovery for the years subsequent to those in which the adjudications in bankruptcy and the appointment of the receiver occurred, and so do not concern the recoveries allowed. The appeals were heard together in this court, but nothing was then said by counsel, and nothing appears in the briefs, in regard to remedy. It is therefore assumed that each decree was open to the appeal taken, and hence the petition to revise the order involved in the first decree must, in accordance with the settled practice, be dismissed.

C. D. Laylin, of Columbus, Ohio, and C. F. Hornberger, of Cincinnati, Ohio, for the State of Ohio.

W. L. R. Flory, of Cleveland, Ohio, for appellee Harris.

G. B. Marty, of Cleveland, Ohio, for appellee Clum.

A. A. Ferris, of Cincinnati, Ohio, for appellee Ferris.

Before WARRINGTON, KNAPPEN, and DENISON, Circuit Judges.

WARRINGTON Circuit Judge (after stating the facts as above).

Is it the intent of the Ohio statute to exact a franchise tax in respect of an insolvent domestic corporation, where the corporation has either been adjudged a bankrupt or its assets have been placed in the hands of a receiver (who, though empowered to continue the business, such as that of mining and selling coal, is not shown or claimed to have continued the business except only so far as this may have been involved in his admitted collection of claims and discharge of debts of the corporation), and where tax claimed is for a time subsequent to the tax year in which such adjudication or appointment took place?

The facts deducible from the present records do not call for decision upon some features of the arguments of counsel. For example, whether the tax would be recoverable for such a period: (1) If it were made to appear in respect of a corporation, which is in bankruptcy or whose assets are in the hands of a receiver, that there will be a surplus of assets after discharge of the indebtedness; or (2) if a receivership were created with authority in the receiver to continue the business, and the business were in fact conducted by him during a period for which the tax is not paid. No such case is before us, but simply stating these instances serves measurably to clarify the present situation. The instant cases have to do with corporate assets which had been taken from the corporations in virtue of judicial orders, and at times when the corporations were admittedly insolvent; and, further, it is to be remembered that the present claims for taxes are not for the years in which any of the corporate assets were seized, but are for years subsequent to the seizures, and while the assets were in the custody of the law for the sole purpose of being converted into money and applied toward payment of the corporate debts.

Concededly, these corporations fall nominally within the class to which the franchise fee or tax claimed in terms applies, for they were organized under the laws of Ohio 'for profit.' 3 P. & A.O.G.C. Sec. 5495. Before giving attention to the nature of the fee as it has been judicially defined, reference will be made to its statutory sanction. The amount is computed according to a prescribed standard. Domestic corporations are required to file reports annually with the state tax commission in either May or June; and every report must be made under oath by one of the officials of the corporation (sections 5495, 5496, Id.), and must show, among other facts not now important, the issued and outstanding capital stock of the company (section 5497, Id.). The tax commission is then required to determine, and certify to the auditor of state, the amount of stock outstanding. The auditor must by August 15th 'charge for collection, * * * from such corporation, a fee of three-twentieths of one per cent.' upon the amount of stock so certified to him; the fee is payable by the 1st of the following October (section 5498, Id.). It will be observed that the fee is thus made an annual charge, though the statute does not specify the year for which the charge is made. Judge Clarke held, in the present bankruptcy interventions, that this period is the current calendar year, while Referee Doyle held in Bank v. Aultman, 12 Am.Bank.R. 13 (same case, 14 O.F.D. 298), that it is 'the year ensuing after the filing of the annual report. ' It is not necessary to determine which of these periods is the correct one, for it must be one or the other, and, in view of the tax recoveries allowed below, each of the corporations lost possession and control of its property within a tax-paid period; but we are disposed to believe Judge Clarke's conclusion is right.

The particular portion of the Ohio legislation which, as we have seen, authorizes the charge to be made, calls it a 'fee,' and this was true of the original act commonly known as the Willis Law. 95 Ohio Laws, 124, 125. The evident reason for adopting this name, when it is considered in connection with the mode selected for computing the amount to be exacted, was to distinguish the charge from a tax on property, and so to avoid the limitation of the Ohio Constitution which requires 'all real or personal property' to be taxed 'according to its true value in money. ' Article 12, Sec. 2, Const. of 1851 and 1912. Franchises have never been regarded as property, within the meaning of this limitation. Southern Gum Co. v. Laylin, 66 Ohio St. 578, 593, et seq., 64 N.E. 564; article 12, Sec. 10, Const. of 1912. It was because of this distinction that the Willis Law was sustained; the charge it imposed being defined as 'a franchise tax, and not a tax on property. ' Southern Gum Co. v. Laylin, supra, 66 Ohio St. at page 578, syl. 6, 64 N.E. 564. The decision, however, did not point out the particular franchise that was affected by the act; that is, whether it was the right of the corporation to exist or its right to exercise the powers contemplated by its charter-- its articles of incorporation-- or both, though it was said in the course of the opinion (66 Ohio St. 596, 597, 64 N.E. 564) that the fee was not a tax on the stock, since the stock was not owned by the company but by the stockholders. Mr. Justice Day, when considering a kindred statute (of New Jersey) and the different names which had there been applied to a similar charge, said of the provision requiring corporations to 'pay an annual license fee or franchise tax * * * on all amounts of capital stock issued and outstanding' (P.L. 1892, p. 136; 3 Gen.Stat.N.J.p. 3338) that it was 'a tax imposed by the state upon the corporation for the privilege of existence and the continued right to exercise its franchise. ' Sup.Ct. 137, 51 L.Ed. 284. ^[1] The effect of the New Jersey statute, as thus defined by Mr. Justice Day, would seem to justify imposing the tax while the corporation through permanent dispossession of its property was...