Wood Preserving Corp. v. Department of Treasury

• Decision Date: 03 October 1940
• Docket Number: No. 7126.,7126.
• Citation: 114 F.2d 922
• Parties: WOOD PRESERVING CORPORATION v. DEPARTMENT OF TREASURY OF STATE OF INDIANA.
• Court: U.S. Court of Appeals — Seventh Circuit

114 F.2d 922 (1940)

WOOD PRESERVING CORPORATION v. DEPARTMENT OF TREASURY OF STATE OF INDIANA.

No. 7126.

Circuit Court of Appeals, Seventh Circuit.

July 20, 1940.

Rehearing Denied October 3, 1940.

Frederick E. Matson and Harry T. Ice, both of Indianapolis, Ind. (Carleton M. Crick, of Pittsburgh, Pa., and Matson, Ross, McCord & Ice, of Indianapolis, Ind., of counsel), for appellant.

Omer Stokes Jackson, Atty. Gen., and Joseph W. Hutchinson and Joseph P. McNamara, Deputy Attys. Gen., for appellees.

Before SPARKS and MAJOR, Circuit Judges, and LINDLEY, District Judge.

MAJOR, Circuit Judge.

This is an appeal from a judgment against the plaintiff in an action to recover taxes collected by defendants under the Indiana Gross Income Tax Act of 1933 (Chap. 50, Indiana Acts 1933, Burns' Statutes Annotated 1933, § 64-2601 et seq.). The court adopted the "stipulation of findings" filed by the parties as its special findings of fact, and stated its conclusions thereon. The errors relied on arise out of the court's conclusions of law.

The facts, as found by the court, are lengthy, and while not in dispute, it seems essential to state a resumé of the same in order properly to consider the questions of law presented.

All the gross receipts in question were received by plaintiff during 1934, 1935 and 1936 (the taxable years), from the sale of cross-ties furnished to the Baltimore and Ohio Railroad Company pursuant to certain contracts and course of dealings had between the parties. One contract was between Central Creosoting Company of Delaware, operating a treatment plant¹ at Finney, Ohio, and the railroad, a Maryland Corporation, with main offices at Baltimore, Maryland, executed December 21, 1922, which, prior to 1933, was assigned to National Lumber and Creosoting Company. Subsequently, but prior to 1933, plaintiff acquired control of this company and operated it as a subsidiary. By this contract, the railroad was required to deliver annually to the plant at Finney, Ohio, a minimum of 600,000 ties for treatment. The railroad had another contract with the Joyce-Watkins Company of Illinois, which operated a treatment plant, owned by the railroad, at Green Springs, West Virginia. This contract was assigned by Joyce-Watkins to plaintiff March 1, 1933, and provided terms by which plaintiff was to purchase and sell ties to the railroad and operate the plant. Before plaintiff commenced operations, a supplemental agreement was made between the railroad and the plaintiff, accepted and followed by the plaintiffs, during the taxable years, that all ties originating at points on the railroad west of the Ohio River (including Indiana), should be shipped by plaintiff to Finney, Ohio.

Plaintiff is a Pennsylvania corporation with its main office at Pittsburgh. Its office from which its tie business was operated was at Marietta, Ohio. It maintained no office in Indiana, but was qualified to do business in that state where it had a statutory agent for service of process. The railroad company, when it desired ties — in conformity with the Joyce-Watkins contract — through its purchasing agent at Baltimore, Maryland, telephoned plaintiff's Marietta office, stating the number of ties wanted and the price it would pay delivered f. o. b. cars at loading point. Plaintiff's Marietta office would then send a price list circular to producers of ties in its territory, including Indiana, which contained specifications, prices to be paid on the ground at loading point, and the information that plaintiff would pay additional for loading ties on the cars. In response to this price circular, the producers would notify plaintiff at its Marietta office by mail, telephone or telegraph of the quantity, type and quality of ties they could furnish, as well as the nearest loading point. Ties were delivered to such point by the producers, where an agent of the plaintiff, assigned from its Marietta office, and an inspector for the railroad, would go. The ties were examined by the railroad inspector and accepted or rejected. If accepted, they were loaded upon a car of the railroad at plaintiff's expense.

At the end of each day, the railroad inspector would make out a report of ties accepted, and give a copy to plaintiff's agent. On the basis of this report, plaintiff's agent each day paid the producer by sight draft on banks outside the state, for ties accepted by the railroad. The producer received no pay for ties rejected. When loading was completed, plaintiff's agent made out a uniform bill of lading showing plaintiff as consignor, consigning the ties to the railroad in care of its chief engineer of maintenance at Finney, Ohio. Plaintiff paid no freight for transporting the ties. Plaintiff's agent then sent to its Marietta office a copy of the railroad inspector's report of ties accepted and loaded, a copy of the draft used in paying the producer, and a shipping report showing the number and type of ties delivered to the railroad, the number of the car and the billing to Finney, Ohio. The agent also sent to the Finney, Ohio treatment plant, copies of the same papers, and to the railroad office at Baltimore, Maryland, a copy of the billing of the car to its chief engineer of maintenance at Finney, Ohio. At the end of each week, plaintiff's Marietta office made out and sent to the railroad at its Baltimore office, an invoice of ties sold and delivered to it during the previous week. At the end of each month, plaintiff's Marietta office sent its Pittsburgh office a statement showing all invoices rendered the railroad during the month for ties loaded in Indiana and shipped to Finney, Ohio. All ties purchased from plaintiff by the railroad during the taxable years were delivered to Finney, Ohio for treatment. All office and bookkeeping functions connected with these transactions were performed at plaintiff's office in Marietta, Ohio, and Pittsburgh, Pennsylvania.

No payments for ties were received by plaintiff in Indiana. They were all made by the railroad from its Baltimore office and sent to plaintiff at its office in Pittsburgh, Pennsylvania, and deposited by plaintiff in its Pittsburgh bank. It is the income thus received about which the controversy in the instant case revolves.

The contested issues are not in dispute and, as stated by plaintiff, are:

1. Whether the gross income taxes herein sought to be recovered are invalid as in violation of the due process clause of the 14th Amendment to the Federal Constitution, because laid upon a taxable event — the receipt of gross income — which occurred outside the territorial limits of Indiana and beyond the jurisdiction of the taxing authorities.

2. Whether the gross income taxes herein sought to be recovered are invalid as in violation of the due process clause of the 14th Amendment to the Federal Constitution, because laid without allocation or apportionment upon business activities both without and within the territorial limits of Indiana and, as to activities outside the state, beyond the jurisdiction of the taxing authorities.

3. Whether the gross income taxes herein sought to be recovered are invalid as in violation of the commerce clause, Article I, Section 8, of the Federal Constitution, because laid upon receipts derived from interstate commerce, constitute a direct burden upon such commerce and are of a type which subjects the commerce to the risk of multiple taxation of like kind in other states.

The solution of the first contested issue depends upon an answer to the question — What was the taxable event? It is contended by the plaintiff that the event was the receipt of gross income which occurred in Pennsylvania. If this position is sound, it is evident — in fact, not disputed — that the State of Indiana was without power to levy and collect the tax. It is defendants' contention, as stated in their brief, that "the thing which the Statute authorizes as the taxable event, the thing which was taxed, is the transaction which occurs within Indiana involved in one of two things, either doing business within the state or deriving income from a source within the state." Under this theory, the gross income received in Pennsylvania is merely the measure for the tax.

It is at once apparent that the respective contentions require a construction of the Statute relied upon as authority for the tax. The Act is entitled "An Act to provide for the raising of public revenue by imposing a tax upon the receipt of gross income * * *." Section 1 provides that this Act may be cited as the "Gross Income Tax Act of 1933." Section 2 of the Act, the one in controversy, provides: "There is hereby imposed a tax, measured by the amount or volume of gross income, and in the amount to be determined by the application of rates on such gross income as hereinafter provided. Such tax shall be levied upon the entire gross income of all residents of the State of Indiana, and upon the gross income derived from sources within the State of Indiana, of all persons and/or companies, including banks, who are not residents of the State of Indiana, but are engaged in business in this state, or who derive gross income from sources within this state, and shall be in addition to all other taxes now or hereafter imposed with respect to particular occupations and/or activities. * * *"

Section 3 provides the applicable rates "upon the entire gross income of every person * * *."

This Act has been construed by the Supreme Court in Adams Mfg. Co. v. Storen, 304 U.S. 307, 58 S.Ct. 913, 82 L.Ed. 1365, 117 A.L.R. 429. There, the taxpayer, an Indiana corporation, was a manufacturer of road machinery and equipment, and maintained its home office, principal place of business, and factory in the state. A good part of its products was sold to customers in states other than Indiana. Payments for its products were remitted to the home office. The case reached the Supreme Court by appeal from the Supreme Court of Indiana, 212 Ind. 343, 7 N.E.2d...