Union Twist Drill Co. v. Erwin M. Harvey, Commr. of Taxes

• Decision Date: 02 May 1944
• Parties: UNION TWIST DRILL CO. v. ERWIN M. HARVEY, COMMR. OF TAXES
• Court: Vermont Supreme Court

37 A.2d 389

113 Vt. 493

UNION TWIST DRILL CO. v. ERWIN M. HARVEY, COMMR. OF TAXES

Supreme Court of Vermont

May 2, 1944

February Term, 1944.

Method of Computing Franchise Tax on Corporation Doing Business Both Within and Without the State.

1. The enforcement of a tax is a proceeding in invitum and, as against the taxpayer, whoever would enforce the collection of the tax must establish the legality of every step in the taxing process.

2. A tax assessed against property not within the jurisdiction of the taxing authority, or against non-taxable property, is illegal and void.

3. In construing an act of the legislature its real meaning and purpose is to be sought, and if a fair and reasonable construction discloses it, it is to be given effect although a taxing statute is not to be extended by implication beyond the clear import of the language used and doubts are to be resolved against the taxing power and in favor of the taxpayer.

4. The intention of the legislature in enacting a law is to be ascertained, not from the literal sense of the words used but from a consideration of the whole and every part of the statute, the subject matter, the effects and consequences and the reason and spirit of the law.

5. A law for the assessment and collection of taxes is to be construed with the utmost liberality, and the construction is not to be critical with a view to defeat the enactment, but a liberal interpretation so as to uphold it if possible.

6. P. L. 888 prescribes no time in which the regulations therein mentioned must be adopted, and it is held that such adoption need not precede the time when the returns are due.

7. Provision of P. L. 902, giving taxpayer opportunity to confer with Commissioner of Taxes within thirty days after assessment, having been enacted for taxpayer's benefit may be waived by him, and when waived assessment is not illegal because conference has not been had within time set by the statute.

8. The provision of P. L. 902 that when the Commissioner discovers that the income of any taxpayer has not been assessed he may at any time within two years after the return was due, assess the same is not merely directory, but states a condition precedent to the legality of the tax and is intended for the security of the taxpayer; in the absence of fraud, it is a limitation on jurisdiction and is not subject to waiver.

9. Fraud is not to be presumed but must be proved.

10. When findings of fact are immaterial and may be disregarded without affecting the result of the material findings exceptions thereto are not for consideration on appeal.

11. When payment of a tax is demanded and the taxpayer has reason to believe that steps will be taken to enforce payment, payment of such tax under protest is not voluntary.

12. Taxes not assessed within the period prescribed by statute are illegal.

13. Under P. L. 909 the county court has no jurisdiction to prescribe a formula for the ascertainment of franchise taxes; it has power only to accept or reject the formula adopted by the Commissioner of Taxes.

14. In view of the fact that the Vermont Franchise Tax is not a direct tax upon the allocated net income of the taxpayer but rather an annual tax for the privilege of doing business within the State, a formula for the ascertainment of income which is not unreasonable and arbitrary and which fairly and justly reflects the net income of that portion of the business done within the State will be upheld.

15. Held, that the formula adopted by the Commissioner of Taxes for apportionment of income of a taxpayer is not shown to be inherently arbitrary or to operate unreasonably or arbitrarily or to result in the taxation of extra-territorial values.

PETITION seeking relief from the assessment of franchise taxes. Trial by court, Washington County Court, March Term, 1943, Hughes, J., presiding. To the order entered thereon both parties excepted.

Judgment reversed and judgment that the additional assessments of franchise taxes, and interest, made by the Commissioner of Taxes, against the petitioner, for the years 1934 and 1935, amounting respectively to $ 481.34 and $ 796.28, were illegally assessed and a refund thereof, together with interest thereon at 6% from October 10, 1942, is ordered. Let the petitioner recover its costs.

George L. Hunt and Ralph E. Tibbetts (of the Massachusetts bar) for the petitioner.

Gelsie J. Monti for the petitionee.

Present: MOULTON, C. J., SHERBURNE, BUTTLES, STURTEVANT and JEFFORDS, JJ.

OPINION

MOULTON

The petitioner is a Massachusetts corporation engaged in the manufacture of small cutting tools, and authorized to transact business within the State of Vermont. At all times here material it has owned and operated four factories; at Athol, Massachusetts, which produces taps and dies, and is its main office; at Mansfield, Massachusetts, known as the E. S. Card Division, where taps, dies, reamers, drills and cutters are manufactured; at Rock Island, in the province of Quebec, the output of which is of the same kind as at the Card Division; and at Derby Line in this State, where taps, dies, reamers and other similar tools are made. The Rock Island plant is just across the boundary between the United States and Canada, and the Derby Line factory is just this side of it, and the two are connected by an enclosed passage way over the river that forms at this point the international boundary. These two plants were originally a distinct and independent establishment, known as Butterfield and Company, but at some time before the present controversy arose they became the property of the petitioner corporation, and together are known as the Butterfield Division.

The proceeding is a petition brought by the petitioner to the County Court within and for Washington County, as provided by P. L. 909, seeking relief from the assessments of franchise taxes made against it by the petitionee, the Commissioner of Taxes for this State, for the years 1934, 1935, 1936, 1937 and 1938. After hearing the County Court filed findings of fact and entered an order which pleased neither party and the cause comes to this Court on the exceptions of both of them.

The Vermont Income and Franchise Tax Act (chapters 39-41 inclusive of the Public Laws) took effect on December 31, 1931. The pertinent provisions of the Act are these: An annual franchise tax computed at the rate of two percent upon its net income for the next preceding fiscal or calendar year, is imposed by P. L. 887 upon every foreign corporation, liable to tax under P. L. Chapter 40, doing business in this State. P. L. 888 provides that: "If the entire business of the corporation be transacted within the State, the tax imposed shall be based upon the entire net income of such corporation for such fiscal or calendar year. If the entire business of the corporation be not transacted within the State and its gross income derived from business done both within and without the State, the determination of its net income shall be based upon the business done within the State and for the purpose of computing such net income the commissioner shall adopt such recommendations and regulations for the allocation of net income as will fairly and justly reflect the net income of that portion of the business done within the state." The form and content of the returns to be filed by the corporation are prescribed in P. L. 893 and 894, and by sub-division XI of the latter section: "If it shall appear to the commissioner that the segregation of assets shown by any report made under this section does not properly reflect the corporate activity or business done in this State, because of the character of the business of the corporation and the character and location of its assets, the commissioner is authorized and empowered to equitably adjust the tax upon the basis of the corporate activity or the business done within and without the State rather than upon capital or assets employed." And P. L. 902 contains the following: "When the commissioner discovers from the examination of the return or otherwise that the income of any taxpayer, or any portion thereof, has not been assessed, he may, at any time within two years after the time when the return was due, assess the same and give notice to the taxpayer of such assessment, and such taxpayer shall thereupon have an opportunity, within thirty days, to confer with the commissioner as to the proposed assessment. The limitation of two years to the assessment of such tax or additional tax shall not apply to the assessment of additional taxes upon fraudulent returns. After the expiration of thirty days from such notification, the commissioner shall assess the income of such taxpayer or any portion thereof which he finds has not theretofore been assessed and shall give notice to the taxpayer so assessed, of the amount of the tax and interest and penalties, if any, and the amount thereof shall be due and payable within ten days from the date of such notice. The provisions of this chapter with respect to appeal shall apply to a tax so assessed...." The foregoing section is quoted as amended by No. 28, Acts of 1937, but the amendment does not affect any question raised in this cause.

The substance of the findings of fact follows: In 1932 the Commissioner of Taxes issued a ruling, under the authority of P. L. 888, that corporate returns must be prepared on the basis of net income as shown by the Federal Income Tax Returns, and not upon the separate basis of business done in Vermont. Shortly after the passage of the Income and Franchise Tax Act he issued a bulletin for the guidance of taxpayers, which stated that where a corporation did business partly within the State of Vermont, the tax was to be computed under such...