Summary
In Southern Package, the company, which manufactured fruit and vegetable boxes or crates in Mississippi, attempted to advocate the same idea as Chevron: that only receipts from sales begun and sold in this state should be used, thus excluding receipts from sales made in interstate commerce.
Summary of this case from State Tax Com'n v. Chevron U.S.A., Inc.Opinion
No. 35521.
January 24, 1944. Suggestion of Error Overruled February 28, 1944.
1. TAXATION.
The state may levy a franchise tax upon corporations which carry on any substantial part of their business activities in the state (Laws 1934, ch. 121, secs. 3, 6-8).
2. TAXATION.
The amount and mode of measurement of franchise tax is within legislative discretion when not burdensome or oppressive and when solely for revenue (Laws 1934, ch. 121, secs. 3, 6-8).
3. CORPORATIONS.
The "capital" of a corporation is its tangibles, the aggregate of its property, and assets of all kinds; while its "capital stock" is evidence of rights in such property.
4. TAXATION.
Preferred stock issued to represent timber situated within state conveyed to foreign corporation was properly included in computation of franchise tax, notwithstanding that as between corporation and stockholders, under circumstances of issue, relation of debtor and creditor existed (Laws 1934, ch. 121, secs. 3, 6-8).
5. TAXATION.
The provision for calculation of franchise tax on foreign corporations on ratio of gross receipts from business in state to total gross receipts does not exclude receipts from interstate sales or sales of goods produced in state by an agent situated without state to buyers in other states (Laws 1934, ch. 121, secs. 3, 6-8).
6. TAXATION.
Under statutory provision for calculation of franchise tax on foreign corporations on ratio of gross receipts from state business to total gross receipts, receipts from business actually done in state regardless of ultimate destination of products must be included in computation (Laws 1934, ch. 121, secs. 3, 6-8).
ON SUGGESTION OF ERROR. (In Banc. Feb. 28, 1944.) [16 So.2d 856. No. 35521.]1. TAXATION.
The total of the capital stock, stated surplus, and undivided profits of a corporation is used prima facie as a determinative factor of corporate capital, in computing corporate franchise tax (Laws 1934, ch. 121, secs. 3, 6-8).
2. TAXATION.
The prima facie effect of the listing as capital stock alleged evidences of indebtedness issued to represent timber conveyed to corporation in computing corporate franchise tax could not be overcome by showing as to actual value of evidences of indebtedness as represented by actual timber held by corporation (Laws 1934, ch. 121, secs. 3, 6-8).
APPEAL from circuit court of Copiah county, HON. J.F. GUYNES, Judge.
Watkins Eager, of Jackson, and W.S. Henley, of Hazlehurst, for appellant.
This suit involves the amount of the plaintiff's franchise tax in the State of Mississippi for the years 1936, 1937 and 1939. The suit arose as the result of the returns which were filed by the taxpayer being questioned by the Tax Commission and additional assessments being made. The Tax Commission does not question the correctness of appellee's records, but does question the items which should be included in the franchise tax return. The hearing was had before the Tax Commission and a construction placed on the Mississippi franchise tax law adverse to the taxpayer's contention. From such decision of the State Tax Commission this appeal has been prosecuted.
The precise questions involved are (1) as to whether or not the securities issued by the appellant and designated as Class "B" Preferred Stock in fact evidence an indebtedness of the appellant to the holder in the nature of a debenture or bond; and (2) as to whether or not sales made by the appellant outside of the State of Mississippi should be treated as to reduced ratio of the capital forming the basis of taxation.
Every presumption is in favor of non-liability.
Pan-American Petroleum Corporation v. Miller, State Tax Collector, 154 Miss. 565, 122 So. 393; State ex rel. Attorney General v. Mississippi Power Light Co., 161 Miss. 839, 138 So. 567; Bluff City Ry. Co. v. Clarke, 95 Miss. 689, 49 So. 177; Board of Levee Commissioners for Yazoo Mississippi Delta v. Howze Mercantile Co., 149 Miss. 843, 116 So. 92; Miller v. Illinois Cent. R. Co., 146 Miss. 422, 111 So. 558; State ex rel. Collins v. Grenada Cotton Compress Co., 123 Miss. 191, 85 So. 137.
The designation of a security issued by a corporation is not conclusive for the purpose of taxation.
Helvering, Commissioner of Internal Revenue, v. Richmond, Fredericksburg and Potomac Railroad Co., 90 F.2d 971; Arthur R. Jones Syndicate v. Commissioner of Internal Revenue, 23 F.2d 833; Wiggin Terminals, Inc., v. United States, 36 F.2d 893; Commissioner of Internal Revenue v. Palmer, Stacy-Merrill, 111 F.2d 809; 76 U. of Pa. L. Rev. 814; 13 N.Y.U.L.Q. Rev. 407, 421; 55 Harvard Law Review 1189.
In order to determine the true nature of the transaction, oral evidence is admissible to show the circumstances under which the contract was made and determine and interpret the agreement therefrom.
State Tax Commission v. Mississippi Power Light Co., 194 Miss. 260, 11 So.2d 828; Sumter Lumber Co. v. Skipper, 183 Miss. 595, 184 So. 296; Pratt v. Canton Cotton Co., 51 Miss. 470; Newman v. Supreme Lodge, K. of P., 110 Miss. 371, 70 So. 241; Hunt v. Gardner, 147 Miss. 374, 112 So. 7; Darden v. American Bank Trust Co., 158 Miss. 742, 130 So. 507; Grandberry v. Mortgage Bond Trust Co., 159 Miss. 460, 132 So. 334; Williams v. Batson, 186 Miss. 248, 187 So. 236; Tyler Co. v. Laurel Equipment Co., 187 Miss. 590, 192 So. 573; Commissioner of Internal Revenue v. Proctor Shop, Inc., 82 F.2d 792; Indiana Law Journal, August 1940, p. 478.
The certificates of Class "B" Preferred Stock possess the characteristics of a note, bond or debenture, and not capital stock. The holder of Class "B" certificates has no interest in ownership in corporate property; income not dependent on earnings. The holders of common "B" Preferred Stock are not entitled to vote. Neither interest nor principal received by holders of Class "B" certificates were derived from profits. Each holder of Class "B" certificates had an equitable vendor's lien upon the timber, the purchase money of which was represented by Class "B" certificates. The indebtedness of a certificate holder became due and payable upon the removal of the timber and the certificate holder was not dependent upon the liquidation of the company for the repayment of the certificate with interest.
Haden v. Sims, 168 Miss. 64, 150 So. 210; Blum v. Planters' Bank Trust Co., 161 Miss. 226, 135 So. 353; Matthews v. Delta Southern R. Co., 90 Miss. 429, 43 So. 475; Stewart v. Ives, 1 Smedes M. (9 Miss.), 197; Dunlap v. Burnett, 5 Smedes M. (13 Miss.), 702; Clower v. Rawlings, 9 Smedes M. (17 Miss.), 122; Walton v. Hargroves, 42 Miss. 18; Johnson v. Jones, 51 Miss. 860; Washington v. Soria, 73 Miss. 665, 19 So. 485; Fowlkes v. Lea, 84 Miss. 509, 36 So. 1036; Arthur R. Jones Syndicate v. Commissioner of Internal Revenue, supra; Elko Lamcille Power Co. v. Commissioner of Internal Revenue, 50 F.2d 595; Commissioner of Internal Revenue v. O.P.P. Holding Corporation, 76 F.2d 11; 13 Am. Jur. 318, Sec. 200; 13 Am. Jur. 319, Sec. 201; 13 Am. Jur. 298, Sec. 172; Harvard Law Review, May 1942 issue, p. 1191; A.L.I., Restatement Contracts, Sec. 240.
Sale of manufactured product entered into, made and consummated beyond the limits of Mississippi should not have been taken into consideration in forming the basis for the tax proper.
Quartette Music Co. v. Haygood, 108 Miss. 755, 67 So. 211; Peterman Const. Supply Co. v. Blumenfeld, 156 Miss. 55, 125 So. 548, 550; Wiley Electric Co. of Jackson v. Electric Storage Battery Co., 167 Miss. 842, 147 So. 773; Marx Bensdorf, Inc., v. First Joint Stock Land Bank of New Orleans, 178 Miss. 345, 173 So. 297; Commissioner of Corporation Taxation v. Ford Motor Co., 308 Mass. 558, 33 N.E.2d 318, 139 A.L.R. 936; State Revenue Commission et al. v. Edgar Bros. Co. (Ga.), 190 S.E. 623; So. Pac. Co. v. State Corporation Commission of New Mexico (N.M.), 72 P.2d 15; Yazoo M.V.R. Co. v. Grosjean, 16 F. Supp. 276; Laws of 1934, Ch. 121, Sec. 8; 6 Words Phrases 193, 196; Black's Law Dictionary (3 Ed.), p. 811. J.H. Sumrall, of Jackson, for appellee.
There are only two questions presented to this court for decision. The first is whether or not a corporation which has invested all of its capital in the State of Mississippi and conducts all of its operations in Mississippi except the sale of some of its products outside of the state, such sales being accomplished by orders taken by its representatives and filled with the products of its plant in Mississippi, when such orders are procured without the investment of one penny of its capital in any other state, may deduct the amount of such sales in determining the value of the capital employed in Mississippi. The second question is whether or not preferred stock issued in return for contributions of value to the assets of the company should be deducted in determining the basis of the tax due, when said tax is required by the law imposing same to be calculated on the basis of the value of the capital employed, measured by the combined issued and outstanding capital stock, surplus and undivided profits of the corporation.
It was not proper to deduct sales of its products in other states without the investment of capital outside of Mississippi in determining the value of the capital employed in Mississippi for franchise tax purposes.
Saxony Mills v. Wagner Co., 94 Miss. 233, 47 So. 899; Interstate Natural Gas Co. v. Stone, 103 F.2d 544; California v. Pacific R. Co., 127 U.S. 41, 32 L.Ed. 157; Home Insurance Co. of New York v. People of the State of New York, 134 U.S. 594, 33 L.Ed. 1025; Commissioner of Corporation Taxation v. Ford Motor Co., 308 Mass. 558, 33 N.E.2d 318, 139 A.L.R. 936; National Knitting Co. v. Bronner, 45 N.Y.S. 714; Vio Chemical Co. v. Studholme, 103 N.Y.S. 463; Beard v. Union American Pub. Co., 71 Ala. 60; DeWitt v. Berger Mfg. Co. (Tex.), 81 S.W. 334; Commonwealth v. Hogon McMorrow Ticke Co., 25 Ky. L. Rep. 41, 74 S.W. 737; S.A. Maxwell Co. v. Edens, 65 Mo. App. 439; Belle City Mfg. Co. v. Frizzell, 11 Idaho 1; Payson v. Withers, 269 Fed. Cas. No. 10,864; Davis R. Bldg. Mfg. Co. v. Dix, 64 F. 406; Coit Co. v. Sutton, 102 Mich. 324; Toledo Commercial Co. v. Glen Mfg. Co., 55 Ohio St. 217; New Jersey Steel Tube Co. v. Riehl, 9 Pa. Super., 220; Blakeslee Mfg. Co. v. Hilton, 18 Pa. Co. Ct. 553; So. Pacific Co. v. State Corporation Commission of New Mexico (N.M.), 72 P.2d 15; Laws of 1934, Ch. 121, Secs. 1, 6, 7, 8.
The Class "B" stock issued by the corporation in payment of the value of assets contributed to the corporate assets by the holders thereof should not be deducted from the book value of the capital of the company.
In re Collier's Estate, 182 N.Y.S. 93, 112 Misc. 70; Cass v. Realty Securities Co., 132 N.Y.S. 1074, 1077, 1078, 148 App. Div. 96; In re Fechheimer Fischel Co., 212 F. 357, 360, 129 C.C.A. 33; Williams v. Mitchell (Pa.), 1 Penn. W. 9, 11; Carson, Pirie, Scott Co. v. Duffy-Powers, Inc., 9 F. Supp. 199, 201; Marvin v. Housing Authority of Jacksonville (Fla.), 183 So. 145, 156; Booth v. Union Fibre Co., 137 Minn. 7, 162 N.W. 677; Jefferson Banking Co. v. Trustees of Martin Institute, 146 Ga. 383, 91 S.E. 463, 468; Scott v. Baltimore O.R. Co., 93 Md. 475, 49 A. 327; Vanden Bosch v. Michigan Trust Co., 35 F.2d 643, 645.
Argued orally by W.H. Watkins, for appellant, and by J.H. Sumrall, for appellee.
During the year 1930 eight industrial concerns located in this state and engaged in the business of manufacturing fruit and vegetable boxes or crates decided to consolidate their plants and assets into one new corporation, and they entered into a consolidation agreement to that effect. The plants and all their property and assets were to be conveyed to the new corporation in consideration of Common and of Class A Preferred Stock, except timber assets, but for timber owned by the several consolidating concerns and conveyed to the new corporation, that particular property was to be evidenced by Class B Preferred Stock. The consolidated agreement on the subject of the timber was in the following terms:
"Class `B' Preferred Stock shall be authorized to the extent of five thousand shares of par value of $100.00 each, to be used from time to time, in the purchase of timber, is to be cumulative non-voting to receive dividends at the annual rate of 6%, to be payable annually, and to be preferred over all other stock as to all of the timber holdings, including the real estate on which the timber is situated, and to carry the usual provisions, including the provision that said stock may be retired at any time by the payment of $100.00 per share for each share of the par value of $100.00, or, in other words, said stock may be retired without the payment of any premium whatever, except accrued dividends. A retirement fund shall be set aside in a separate bank account at the end of each month, in amounts equal to the value of timber cut during the previous months, based on the value of timber at the time of purchase. This class of Capital Stock shall be in serial numbers, starting with number one and when the retirement fund is sufficient to retire one or more shares of this Capital Stock, the New Company shall call for retirement at par value of said shares of this stock, commencing with number one (1) and following until the retirement fund is exhausted from time to time."
In pursuance of the consolidation agreement, appellant corporation was organized under the laws of Delaware; the charter carried express provisions as to the issuance of the three classes of stock mentioned, including particularly the authority for the issuance of the Class B Preferred Stock, and this in accordance with the terms of the above quoted timber stipulation. Timber in the estimated value of $500,000 was conveyed to the corporation, and the owners received Class B Preferred Stock therefor, the stock certificates being also in accord with the agreed plan above quoted. This stock was set up on the books as a part of its capital, and is so shown on its annual returns made for the franchise tax.
Appellant corporation contends now however, that said Class B Preferred Stock is in substance a mere evidence of indebtedness, creating between the corporation and the holders of this particular stock the relation of debtor and creditor, and that therefore it should not be included in the computations of the franchise tax.
Corporations enjoy privileges and immunities not possessed by natural persons, and for the security and protection, by its laws and authority, of such privileges and immunities, the state, for revenue and as a quid pro quo, may levy upon corporations which carry on any substantial part of their business activities in the state, an exaction called a franchise tax. The amount of the franchise tax and the mode of the measurement thereof are matters which rest within legislative discretion, when not burdensome or oppressive and when solely for revenue. The usual mode of measurement is to look to the amount of the capital of the corporation employed or so situated as to be privileged to be employed in the state, and in determining the amount of the capital, the total of the capital stock, stated surplus, and undivided profits of the corporation is used prima facie as a determinative factor. Such, as to the features mentioned, is our Franchise Tax Law, Chapter 121, Laws 1934.
The capital of a corporation is its tangibles, the aggregate of its property and assets of all kinds, while its capital stock is the evidence of rights in such property. As has been stated, timber to the estimated value of $500,000 was conveyed to the corporation, so that the corporation thereupon and thereafter had entire dominion and control over said timber and the full right to use or employ said timber as assets in the business of the corporation. Class B Preferred Stock was issued to those who conveyed the timber to the corporation, wherefore the stock thus issued represented the timber so conveyed. Section 3 of the Act in question levied a franchise or excise tax on foreign corporations "equal to $1.00 of each $1,000.00 or fraction thereon of the value of capital used, invested or employed within this state, except as hereinafter provided." Of the capital used or invested or employed by the corporation was and is this $500,000 worth of timber, and when we turn to Sections 6, 7, and 8 of the Act it is seen that the capital stock, surplus, etc., is looked to simply as a convenient form of the evidence prima facie of the "value of capital used, invested or employed within this state." It is immaterial, therefore, what name or characteristic the particular capital stock which represented this timber may have or what rights it confers inter sese — it is enough, so far as the franchise tax is concerned, that it represents or evidences capital used, invested, or employed within this state, and it is undisputed that all the capital timber which this stock represents is situated within this state.
Appellant's second contention arises out of the fact that a considerable portion of its products is sold by executive officers in sales transactions wholly begun and concluded outside this state and to nonresident buyers. It is noted that under Section 8 the calculations of the franchise tax on foreign corporations is to be based on the ratio which (a) The real estate and taxable personal property owned or used in this state, and (b) the gross receipts from business carried on in this state, bears to (c) the total real estate and tangible personal property of the corporation and (d) gross receipts, wherever located and from wherever received.
Appellant's contention is that as to (b) there is to be included only receipts from sales begun and terminated in this state, and which would exclude receipts from sales made in interstate commerce. The effect of this contention, if sustained, would work a substantial reduction in the tax total and in partial proportion to the amounts represented by such sales in interstate commerce. If, then, a foreign corporation had all its capital invested in twenty factories located and operating in this state, producing hundreds of thousands of dollars of goods a year and the total output was sold through and only through an executive sales agent whose office is in another state and the sales were all to buyers in other states, no franchise tax would be due here, insofar as "the gross receipts from business carried on in this state" would be thus availed of incidentally to displace it. The contention, by its technical extremity, disproves itself. What is meant by the language of the statute under (b) is receipts from that which is actually done or carried on in this state — and not as to where the sales of the products were made or to whom. What here was sold was that which was produced in this state by a business carried on in this state, and the franchise tax is for the corporate privilege or franchise of doing in this state what was done and is being done here regardless of the ultimate destination of the products or by what legalistic means they may get there. Compare Stone v. Interstate N. Gas Company (5 Cir.), 103 F.2d 544.
Affirmed.
ON SUGGESTION OF ERROR.
Appellants re-argue the contention that the Class B Preferred Stock, issued to those who conveyed timber to it, is merely an evidence of indebtedness. Support for that view is not wanting. As stated in the original opinion, however, the total of the capital stock, stated surplus, and undivided profits of the corporation is used prima facie as a determinative factor. Even conceding, for the sake of discussion, but not deciding, that such stock created a mere relation of debtor and creditor, the prima facie effect of its listing as capital stock is not overcome by any showing as to the actual value of its tangible assets as represented by the actual timber yet so held. A resort to assumption or judicial notice, if invoked, could conceivably reveal a substantial equity in such timber. We do not explore this point, but rest our decision upon the prima facie effect of its return for franchise tax
PARTIALLY DISSENTING OPINION.
This Class B Preferred Stock issued by this corporation is, in my judgment, capital stock, and I think the court should now definitely so say, and not cast a doubt on its being such, as I fear its opinion on this suggestion of error does, thereby inviting other lawsuits growing out of a contention that this character of corporate stock is not in fact capital stock but merely evidences in indebtedness due by the corporation issuing it.