People ex rel. Alpha Portland Cement Co. v. Knapp

The relator, a corporation organized in New Jersey, manufactures and sells its products here and elsewhere. A tax was assessed against it in 1918 by the tax commission of New York for the privilege of doing business. The validity of the statute which assumes to authorize the tax is the question to be determined.

Article 9A of the Tax Law (Consol. Laws, chap. 60), as adopted in 1917 and amended in 1918, establishes a new scheme of taxation for manufacturing and mercantile corporations, both foreign and domestic (L. 1917, ch. 726;. L. 1918, ch. 276; L. 1918, ch. 417). Every domestic manufacturing or mercantile corporation is to pay an annual tax for the privilege of exercising its franchises in

1. I think the statute is invalid, in its application to the relator, in so far as it lays upon income a burden that is irrespective of the situs of the assets by which income is produced. The power of a state to attach conditions to the transaction of intrastate business by foreign corporations is not unlimited to-day, whatever under earlier decisions it may once have seemed to be. The field of law is one where new rules are in the making. Only the Supreme Court of the nation can definitively fix their content. The judgment of a state court can hardly fail, in the meantime, to- be tentative and groping. We must shape our path and our progress by such light as we have. No doubt in the earlier cases there was much said, if not decided, that would seem to emancipate the state from all restrictions in conditioning the local business (Horn Silver Mining Co., v. New York, 143 U. S. 305 ; Maine v. Grand Trunk Ry. Co., 142 U. S. 217 ; Home Ins. Co. v. N. Y., 134 U. S. 594 ; Ashley v. Ryan, 153 U. S. 436 ). Later cases have explained and qualified these judgments, and, to the extent of conflict, overruled them (International Paper Co. v. Mass., 246 U. S. 135 ; Looney v. Crane Co., 245 U. S. 178 ; Western Union Telegraph Co. v. Kansas, 216 U. S. 1 ; Meyer, Auditor of Oklahoma v. Wells Fargo & Co,, 223 U. S. 298 ; Wallace v. Hines, 253 U. S. 66 ; 40 Sup. Ct. 435 ; Powell, Indirect Encroachment on Federal Authority, 31 Harvard Law Review, 721, 774, 932, 942; Powell, The Changing Law of Foreign Corporations, 33 Political Science Quarterly, 569; Henderson, Foreign Corporations in American Constitutional Law, Harvard University Press, pp. 131, 134, 151, 161). The rule now is that a foreign corporation may not be required to purchase relief from ouster at the price of a surrender of constitutional immunities. The state may not say that the right to conduct the local business shall be lost if the corporation exercises the privilege of resorting to

Tested by these precedents, the tax imposed upon this franchise must be held in practical operation to be a tax upon the income. Such, indeed, it would be in form as well as in substance, if the legislature had not stated (sec. 209) that the “ privilege of doing business ” was the consideration for the payment. Nothing but that recital stands between the statute and conceded invalidity. How the legislature itself looked upon the substance of the burden is indicated by other provisions of the same and later statutes. The tax is to be in lieu of all other taxes on personal property or capital stock (Tax Law, sec. 219-J). It is to be in lieu of all other taxes upon income (sec. 350, subd. 7). There surely was no intention that all mercantile and manufacturing corporations, foreign and domestic, should in very truth be exempt from taxes upon property so fundamental in importance as capital and the fruits of capital. The reason for the apparent exemption was that, under the form of a tax upon the franchise, the property of such corporations had already been subjected to its share of public burdens.

I think, therefore, that in substance, though not in form, in tendency, though not in name, this tax is equivalent to a tax upon relator’s income. The only question then is whether the method of allocation is reasonably adapted to the apportionment of income according to the situs of its origin. The state substantially concedes that a tax on income could not stand if allocated on such a basis. Meyer, Auditor of Oklahoma v. Wells Fargo & Co. ( 223 U. S.

It does not help the case to argue that bonds and stock certificates can be moved from state to state, and that frauds upon the tax might become common if possession in another jurisdiction were accepted as the test. That may be a very good reason why such assets and their income should be eliminated altogether fróm both branches of the proportion. It is no reason why, the income being included, the assets yielding the income should be excluded for the purpose of apportionment. There is no greater difficulty, moreover, in fixing the situs of shares beyond the ten per cent limit than in fixing that of shares below it. Rejected too must be the argument that the plan of apportionment is made valid by the possibility that the excluded assets will sometimes have their situs here, in which event the taxpayer may be helped by their exclusion. That is mere chance. The state does not expect that the chances will preponderate in favor of such an outcome, or it would have used some other formula. The argument, if accepted, would sustain the tax condemned in Meyer, Auditor of Oklahoma v. Wells Fargo & Co. (supra), and, indeed, would serve to justify the most obvious-vagaries. The legislature in that view might exclude everything but real estate from the scheme of allocation, and justify the restriction upon the plea that profit would result to some one. Such hit or miss methods do not take the place of regularity and system. The taxpayer complaining of the tax is injured. It does not help the statute that anpther may be benefited.

2. The question remains whether what is bad may be severed from, what is good, and the substance of the scheme preserved. I think the severance is possible. Two defects have been found. The remedy for each will be separately considered.

Thus viewing it, I cannot doubt that the exclusion of interest on intangibles will leave the essence of the scheme intact. I find it unbelievable that a legislature willing to impose a ta’x with those items in, would be unwilling that the tax should stand if those items were out. Undoubttedly it wished them in if it had the legal right to keep them. To say that does not mean that rather than lose them, it would throw the project .to the winds. Laws are not to be sacrificed by courts on the assumption that legislation is the play of whim and fancy. A doctrinaire emphasis on the possible rather than the probable would forbid .severance at all times. No doubt it is easy, sheltering ourselves behind some implacable tenet of the separation of governmental powers, to insist upon a certainty impossible of attainment. We do small service to the state by so intransigent a pose. Our right to

(b) I pass now to the shares of stock. Much that has been said about the bonds is again applicable here. Stock investments are more likely, it may be, to represent a substantial factor in the assets, at least when the business is conducted through subsidiaries. None the less there must be many corporations that do not invest in shares at all, and few, where the dividends from shares are important elements of income as compared with earnings-of the business. There are, however, special considerations, applicable to shares of stock, but inapplicable to bonds, which reinforce the argument for severance, though they suggest that the remedy in this instance is by addition to the principal rather than by subtraction from the income.

Article 9A of the Tax Law was first placed upon the statute books by Laws of 1917, chapter 726, and was amended by Laws of 1918, chapter 276, and Laws of 1918, chapter 417. As first enacted, it provided for a comparison of the average total value of the shares of other corporations held by the taxpayer within the state with the average total value of the shares in other corporations held within and without the state, the value to be apportioned in and out of the state in accordance with the

In these circumstances the history of the statute defines the lines of cleavage that severance- should follow. The amendment, being invalid, is to be exscinded, and the statute in its valid form preserved. A scheme of allocation, lawful in its inception, but made unlawful thereafter by force of an illegitimate proviso, is not for that reason to be abandoned altogether. The amendment falls. The rule which there was an abortive effort to amend survives (Huntington v. Worthen, 120 U. S. 97 , 102; General Construction Law, sec. 95).

I have said that the statute, in so far as it deals with shares, is valid as first enacted, when applied to this relator. I do not overlook the provision that “ the value of share stock of another corporation owned by a corporation hable hereunder shall for purposes of allocation of assets be apportioned in and out of the state in accordance with the value of the physical property in and out of the state

My conclusion is that the relator should be permitted to subtract from the income the item of interest on the bonds; that it should be permitted to add the value of its shares in other corporations to the value of its assets without the state; and that the order of the Appellate Division, in so far as it sets aside the whole tax, should

A statute is not to be treated ‘ as unconstitutional because it contains clauses that in some instances would deprive a person of his property without due process of law or would interfere with interstate commerce, if in those instances a means is provided to prevent such results. So far as the bonds in this case are concerned, the difficulty is that the tax is figured on a proportionate valuation. As all described property in the state is to all such property wherever situated so is taxable net income to entire net income. We agree that the bonds themselves may not be taxed. So as to their income. But if their income is included in the entire net income which constitutes one term of this proportion, and their value not included in the other term,— “ all such property wherever situated,”— the result is what we hold may not be done. It is said that this is what the statute provides. If that be so, then I agree that it is unconstitutional, and we are driven to the question which Judge Cardozo discusses. However, I do not so understand it.

For the privilege of doing business in this state a foreign corporation shall pay a tax computed on its net income, which income “ is presumably the same as the income upon which such corporation is required to pay a tax to the United States.” (Tax Law, § 209.) There are, therefore, cases where the income taxable here, and by the United States are not identical. This is made certain by a reference to a history of the law. Originally the tax was computed upon the net income “ upon which income such corporation is required to pay a tax to the United States.” (L. 1917, ch. 726, § 209.) The next year the section was- enacted as it now stands, and

Such a corporation shall annually make to the tax commission a report showing its net income for the preceding year “ as shown,” said the act of 1917, “ in the last return of annual net income made by it to the United States treasury department.” The amendment of 1918 added the words “ and if the corporation shall claim that such return is inaccurate, the amount claimed by it to be the net income for such period.” (Tax Law, § 211.) The report shall also contain a statement “ of the portion of its net income which ” the corporation “ believes to be the basis upon which the tax shall be imposed.” (§ 219-b.) Thus again, an opportunity to raise any question of the inaccuracy of the United States report, and to state its claim as to the proper basis of the net income term of the proportion was given the corporation. The report is also to contain such other facts as the tax commission may require for the purpose of computing the tax. (§ 211.)

The tax imposed on a foreign corporation was by the act of 1917 to be based on a proportion of the net income — the amount, obviously, returned to the United States — calculated according to certain rules. Now it is based upon “a proportion of such ascertained net income.” The “ ascertained net income ” is as I understand it the net income returned to the United States corrected if “ inaccurate ” (§ 211) and also corrected by the commission because of a claim made under section 219-b. The tax imposed is three per cent “ of the net income or portion thereof taxable within the state.” (§ 215.)

If no report is made the commission shall make an estimate of the net income of the corporation. The corporation must be given an opportunity to be'heard in

The net income returned to the United States being the basis of the state tax, the act of 1917 provided that if the amount so returned was changed or corrected by some competent authority the commission should accept such result and act accordingly. When in 1918 the return was made only presumptive evidence of the basis on which the tax was computed, the commission was called upon to make an independent investigation of the subject. (§ 219-d.) They shall return the true net income for the year but their proceedings or a reassessment are to be adjusted as provided by section 218. That is, the account reached by them shall not include taxes that may not be lawfully demanded.

In view of these various provisions I find no objection to the statute so far as the bonds are concerned. If the income derived from them is not included in the net income term of the proportion, no wrong is done the relator. The commission already has the power to make such exclusion. Its failure so to do is reviewable by the courts. The net income return to the United States is only presumptive evidence on the subject. If it contains now and then items which should not be reckoned when it comes to state taxation, the corporation has a remedy, and may in its state return claim that the United States return is inaccurate. For while “ inaccurate ” may refer to some mistake in computations or figures here taken in connection with section 219-b, I think it means that the return taken as a basis for state taxation contains items

I do not discuss the question of the stock. Upon this subject the amending act of 1918 expressly provides for a computation that the majority of the court consider improper. I agree that this amendment may be eliminated.

I dissent. No reported case has gone so far as to hold, as we are about to hold in principle that a foreign corporation, if admitted to another state, may be assessed for the privilege of doing business in such state only on the earnings of the local business or on the capital employed therein. The license fee exacted by this state is in no sense a tax on the entire business or property, or the entire income of the relator. It does not come under the condemnation of such cases as International Paper Co. v. Mass. ( 246 U. S. 135 ). It places no direct burden either upon interstate commerce or on

The order appealed from should be reversed and the writ of certiorari dismissed, with costs in all courts.

Chase and Crane, JJ., concur with Cardozo, J.; Andrews, J., concurs in result in opinion; His cock, Ch. J., and Collin, J., dissent and vote for affirmance on ground that statute is unconstitutional; Pound, J., reads dissenting opinion.

Ordered accordingly.