West Pub. Co. v. McColgan

• Decision Date: 21 May 1943
• Docket Number: No. 10162.,10162.
• Parties: WEST PUB. CO. v. McCOLGAN, Franchise Tax Com'r of California.
• Court: U.S. Court of Appeals — Ninth Circuit

138 F.2d 320 (1943)

WEST PUB. CO. v. McCOLGAN, Franchise Tax Com'r of California.

No. 10162.

Circuit Court of Appeals, Ninth Circuit.

May 21, 1943.

John W. Preston, of Los Angeles, Cal., for appellant.

Robert W. Kenny, Atty. Gen. of California, H. H. Linney, Asst. Atty. Gen., and James E. Sabine, Deputy Atty. Gen., for appellee.

Before WILBUR, GARRECHT, and DENMAN, Circuit Judges.

GARRECHT, Circuit Judge.

This case is before us on the primary record, appellee (defendant below) having filed a motion to dismiss in the lower court, which was granted, and judgment was entered accordingly. By way of introduction, it may be stated that appellee McColgan, Franchise Tax Commissioner, advised appellant that he was informed it was subject to the California Corporation Income Tax Act and was required to file returns under its provisions for all years ending subsequent to January 31, 1939. The appellant, upon receipt of a second letter from appellee, answered that it was a Minnesota corporation, transacting all its business in that state, and was subject to its income tax law, and that, "therefore, no part of our income is taxable under the California Corporation Tax Act." After further correspondence emanating from appellee, which was not answered, he levied "arbitrary" assessments against appellant for the calendar years 1937, 1938, and 1939. The appellant then filed an action in the court below against the appellee praying declaratory relief and for an injunction.

For its cause of action the appellant alleged that it was a corporation organized and existing under the laws of the state of Minnesota with its principal place of business in the city of St. Paul in said state; that it was engaged in the business of "compiling, editing, printing, binding, publishing and selling law books and other legal publications" throughout the United States and in certain foreign countries; that it has not filed an application to transact business in the state of California, nor has it requested or been granted a permit or license to carry on business in said state; that it has not maintained any office or place of business in the state of California nor has it maintained any store in said state, either wholesale or retail, for the purpose of selling or delivering its products or merchandise in California, or for any other purpose; that it has not sold or delivered any of its products to purchasers in California, except in interstate commerce. It further alleged that, in conducting its business in interstate commerce, it has sent traveling salesmen into the state of California to solicit orders for the sale of law books and other publications from lawyers and others resident in said state; that the salesmen have authority only to solicit such orders which, when obtained, were required to be, and were, sent to the appellant at its principal office in St. Paul, Minnesota, for acceptance or rejection; that orders accepted by the appellant are filled by delivering the goods ordered to a common carrier at St. Paul, Minnesota, freight charges prepaid, for shipment to the purchasers thereof resident in California; that all such transactions were consummated and deliveries made in the state of Minnesota. The complaint also alleged that all of the appellant's income derived from sales of its products to customers resident in California was received by it at its office and place of business in St. Paul, Minnesota; that it has not received any of its income in the state of California; that none of its income has at any time been within the jurisdiction of said state or any of the officers thereof; that it has not brought itself within the jurisdiction of the state of California, nor made itself liable for any tax under the California Corporation Income Tax Act of 1937, St.Cal.1937, p. 2184 et seq.; that appellee has no right or power to levy a tax against its income, or any part thereof, whether derived from sales of its products to customers in the state of California, or otherwise; that appellant does not have, and has not had, any property in the state of California from which it has derived any income whatsoever. The complaint then goes on to allege the claims of appellee Franchise Tax Commissioner and state the substance of certain letters (heretofore referred to) which passed between the parties (set out in full as exhibits attached to the complaint), and alleges that it was exempted and excluded from taxation by the terms of the Act itself; that if the tax levies are authorized by the Act, they are in conflict with the Fourteenth Amendment to the Constitution of the United States as being a deprivation of property without due process of law; that the taxing act places a direct burden upon interstate commerce, Art. I, Secs. 7 and 8, Const.U.S.; that because unpaid tax levies constitute a lien against property of the taxpayer within the state of California, property of appellant which may be brought into California is in danger of seizure and if this is accomplished appellant will suffer irreparable loss and damage.

In its concluding paragraph the complaint alleges that it does not have a plain, speedy, and efficient remedy at law or in equity in the courts of the state of California because Section 23 of the California Corporation Income Tax Act, St.1939, p. 2927, provides that "no injunction or writ of mandate or other equitable process shall issue in any suit" or action to prevent or enjoin assessment or collection of any tax under the act and that appellant cannot secure relief in the courts of the state of California.

The appellant prayed for a declaratory judgment that it was not liable for any tax under the Act; that it be declared that levies made against it are void and liens created by reason thereof be vacated; and that appellee be enjoined from proceeding against any property belonging to appellant, and that he be enjoined from taking any action to collect any sum whatever from appellant to satisfy the tax levies for the years 1937, 1938, and 1939.

The appellee's motion to dismiss assigned the following grounds:

"a. This is a suit to enjoin, suspend, or restrain the assessment, levy or collection of a tax imposed by or pursuant to the laws of a State where a plain, speedy and efficient remedy may be had at law or in equity in the courts of such State (Sec. 41 (1) of the United States Code as amended in 1937 by 50 Stat. 738 28 U.S.C.A. § 41 (1)).

"b. This is an action by a private corporation against the State of California without the latter's consent and is prohibited by the Eleventh Amendment to the Constitution of the United States."

The plaintiff appeals from the judgment of the court below granting this motion.

By the provisions of Section 3 thereof, the Corporation Income Tax Act of 1937, St.1937, p. 2184, as amended, of the state of California imposes a tax for each taxable year "at the rate of 4 per cent upon the net income of every corporation derived from sources within this State on or after January 1, 1937, other than income for any period for which the corporation is subject to taxation under the Bank and Corporation Franchise Tax Act, Statutes of 1929, Chapter 13, as amended, according to or measured by net income. There shall be offset against the tax hereby imposed for any period the amount of any tax imposed on the corporation under the Bank and Corporation Franchise Tax Act for the same period. Income from sources within this State includes income from tangible or intangible property located or having a situs in this State and income from any activities carried on in this State, regardless of whether carried on in intrastate, interstate or foreign commerce." St.1939, p. 2903. This Act deals with gross income, deductions, determination of gain or loss, and other appropriate divisions in such legislation, and then, in Section 16, requires that every corporation "deriving income from sources within this State of California subject to the tax imposed by this act shall," within a specified time, file a return. One-half the amount of the tax disclosed by the return is due and payable on or before the date of filing the return and the balance of the tax must be paid on or before the fifteenth of the ninth month following the close of the taxable year, Section 17. In the case of an overpayment, credit or refund is provided for, Sections 19.1, 20, upon claim being made. If the commissioner disallows a claim he must notify the taxpayer, who is allowed an appeal to the State Board of Equalization; the commissioner must act within six months, or the taxpayer may consider his claim disallowed and appeal to the board. A determination of the board becomes final in six months. Interest is allowed on overpayments, where the taxpayer is not in fault. Section 22 of the Act provides that "The taxes imposed by this act shall constitute a lien upon the real property of the taxpayer," which "shall remain until the taxes are paid or the property subject to the lien is sold for the payment thereof * * *." Because of its importance we quote rather extensively from Section 23 of the Act, as follows:

"Judicial Remedies. Action for Recovery of Tax. No injunction or writ of mandate or other legal or equitable process shall issue in any suit, action or proceeding in any court against this State or against any officer thereof to prevent or enjoin the assessment or collection of any tax under this act, but any taxpayer claiming that the tax computed and levied against it pursuant to section 19 of this act is void in whole or in part may bring an action against the commissioner for the recovery of the whole or any part of the amount paid. Such action must be filed within four years from the last date prescribed for filing the return or within one year from the date the tax was paid, whichever period expires the later; provided, that no action shall be filed for the recovery of a deficiency assessment unless the taxpayer has...