National Tax Association

SOME RECENT DECISIONSSource: The Bulletin of the National Tax Association, Vol. 1, No. 3 (April, 1916), pp. 81-83Published by: National Tax AssociationStable URL: http://www.jstor.org/stable/41787790 .

Accessed: 16/05/2014 16:11

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .http://www.jstor.org/page/info/about/policies/terms.jsp

.JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range ofcontent in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new formsof scholarship. For more information about JSTOR, please contact support@jstor.org.

.

National Tax Association is collaborating with JSTOR to digitize, preserve and extend access to The Bulletin ofthe National Tax Association.

http://www.jstor.org

This content downloaded from 195.78.109.42 on Fri, 16 May 2014 16:11:43 PMAll use subject to JSTOR Terms and Conditions

BULLETIN OF THE NATIONAL TAX ASSOCIATION 81

SOME RECENT DECISIONS

TAXATION OP FOREIGN CORPORATIONS

The extent to which the states may im- pose taxes measured by the authorized capital stock of foreign corporations with- otu violating the commerce clause of the Federal Constitution has been indicated in the opinions of the United States Supreme Court in two recent cases arising in Kansas.

By Laws of 1913, Chapter 135, Kansas imposes an annual franchise tax upon domestic corporations based upon their paid-up capital stock, and upon foreign corporations based upon the proportion of issued capital stock devoted to Kansas business. The minimum tax in both cases is $10.00 and the maximum is $2,500. The Supreme Court of Kansas has held that this law makes a warrantable and proper distinction between domestic and foreign companies. A Kansas railroad corporation, whose paid-up capital stock was $31,660,- 000 and whose business extended into other states, paid the maximum fee of $2,500 under protest and brought suit to recover it. The State Supreme Court sustained the tax and denied recovery. Its judgment is now affirmed by the United States Supreme Court, which says in part: "It is well settled that a tax of this sort is not neces- sarily rendered invalid because it is meas- ured by capital stock which in part may represent property not subject to the State's taxing power. ... In the present case, the tax is not laid upon transactions in inter- state commerce, or upon receipts from in- terstate commerce, either separately or in- termingled with other receipts. It does not fluctuate with the volume of interstate busi- ness. It is not a tax imposed for the privilege of doing an interstate business. It is a franchise tax - on the privilege granted by the State of being a corpora- tion - and while it is graduated according to the amount of paid-up stock, the maxi- mum charge is $2,500 in the case of all corporations having a paid-up capital of $5,000,000 or more. This is the amount imposed in the present case, where the cor- poration has a capital of $31,660,000. We find no ground for saying that a tax of this character, thus limited , is in any sense a tax imposed upon interstate commerce." (Italics supplied.) Kansas City, Fort

Scott & Memphis Rwy. Co. v. Botkin (Oc- tober Term, 1915). Attack upon the con- stitutionality of this law by a foreign cor- poration was decided adversely to com- plainant on the same day and upon the same grounds. Lusk et al. v. Botkin (Oc- tober Term, 1915).

The constitutional question involved in the taxation by the states of foreign cor- porations when the tax is based on the authorized capital stock has been before the United States Supreme Court in several cases since 1910. In three cases - Western Union Telegraph Co. v. Andrews, Western Union Telegraph Co. v. Kansas, and Pull- man Co. v. Kansas (216 U. S.) - the court held that the taxes sought to be imposed on the authorized capital stock were a bur- den on interstate commerce. It is signifi- cant to note that the amount of tax was very large, in one case being $20,050. These cases were generally understood to prohibit the imposition of a tax on the entire authorized capital stock of a foreign corporation engaged in interstate commerce for the privilege of doing a local business in any particular state, and the legislatures of several states, which had theretofore taxed foreign corporations on the entire authorized capital stock, changed the tax to one based upon the proportion of capital stock, or the amount of capital, employed in the state. The state of Massachusetts, however, adhered to its practice of impos- ing an annual excise tax based upon the authorized capital. This tax came before the court in 1913 in the case of Baltic Min- ing Company v. Massachusetts, 231 U. S. 68, and the court upheld the tax. It is significant to note that the Massachusetts tax rate was low and the maximum tax which could be imposed was $2,000. The Supreme Court of Idaho, Northern Pacific Railroad Company v. Gifford, 136 Pac. 1131, in upholding a similar statute of Idaho, attempted to reconcile the decisions of the United States Supreme Court in the cases above referred to, by calling attention to the fact that the amount of the license fees laid upon corporations by the Kansas and Arkansas statutes were so exorbitant and unreasonable that the companies would not likely have been able to pay the same, and that the amount of the tax, rather than the

This content downloaded from 195.78.109.42 on Fri, 16 May 2014 16:11:43 PMAll use subject to JSTOR Terms and Conditions

82 BULLETIN OF THE NATIONAL TAX ASSOCIATION

fact that it was measured by the authorized capital, had the effect of interfering with interstate commerce and taking the prop- erty of the companies without due process of law. In its opinion, the United States Supreme Court intended to determine the effect of each statute of this kind as it ap- plied in actual practice , rather than to de- cide it upon the theory of any apprehended dangers which might flow from other simi- lar legislation. The Kansas cases referred to above seem to support the view taken by the Idaho Supreme Court. In these latest cases it will be noted that the maximum tax was $2,500, and the court said, in the course of the opinion, " we find no ground for saying that a tax of this character, thus limited , is in any sense a tax imposed upon interstate commerce."

INCOME TAX The Decision in the Brushaber

Case is followed in four opinions handed down by the United States Supreme Court on February 21st. The titles of the cases decided are: Dodge & Dodge v. Brady (No. 213 - October Term, 1915) ; Stanton v. Baltic Mining Co. (No. 359 - October Term, 1915) ; Tyee Realty Company v. Anderson, Thorne v. Anderson (Nos. 393 and 394 - October T erm, 1915), and Dodge & Dodge v. Osborn (No. 396 - October Term, 1915).

Dodge & Dodge v. Brady originally was an action to enjoin the collection of surtaxes. By supplemental bill it was transformed into a suit to recover these surtaxes from the collector, to whom they had been paid under protest. So far as the original bill was concerned, the court below was without jurisdiction, because it was an attempt to enjoin the collection of a tax. Consideration of the supplemental bill on its merits was not reversible error, because it failed to allege that an appeal had been taken to the commissioner of in- ternal revenue, as provided in Revised Statutes, sections 3220 and 3226. All the contentions concerning the unconstitution- ality of the law and of the surtaxes which it imposes have been considered and ad- versely disposed of in Brushaber v. Union Pacific Railroad Company.

In Dodge & Dodge v. Osborn, the court holds that pursuant to R. S. 3224, the commissioner of internal revenue may

not be enjoined from the assessment and collection of taxes. Provisions of the law requiring an appeal to the commissioner of internal revenue after payment of the taxes and giving a right to sue in case of refusal to refund, need only to be stated, accord- ing to the court, to demonstrate that they are not wanting in due process of law.

Stanton v. Baltic Mining Co. was commenced by a stockholder to enjoin pay- ment of the tax, the same proceeding as was adopted and upheld in the Brushaber case. Special stress was laid by complain- ant against the provision of the law limit- ing the deduction for depletion of ore de- posits 5 per cent of the " gross value at the mine, of the output of the year." This was alleged to discriminate against mining corporations in favor of individuals and corporations other than those engaged in mining. This and the other contentions of complainant were adversely disposed of by the opinion in the Brushaber case. A con- tention that the tax as applied to mining corporations is " not on the net product but in a sense somewhat equivalent to a tax on the gross product of the working of the mine," and therefore not within the pur- view of the Sixteenth Amendment, and con- sequently to be treated as a direct tax on property because of its ownership, and as such void for want of apportionment, makes a "distinction without a difference" as to subjects considered in the Brushaber case. The court says that independently of the effect of the operation of the Six- teenth Amendment, it was settled in S trat - tons' Independence v. Howbert, 231 U. S. 399, that such a tax is but a true excise levied on the results of the business of carrying on mining operations. The con- tentions in this case were in substance dis- posed of in the Brushaber opinion.

Tyee Realty Co. v. Anderson and Thorne v. Anderson were disposed of in the same opinion. They were suits to re- cover taxes paid and were brought after an adverse ruling by the commissioner of in- ternal revenue, on grounds attacking the constitutionality of the law. The conten- tions made were disposed of in the Bru- shaber case.

Treasury Decision 2313. Interest from bonds and dividends on stock of domestic corporations accruing to non-resident aliens have been, by a recent ruling of the Com- missioner of Internal Revenue, held to be

This content downloaded from 195.78.109.42 on Fri, 16 May 2014 16:11:43 PMAll use subject to JSTOR Terms and Conditions

BULLETIN OF THE NATIONAL TAX ASSOCIATION 83

taxable under the Federal Income Tax. We quote below several paragraphs from the recent Treasury Decision announcing this surprising ruling.

" Under the decision of the Supreme Court of the United States in the case of Brushaber vs. Union Pacific Railway Company, decided January 24, 1916, it is hereby held that income accruing to non-resident aliens in the form of interest from the bonds and dividends on the stock of domestic ■corporations is subject to the income tax imposed by the Act of October 3, 1913. " Non-resident aliens are not entitled to the specific exemption designated in paragraph C of the Income Tax Law, but are liable for the nor- mal and additional tax upon the entire net income * from all property owned, and of every business, trade, or profession carried on in the United States,' computed upon the basis prescribed in the law. [Par. 20.] " The responsible heads, agents, or representa- tives of non-resident aliens, who are in charge of the property owned or business carried on within the United States, shall make a full and complete return of the income therefrom on Form 1040, Revised, and shall pay any and all tax, normal and additional, assessed upon the income received by them in behalf of their non-resident alien prin- cipals. [Par. 22.] " The normal tax shall be withheld at the source from income accrued to non-resident aliens from corporate obligations and withholding agents as in the case of citizens and resident aliens, but without benefit of the specific exemption desig- nated in paragraph C of the law."

Wisconsin Income Tax. Bayfield County v. Pishon, in Supreme Court : State of Wisconsin ; No. 206.

I. H. Wing, a resident of Bayfield County, Wisconsin, died testate in 1907. Under his will, probated in Bayfield County, a trust was created in favor of certain non-resident beneficiaries. In the course of time Hiram L. Pishon, of Au- gusta, Maine, was appointed sole trustee by the Wisconsin Court; and the assets of the estate - money, stocks, bonds and secur- ities - are and have been in his possession without the state. Under these circum- stances the Assessor of Incomes of Bayfield County attempted to tax the income derived from these securities, holding that they were property constructively in Wisconsin because the Bayfield County Court was ad- ministering the trust. The Supreme Court held that this could not be done.

" This statute imposes a tax only upon such part of a non-residenťs income as is derived from sources within the state or within its jurisdiction. It is quite obvious that the purpose of this statute is to tax a non-resident upon his income derived from sources within the territorial jurisdiction of the state. . . . The income under consideration was not derived from property located or business transacted in the State of Wisconsin, and the owners of the property never resided in Wiscon- sin. But it is contended by appellant that the property was constructivelv in Wisconsin because the Bayfield County Court in Wisconsin was ad- ministering the trust. We do not think that the statute is capable of such construction. The lan- guage of the statute must be given its plain, ordinary meaning."

THE 1916 CONFERENCE

The Tenth Annual Conference on Taxa- tion under the auspices of the National Tax Association will be held at Indian- apolis from Monday, August 28, to Thurs- day, August 31, 1916. This change in date has been made in order to secure the largest possible attendance of members; and thanks are due to the local committee, particularly Mr. Houck, for accommodat- ing themselves to a readjustment which in- volved some trouble and inconvenience. The headquarters and principal place of meeting will be the Hotel Claypool.

Remember the Date, August 28-31, 1916.

Make Your Hotel Reserva- tions Early.

Invitations will be Sent to the Governors and Presi- dents of Universities and Colleges at an Early Date.

See that Delegates are Ap- pointed to Represent Your State.

This content downloaded from 195.78.109.42 on Fri, 16 May 2014 16:11:43 PMAll use subject to JSTOR Terms and Conditions