Case Title: Reuben L. Anderson-Cherne v. COM'R OF TAXATION

Citation: 226 N.W.2d 611

Docket Number: 44816

State: minnesota

Court: Minnesota Supreme Court

Date: 1975-02-14T00:00:00Z

Document:
226 N.W.2d 611 (1975) REUBEN L. ANDERSON-CHERNE, INC., Relator, v. COMMISSIONER OF TAXATION of the State of Minnesota, Respondent. No. 44816. Supreme Court of Minnesota. February 14, 1975. *612 Lewis L. Anderson, St. Paul, for relator. Warren Spannaus, Atty. Gen., C. H. Luther, Deputy Atty. Gen., Arthur J. Glassman, Sp. Asst. Atty. Gen., Dept. of Revenue, St. Paul, for respondent. Heard before OTIS, KELLY, TODD, YETKA, and KNUTSON, JJ., and considered and decided by the court en banc. KNUTSON, Justice.[*] Certiorari on the relation of Reuben L. Anderson-Cherne, Inc., to review an order of the Minnesota Tax Court denying relator's application for a refund of taxes paid pursuant to Minn.St.1971, § 290.02, for the years 1968, 1969, and 1970. The following facts have been stipulated: Minn.St.1971, § 290.02, reads: It is relator's contention that its income from interest on United States government securities cannot be included in determining net income for the purpose of computing the taxes imposed under § 290.02. The interest from Federal securities is exempt from our state income tax under Minn.St. 290.08, subd. 8. It is also exempt from Federal taxation under 31 U.S.C.A. § 742, unless it comes within the exception found in that statutory provision. The only question before us in this case may be stated as follows: Does 31 U.S.C.A. § 742, which forbids the state to include interest income on United States government obligations in its computation of any tax other than nondiscriminatory franchise or other nonproperty taxes in lieu thereof imposed upon corporations, forbid the inclusion of such income in a Minnesota corporation's net taxable income for the purpose of computing the so-called franchise tax imposed by § 290.02? The governing Federal statute, 31 U.S. C.A. § 742, reads: The relator does not contend that the tax imposed by Minn.St.1971, § 290.02, is discriminatory but contends that it is an income or property tax rather than a franchise tax. The Tax Court held that income from interest on Federal securities was includable in the net income of a corporation for the purpose of determining the amount of tax due under § 290.02. It said in part: Relator relies on State v. Duluth, M. & N. Ry. Co., 207 Minn. 618, 292 N.W. 401 (1939), certiorari denied, 311 U.S. 719, 61 S. Ct. 439, 85 L. Ed. 468 (1941); The Pullman Co. v. Commr. of Taxation, 223 Minn. 96, 25 N.W.2d 838 (1947); and Milwaukee Motor Transp. Co. v. Commr. of Taxation, 292 Minn. 66, 193 N.W.2d 605 (1971). It is true that in the first two cited cases we held that the tax imposed was a property tax. However, these cases are not controlling here. They considered the statute prior to 1947, when the legislature amended Minn.St.1945, § 290.02, to provide that the tax was an excise tax. See, Western Union Tel. Co. v. Spaeth, 232 Minn. 128, 44 N.W.2d 440 (1950). The case of The Pullman Co. v. Commr. of Taxation, supra, contains a persuasive dissent by three members of the court as then composed in which the difference between a franchise tax and a property tax is clearly stated in the following language: In the Milwaukee Motor case, we did refer to the tax somewhat interchangeably as a franchise and income tax. The nature of the tax was not an issue in that case; the only question was whether the two corporations involved were one and the same rather than two separate corporations. While we may have referred to the tax as an income tax rather imprecisely, what we were dealing with was the franchise tax and not an income tax. Relator has cited us no case holding directly that the tax under § 290.02 is an income tax.[1] The United States Supreme Court has stated the general rule that a tax is a franchise tax rather than an income tax if it requires that the earning of the income and the exercising of the privilege of doing *615 business in corporate form coincide before imposing tax liability. See, Educational Films Corp. v. Ward, 282 U.S. 379, 51 S. Ct. 170, 75 L. Ed. 400, 71 A.L.R. 1226 (1931); Flint v. Stone Tracy Co., 220 U.S. 107, 31 S. Ct. 342, 55 L. Ed. 389 (1911). The controlling Federal statute, 31 U.S. C.A., § 742, was amended in 1959 so as to include the language now found in it which permits the inclusion of income on Federal obligations for the purpose of determining the amount of a nondiscriminatory franchise tax. Prior to the amendment the statute read: "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." If the contention of relator is tenable, the amendment of the Federal act so as to permit the inclusion of income from Federal obligations in determining the amount of "nondiscriminatory franchise or other nonproperty taxes" would be completely meaningless. Without going into a lengthy discussion on the subject, we are convinced that the Tax Court correctly held that the tax involved in this case is not levied on the income from interest on government securities as such, but was, in fact, a franchise tax imposed upon the privilege of operating as a corporation. The inclusion of interest on Federal securities in determining net income of the corporation is used only as a measuring stick to compute the amount of a franchise tax due under Minn.St.1971, § 290.02. As such, it is permissible under 31 U.S.C.A., § 742. Affirmed. [*] Retired Chief Justice acting pursuant to Minn.St. 2.724. [1] We note that the legislature, in L.1974, c. 556, § 18, amended Minn.St.1971, § 290.02, by striking the word "excise" and inserting the word "income" to describe the tax imposed by § 290.02. Whatever the effect of the amendment may be, as to which we express no opinion, it is not applicable to this case.