Opinion
June 2, 1930.
Roger Hinds, of New York City (Benjamin P. Dewitt, Siegfried F. Hartman, and Roger Hinds, all of New York City, of counsel), for plaintiff.
Hamilton Ward, Atty. Gen. (Wendell P. Brown, Third Asst. Atty. Gen., of counsel), for defendants.
Before CHASE, Circuit Judge, and BONDY and WOOLSEY, District Judges, convened pursuant to section 266 of the Judicial Code (28 USCA § 380).
Action by the Educational Films Corporation of America against Hamilton Ward, Attorney General of New York, and others.
Injunction denied, and bill dismissed.
In this action brought and heard by virtue of U.S. Code, title 28, § 41(1), 28 US CA § 41(1), the plaintiff is seeking to have the defendants enjoined from collecting that part of the franchise tax assessed against it for the year ending October 31, 1930, under and by virtue of article 9-A (section 208 et seq.) of the New York Tax Law, which results from using any of the plaintiff's income derived from copyrights as a measure of the tax. Its contention is that the law so uses copyright income in violation of the Federal Constitution. The applicable portions of article 9-A of the New York law providing for a franchise tax on business corporations follow:
"§ 209. Franchise tax on corporations based on net income. For the privilege of exercising its franchise in this state in a corporate or organized capacity every domestic corporation, * * * shall annually pay in advance for the year beginning November first next succeeding the first day of July in each and every year an annual franchise tax, to be computed by the tax commission upon the basis of its entire net income, as defined in subdivision three of section two hundred and eight of the tax law, for its fiscal or the calendar year next preceding, as hereinafter provided, which entire net income is presumably the same as the entire net income which such corporation is required to report to the United States, plus any income received as dividends on stocks or any interest received on bonds of any character. * * *"
Section 208, subd. 3 (referred to in section 209, supra), so far as material here, provides as follows:
"3. The term `entire net income' means the total net income, including all dividends received on stocks and all interest received from federal, state, municipal or other bonds. * * *"
Section 211, so far as material here, provides as follows:
" Reports of Corporations to Tax Commission. Every corporation taxable under this article * * * shall annually on or before July first, or within thirty days after the making of its report of entire net income to the United States treasury department for any fiscal or calendar year, preceding said first day of July, transmit to the tax commission a report in the form prescribed by the tax commission, specifying:
* * * * * *
"2. The amount of its entire net income for its preceding fiscal or the preceding calendar year as provided by subdivision three of section two hundred and eight of the tax law * * *. If the corporation shall claim that the return made to the United States treasury department was inaccurate, the amount claimed by it to be the net income for such period shall be specified. * * *"
Section 215 provides:
"Rate of Tax. The tax imposed by this article shall be at the rate of four and one-half per centum of the entire net income of the corporation * * * determined as provided by this article. * * *"
At the hearing, it appeared that the plaintiff had not, before bringing this suit, applied to the New York state tax commission for a revision of the assessment. Since then the parties have by leave of court filed a stipulation showing that a hearing has been had before the commission and the assessment affirmed. The bill of complaint has been amended, and, as amended, is attacked by the defendants' motion to dismiss on the ground that it fails to state a cause of action.
The facts are not in dispute. The plaintiff is a domestic business corporation subject to be taxed under the New York law, if the tax is constitutional. Its income during the year in question consisted in part of $162,588.98 derived solely from copyrights granted by the United States on motion picture films. Its expenses in procuring this part of its income were $49,151.37, leaving its net copyright income $113,437.61. These copyrights were not all held in the name of the plaintiff, some being in its name and some in the names of affiliated corporations, but all were owned by the plaintiff, and it received the income therefrom. It bases this suit solely on the ground that to measure its franchise tax by any part of its copyright income is in effect taxing income from a federal instrumentality which is beyond the reach of state taxation.
The power of a State to impose a tax on the franchise of a corporation doing business therein is too well established for discussion, Kansas City, Fort Scott Memphis Ry. Co. v. Botkin, 240 U.S. 227, 232, 36 S. Ct. 261, 60 L. Ed. 617; and it is equally well settled that, except under conditions discussed below, the net income of a corporation may be used to measure a tax on the privilege of doing business in corporate form, even though such income does in part come from property exempt from taxation by the same taxing power, Flint v. Stone Tracy Co., 220 U.S. 107, 31 S. Ct. 342, 55 L. Ed. 389, Ann. Cas. 1912B, 1312; that the excess of the market value of capital stock over the value of certain specified property behind it may be used by a state as the measure of the tax, although the market value was enhanced by United States bonds held by the corporation, Hamilton Mfg. Co. v. Massachusetts, 6 Wall. 632, 18 L. Ed. 904; that a state may tax the franchise of a savings bank and use as the measure a percentage of its deposits on a day certain, though part of such deposits were actually then invested in tax exempt federal securities, Society for Savings v. Coite, 6 Wall. 594, 18 L. Ed. 897; see, also, Provident Institution for Savings v. Massachusetts, 6 Wall. 611, 18 L. Ed. 907; that the tax may be measured by dividends made or declared, although such dividends had their source in part in capital invested in United States bonds, Home Insurance Co. v. New York, 134 U.S. 594, 10 S. Ct. 593, 33 L. Ed. 1025; that it may be measured by the amount of paid-up capital stock which may represent in part non-taxable property, Kansas City, etc., R. Co. v. Botkin, supra.
In United States Glue Co. v. Town of Oak Creek, 247 U.S. 321, 328, 38 S. Ct. 499, 62 L. Ed. 1135, Ann. Cas. 1918E, 748, it was held that income derived from interstate commerce might be directly reached under an income tax law which did not discriminate against such commerce. See, also, Hump Hairpin Co. v. Emmerson, 258 U.S. 290, 42 S. Ct. 305, 66 L. Ed. 622; Underwood Typewriter Co. v. Chamberlain, 254 U.S. 113, 120, 41 S. Ct. 45, 65 L. Ed. 165; and International Shoe Co. v. Shartel, 279 U.S. 429, 49 S. Ct. 380, 73 L. Ed. 781. State inheritance taxes were held to be lawfully measured by including the value of United States bonds in Blodgett v. Silberman, 277 U.S. 1, 12, 48 S. Ct. 410, 72 L. Ed. 749; and in Plummer v. Coler, 178 U.S. 115, 20 S. Ct. 829, 44 L. Ed. 998, a legacy tax on a bequest consisting wholly of United States bonds was upheld. See Orr v. Gilman, 183 U.S. 278, 22 S. Ct. 213, 46 L. Ed. 196.
Since Long v. Rockwood, 277 U.S. 142, 48 S. Ct. 463, 72 L. Ed. 824, however, it cannot be thought that a state may tax directly income from patents or copyrights. While a copyright is not such a federal instrumentality as is a bond, for instance, sold for the purpose of raising funds for the support of government itself, it results from the exercise of a right or privilege to grant copyrights, given exclusively to the United States by the Constitution, and the value to the government of this right or privilege may not be lessened or destroyed by taxation imposed by a state upon the thing created through federal enjoyment of this exclusive privilege.
In Northwestern Mutual Life Insurance Co. v. Wisconsin, 275 U.S. 136, 48 S. Ct. 55, 72 L. Ed. 202, a tax was held invalid because it was in effect imposed upon exempt property, rather than upon the franchise, of the corporation by making the measure of the tax gross returns rather than net receipts. The substantial distinction between these two methods was noted and will be found pointed out at some length in United States Glue Co. v. Oak Creek, supra, at pages 328, 329 of 247 U.S. 38 S. Ct. 499. In Gillespie v. Oklahoma, 257 U.S. 501, 42 S. Ct. 171, 66 L. Ed. 338, income from oil leases on Indian lands was held nontaxable directly as income because the principal was absolutely exempt, but no question of the measure of a privilege or excise tax was involved; and in Panhandle Oil Co. v. Mississippi, 277 U.S. 218, 48 S. Ct. 451, 72 L. Ed. 857, 56 A.L.R. 583, it was held that to tax a dealer selling gasoline upon the number of gallons sold and to include therein gasoline purchased by the United States was in effect a tax upon the federal government by so much as the cost to it of gasoline so purchased was increased. Yet this case involved a tax on "any person engaged in the business of distributing gasoline," and stands, like the two just previously mentioned, as one where measuring a corporate franchise tax by net income was not in issue.
It cannot be doubted that this tax is not directly on income but is purely an excise. Speaking of this very statute, in Bass, Ratcliff Gretton, Ltd., v. State Tax Commission, 266 U.S. 271, 45 S. Ct. 82, 83, 69 L. Ed. 282, on a point quite apart from the issue now presented, after agreeing with the New York Court of Appeals that the tax is "primarily a tax levied for the privilege of doing business in the State," it is said that: "It is not a direct tax upon the allocated income of the corporation in a given year, but a tax for the privilege of doing business in one year measured by the allocated income accruing from the business in the preceding year. See New York v. Jersawit, 263 U.S. 493, 496, 44 S. Ct. 167, 68 L. Ed. 405."
Were it not for Macallen Co. v. Massachusetts, 279 U.S. 620, 49 S. Ct. 432, 73 L. Ed. 874, we should have no hesitation in reaching the conclusion that in imposing this tax a constitutionally permissible method of measurement has been used. And that decision, though much relied upon by the plaintiff, does not seem to change the general principle developed in the decisions above referred to, but tends to mark the limits of what is mere casual effect upon tax exempt property which will be tolerated in recognizing and trying to overcome the practical difficulties confronting two governments, state and nation, in raising revenue within the same geographical area.
It is urged that the same situation is presented here as was in the Macallen Case, but we think not. After the New York Court of Appeals in People ex rel. Standard Oil Co. v. Law et al., 237 N.Y. 142, 142 N.E. 446, held in 1923 that gross income from which deductions were to be made for purposes of state corporate franchise taxation was the same as gross income determined in accordance with the federal law, and included no interest on federal securities which were within the exception of "subdivision 4 of section 213(b)" (USCA, title 26, § 954(b)(4), the Legislature in April, 1924, amended the law by adding, inter alia, in section 209, Tax Law (chapter 329, § 2, Laws N.Y. 1924), the words "plus * * * any interest received * * * on bonds of any character." Again, in 1927 (Laws N.Y. 1927, c. 479, § 1), the law was amended to "include income from any source, provided only that the assets from which the income arose shall be included in any segregation for the purpose of computing the tax." We think it now beside the point that the New York law as amended may, in so far as interest on federal bonds is concerned, be the result of motives not unlike those responsible for the Massachusetts law held invalid in the Macallen Case. That question is not before us. Copyright income was not excluded from gross income in the exception in the federal law referred to in People ex rel. Standard Oil Co. v. Law et al., supra. Now, as before, it enters into the measure of the franchise tax purely as a casual incident of that tax. Accordingly we have reached the conclusion that this bill of complaint states no cause of action.
Injunction denied, and bill dismissed.