Wren Paper Co. v. Glander

• Decision Date: 13 February 1952
• Docket Number: Nos. 32728-32733,s. 32728-32733
• Citation: 103 N.E.2d 756,156 Ohio St. 583
• Parties: , 46 O.O. 479 WREN PAPER CO. v. GLANDER and five other cases.
• Court: Ohio Supreme Court

Page 583

156 Ohio St. 583

103 N.E.2d 756, 46 O.O. 479

WREN PAPER CO. v. GLANDER and five other cases.

Nos. 32728-32733.

Supreme Court of Ohio.

Feb. 13, 1952.

Syllabus by the Court.

1. United States securities, and interest accrued thereon, owned by a domestic corporation of this state are within the operation of the provision of Section 742, Title 31, U.S.C.A. that 'all stocks, bonds, treasury notes and other obligations of the United States, shall be exempt from taxation by or under state or municipal or local authority.'

2. Where the Tax Commissioner of Ohio, in determining the franchise tax on an Ohio domestic corporation for profit, under the provisions of Section 5495 et seq., General Code, includes in the tax-base formula the value of federal securities owned by the corporation, and thereby the amount of such tax is increased, such inclsuion in legal effect imposes an illegal tax on such securities.

3. Sections 5485 to 5524, inclusive, General Code, which provide for a franchise tax on corporations organized for profit under the laws of this state, except as provided therein, for the privilege of exercising their franchises within the state; which provide for annual reports of such corporations to the Department of Taxation; which provide the method of determining such tax by determining the value of outstanding shares of such corporations; and which provide that in such determination the Tax Commissioner shall be guided by the provisions of Section 5328-1, General Code, providing that intangible property, including investments, shall be subject to taxation, 'excepting as provided in this section or as otherwise provided or exempted in this title,' and including in such title Section 5323, General Code, which defines the term, 'investments,' as including, inter alia, 'shares of stock in corporations * * * excepting (1) those in such corporations and associations as constitute instrumentalities of the federal government for the taxation of which by the several states no provision is made by act of the Congress of the United States' and 'interest bearing obligations for the payment of money * * * excepting such as have been issued (1) by the United States or any of its territories, districts or dependencies, or (2) by any instrumentality of the federal government,' are integrated within the taxation code of the state, are in pari materia, and exclude federal securities from the determination of the franchise tax.

These six causes are in this court on appeals from decisions of the Board of Tax Appeals affirming orders of the Tax Commissioner, appellee herein, denying claims of the corporations, appellants herein, for certificates of abatement because of alleged errors in the annual reports which the corporations, as domestic corporations for profit, filed with the Division of Franchise Tax of the Department of Taxation for the years, variously, 1945 through 1950 on the basis of which reports the corporations have paid franchise taxes for such years. All these cases involve substantially the same questions and are consolidated for the purpose of presentation to this court. They are heard and determined on the record in the case of The Standard Register Company.

Each of the six corporations made its report on Form DC-1 to the Department of Taxation for the purpose of having its franchise tax determined for the years in question and included therein as a part of its assets federal government securities owned by it. The tax assessed against each corporation was based upon the value of its issued and outstanding shares of stock, determinable from the total value as shown by the books of the company of its capital plus earned or unearned undivided profits and reserves, but exclusive of certain items named in Section 5498, General Code, as hereinafter pointed out.

On July 5, 1950, The Standard Register Company filed its claim for a certificate of abatement on the ground that there was an error made in its tax return for each of the years in question, in that there was improperly included in the reported tax base, for the purpose of determining the net worth of the corporation upon which the tax was computed, United States securities and accrued interest thereon, in the aggregate sum of $7,949,852.98, and on account of such error there was an overpayment of $7,940.61 in franchise taxes for the years in question.

The application for the certificate sought was denied by the Tax Commissioner, as were like applications in the five other cases.

Wellmore B. Turner, Guy H. Wells, Clinton S. Courson and Paul H. Granzow, all of Dayton, Corry, Durfey, Martin & Browne and Kenneth L. Rush, all of Springfield, for appellants.

C. William O'Neill, Atty. Gen., and Thomas R. Lloyd, Columbus, for appellee.

HART, Judge.

The question presented is:

May the Tax Commissioner in determining the franchise tax on an Ohio corporation for profit, under Section 5495 et seq., General Code, include in the tax base the value of federal securities owned by the corporation, it being claimed that such inclusion in legal effect imposes an illegal tax upon such federal securities?

The corporations contend that the Tax Commissioner, by requiring the inclusion of federal securities in the franchise tax base, in legal effect imposed a tax upon those securities in violation not only of the federal law but also of the provisions of the statutes of the state under which the Tax Commissioner purported to make the assessment. On the other hand, the commissioner contends that a state may levy a franchise tax on domestic corporations for profit and may use the value of the authorized capital stock issued and outstanding of such corporations as a measuring stick to determine such tax without regard to the character of the property owned by the corporation which gives value to the corporate shares, and that such a tax is not a tax upon the property itself.

Section 742, Title 31, U.S.Code, provides as follows:

'Except as otherwise provided by law, all stocks, bonds, Treasury notes, and other obligations of the United States, shall be exempt from taxation by or under State or municipal or local authority.'

The commissioner in his brief says: 'It is admitted that a tax might not be levied on federal securities as such, this being in conflict with federal law. It is further admitted that a tax which would have the same practical effect could not be levied under the guise of another name. The real test, then, is to determine whether the tax in question is a tax on federal securities.'

In New Jersey Realty Title Ins. Co. v. Division of Tax Appeals, 338 U.S. 665, 70 S.Ct. 413, 94 L.Ed. 439, a taxing district of New Jersey levied on the intangible personal property of a domestic corporation an assessment, in lieu of a franchise tax, based upon a percentage of the corporation's paid-up capital and surplus less liabilities and computed without deducting the principal amount of certain United States bonds and accrued interest thereon. The Supreme Court of New Jersey, conceding that a direct tax could not be levied on United States bonds, took the view that although the assessment was one on the intangible property of the corporation, it was not an ad valorem or property tax but a tax on the net worth of the corporation and was, therefore, constitutionally permissible. The federal Supreme Court, by a seven to one decision, took the view that an assessment of tax on the...