United States Rubber Co. v. Query

• Decision Date: 09 April 1937
• Citation: 19 F. Supp. 191
• Court: U.S. District Court — District of South Carolina
• Parties: UNITED STATES RUBBER CO. v. QUERY et al.

19 F. Supp. 191

UNITED STATES RUBBER CO. v. QUERY et al.

District Court, E. D. South Carolina.

April 9, 1937.

Before PARKER and NORTHCOTT, Circuit Judges, and GLENN, District Judge.

A. L. Wardlaw, of Columbia, S. C., and H. P. Sadtler, Jr., of New York City (A. L. Wardlaw, of Columbia, S. C., H. P. Sadtler, of New York City, Elliott, McLain, Wardlaw & Elliott, of Columbia, S. C., and Arthur, Dry & Dole, of New York City, on the brief), for plaintiff.

John M. Daniel, Atty. Gen., and Claude K. Wingate, Gen. Counsel South Carolina Tax Commission, of Columbia, S. C., for defendants.

PARKER, Circuit Judge.

This is a suit by the United States Rubber Company, a New Jersey corporation having its principal office in New York City, against Walter G. Query and other members of the South Carolina Tax Commission and E. P. Miller, State Treasurer of South Carolina, to enjoin them from collecting or attempting to collect from plaintiff an assessment of corporation franchise taxes for the years 1935 and 1936, amounting with penalties to $23,142.97. Plaintiff resists payment of the taxes assessed on the ground that it is not doing business in the state of South Carolina and also on the ground that the statutes imposing the taxes are in conflict with the Fourteenth Amendment to the Constitution of the United States in discriminating between domestic and foreign corporations. Interlocutory injunction having been applied for, a court has been constituted pursuant to section 266 of the Judicial Code, as amended (28 U.S.C.A. § 380), consisting of three judges, before whom a final hearing has been had and the cause submitted for final decree. It is admitted that, if the tax has been wrongly assessed against plaintiff, there is no adequate remedy at law and that consequently there is jurisdiction in equity to entertain the suit. In the view which we take of the case, it will be necessary for us to consider only one of the grounds upon which plaintiff asks relief, i. e., whether it had ceased to do business in the state of South Carolina prior to the years for which the franchise taxes were imposed and was therefore no longer liable for such taxes.

Plaintiff, as stated, is a New Jersey corporation with its principal office in the city of New York. Prior to September, 1934, it was engaged in the manufacture and sale of rubber goods, both directly and through subsidiary corporations, of which there were at that time more than one hundred; and it was accustomed to file a consolidated income tax return for itself and these subsidiaries. In 1934 the law permitting such consolidated returns was changed and a consolidation of the business of plaintiff was thereupon carried through so as to obviate the necessity of filing separate returns and the loss which these would involve. This consolidation was effected by transferring to one of plaintiff's subsidiaries, the United States Rubber Products, Inc., a Delaware corporation, all of the manufacturing and selling business of plaintiff and its other subsidiaries, leaving plaintiff as a mere holding company, owning manufacturing plants at various parts of the United States which it leased to United States Rubber Products, Inc. Among the properties so leased was a manufacturing plant and village in Fairfield county, S. C., near the town of Winnsboro.

The Fairfield county property of plaintiff was leased, together with its other property, to the Rubber Products Company, under an instrument by the terms of which that company agreed to pay to the plaintiff in monthly installments an amount equal to 6 per cent. per annum on the net book value of the property leased, plus depreciation. The lease contained various provisions as to payment of taxes, insurance, etc., with provision for forfeiture for breach of its conditions. Its purpose is thus stated in the forty-third paragraph, viz.:

"43. It is the purpose of this agreement to provide for the Products Company the properties, facilities, rights and privileges necessary to enable it to carry on, in the United States of America, its territories and possessions, for its own account and its own expense, the manufacturing and selling business previously carried on by the Rubber Company and its various subsidiaries above-named, excepting the selling operations heretofore carried on by Mishawaka Rubber & Woolen Manufacturing Company, Mechanical Fabric Company, New York Belting and Packing Co., a New York corporation, and Mechanical Rubber Co., a New Jersey corporation. The Rubber Company agrees to do all further acts and execute all further documents and give all further assurance necessary or proper to afford the Products Company the full benefits intended by this agreement."

Plaintiff owned all of the stock of the Rubber Products Company except a few qualifying shares held by the directors; and, upon the transfer, this stock was increased to $15,000,000. The assets vested in the Rubber Products Company were valued at $36,000,000, of which $15,000,000 was represented by capital stock, $15,000,000 by paid-in surplus, and $6,000,000 by an account set up on the books of both corporations as owing by the Rubber Products Company to plaintiff. This open account has fluctuated from time to time, the lowest figure being $240,000 and the highest $6,900,000. As dividends have been declared by the Rubber Products Company, they have been credited to plaintiff on its books. Interest at the rate of 5 per cent. per annum on the monthly balances due on this account is provided for by the lease and has been paid by the Rubber Products Company to plaintiff.

Through stock ownership, interlocking directorates and identity of controlling officers, plaintiff controls the Rubber Products Company. The two corporations occupy the same offices in New York City; but each maintains its separate corporate identity, the persons who are officers performing for each corporation the duties pertaining to their offices in that corporation, and transactions between the two corporations being accurately recorded in their corporate books and records. The Rubber Products Company does not borrow from plaintiff, and is prohibited by the lease from borrowing from others on pledge or mortgage of its assets. It finances its operations by sale of merchandise and discount of commercial paper, maintaining large current accounts for the purchase of raw materials necessary to its business.

Since September 1, 1934, the plaintiff has not operated its property in South Carolina, or engaged in any other business in that state, unless the operations carried on in the name of the Rubber Products Company at the Fairfield county plant should be held to be business done by the plaintiff. Plaintiff has been assessed and has paid property taxes on its South Carolina property leased to the Rubber Products Company, but has not paid any franchise tax for the years in question for the privilege of doing business in the state. The Rubber Products Company, as a foreign corporation doing business in the state, has paid a franchise tax based on the property which it owns within the state, as well as the ordinary property taxes assessed against such property.

The South Carolina statutes under which the defendants have assessed the franchise taxes in question against the plaintiff are Civil Code of South Carolina of 1932, sections 2682 and 2690-A, and Act May 31, 1933, No. 406, § 9, of the Acts of the General Assembly of South Carolina for the year 1933 (38 St. at Large, p. 574). These statutes impose a total franchise tax of 3 mills upon each dollar of the paid-in capital stock of domestic corporations and a tax in like amount upon foreign corporations "doing business in this State," upon "each dollar of the true value of the property of such corporation used within this State in the conduct of its business." The first question for our decision, therefore, is whether plaintiff has been engaged in business in the state of South Carolina since its lease to the Rubber Products Company. The question, it will be observed, is not whether plaintiff is engaged in business in the state of New York, where its office is and its various transactions with the Rubber Products Company are had, but whether it is doing business in the state of South Carolina so as to render itself liable for the franchise tax imposed by the statutes of that state. We think it clear that this question must be answered in the negative.

The franchise tax is a privilege tax imposed upon the privilege of doing business as a corporation within the state. The power of the state to levy such a tax upon a corporation, like the power of the state to authorize service of process upon it, is dependent upon the presence of the corporation within the state. And, as said in one of the cases involving service of process, "The jurisdiction taken of foreign corporations, in the absence of statutory requirement or express consent, does not rest upon a fiction of constructive presence, like `qui facit per alium facit per se.' It flows from the fact that the corporation itself does business in the state or district in such a manner and to such an extent that its actual presence there is established." Bank of America v. Whitney-Central Nat. Bank, 261 U.S. 171, 173, 43 S.Ct. 311, 312, 67 L.Ed. 594. The mere ownership of property in the state does not constitute such presence. New Mexico ex rel. v. Baker, 196 U.S. 432, 25 S.Ct. 375, 49 L.Ed. 540; National Regulator Co. v. Abco Boiler Corporation (D.C.) 42...