Source: https://supreme.justia.com/cases/federal/us/266/271/
Timestamp: 2019-04-20 08:50:45+00:00

Document:
1. The tax imposed on foreign corporations by Art. 9-A of the Tax Law of New York, as amended, is not a direct tax on allocated income, but a tax for the privilege of doing business in the state measured by allocated income of the previous year. P. 266 U. S. 280.
2. When the business of a foreign corporation consists in a series of transactions beginning with the manufacture of goods in its home country and ending in their sale there and in other places, the profits accruing only with the sales, a this country in which part of the business is transacted is justified in attributing to that part a just proportion of the net profits earned by the corporation from its business as a whole during the preceding year, as a basis for a tax upon its privilege of doing local business during the year to follow. Underwood Typewriter Co. v. Chamberlain, 254 U. S. 113; Wallace v. Hines, 253 U. S. 66, 253 U. S. 69. P. 266 U. S. 280.
3. A tax on a British corporation for the privilege of doing business in New York during the ensuing year computed under Art. 9-A of the state Tax Law on a portion of the total net income of the year last preceding, the portion being determined by the ratio between the value of such assets of the corporation of certain classes -- real and tangible personal property, bills and accounts receivable, and shares in other corporations -- as were located in New York, and the value of all its assets of those classes, held not arbitrary or unreasonable, and not a violation of due process of law or an unconstitutional burden on foreign commerce. P. 266 U. S. 282.
4. A tax thus computed on allocated net income of the past year for the privilege of continuing local business during the year ensuing should not be deemed invalid merely because the local business of the preceding year yielded no net income, especially where the state law relieves the corporation from any personal property tax. P. 266 U. S. 284.
5. An objection to a state tax not raised before the state taxing authorities or in the state courts cannot be assigned for error and reviewed in this Court. P. 266 U. S. 285.
198 App.Div. 963, 232 N.Y. 42, affirmed.
Error to a judgment of the Supreme Court of New York, entered on remittitur from the Court of Appeals, confirming a tax assessment.
This cases involves the constitutional validity of Article 9-A of the Tax Law of New York under consideration in Gorham Manufacturing Co. v. Tax Commission, ante, 266 U. S. 265.
within the state, the tax is to be based upon the portion of such ascertained net income determined by the proportion which the aggregate value of specified classes of the assets of the corporation within the state bears to the aggregate value of all such classes of assets, wherever located. The classes of assets which are to enter into this ratio -- hereinafter termed the segregated assets -- are: real property and tangible personal property, bills and accounts receivable resulting from the manufacture and sale of merchandise and services performed, and shares of stock owned in other corporations, not exceeding ten percentum of the real and tangible personal property, which are to be allocated according to the location of the physical property representing such stock. § 214. [Footnote 3] The corporation is to be exempt from any personal property tax. § 219-j.
located in New York City and in Chicago. On its report to the New York Tax Commission, amended under protest, the Commission computed and assessed its franchise tax for the year commencing November 1, 1918. At a hearing granted on an application for revision, the Commission adhered to the original assessment. The company then paid the tax under protest. The determination of the Commission was subsequently confirmed, upon a writ of certiorari, by the Appellate Division of the certiorari, by the Appellate Division 189 N.Y.S. 952, and the order of that court was affirmed, upon appeal, by the Court of Appeals, 232 N.Y. 42. The record was remitted to the Supreme Court, to which this writ of error was directed. Hodges v. Snyder, 261 U. S. 600.
the proportion thereof which the segregated assets in New York bore to the segregated assets wherever located, amounting to $27,537.68, and upon this sum computed the franchise tax at the rate of three percentum -- that is, $826.14.
The company contends that this tax is not based upon any net income derived from the business which it carried on in New York, but upon a portion of its net income derived from business carried on outside of the United States which, under the provisions of the statute, has been arbitrarily allocated to its New York business, and that such imposition of the tax deprives it of its property in violation of the due process clause of the Fourteenth Amendment, and imposes a direct burden upon its foreign commerce in violation of the commerce clause of the Constitution.
1. We see no reason to doubt the accuracy of the statement made by the Court of Appeals in the present case that the franchise tax imposed by the statute is "primarily a tax levied for the privilege of doing business in the state." 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, 263 U. S. 496.
"But this showing wholly fails to sustain the objection. The profits of the corporation were largely earned by a series of transactions beginning with manufacture in Connecticut and ending with sale in other states. In this, it was typical of a large part of the manufacturing business conducted in the state. The legislature, in attempting to put upon this business its fair share of the burden of taxation, was faced with the impossibility of allocating specifically the profits earned by the processes conducted within its borders. It therefore adopted a method of apportionment which, for all that appears in the record, reached, and was meant to reach, only the profits earned within the state. 'The plaintiff's argument on this branch of the case,' as stated by the Supreme Court of Errors,"
attributable, for purposes of taxation, to the manufacture of products from the sale of which 80 percent of its gross earnings was derived after paying manufacturing costs."
The corporation has not even attempted to show this, and for aught that appears, the percentage of net profits earned in Connecticut may have been much larger than 47 percent. There is consequently nothing in this record to show that the method of apportionment adopted by the state was inherently arbitrary, or that its application to this corporation produced an unreasonable result.
So, in the present case, we are of opinion that, as the company carried on the unitary business of manufacturing and selling ale, in which its profits were earned by a series of transactions beginning with the manufacture in England and ending in sales in New York and other places -- the process of manufacturing resulting in no profits until it ends in sales -- the state was justified in attributing to New York a just proportion of the profits earned by the company from such unitary business. In Wallace v. Hines, 253 U. S. 66, 253 U. S. 69, it was recognized that a state, in imposing an excise tax upon foreign corporations in respect to doing business within the state, may look to the property of such corporations beyond its borders to "get the true value of the things within it, when they are part of an organic system of wide extent," giving the local property a value above that which it would otherwise possess, and may therefore take into account property situated elsewhere when it "can be seen in some plain and fairly intelligible way that it adds to the value of the [property] and the rights exercised in the state." This is directly applicable to the carrying on of a unitary business of manufacture and sale partly within and partly without the state.
assets located in New York and elsewhere was inherently arbitrary, or a mere effort to reach profits earned elsewhere under the guise of legitimate taxation. The principal factors entering into this allocation are, as in the Underwood case, the real and tangible personal property of the corporation. We see nothing arbitrary in also including bills and accounts receivable resulting from the manufacture and sale of merchandise and services performed, or in taking average monthly values as the measure of all the segregated assets except shares of stock. And, in the present case, the inclusion of a portion of the shares of stock in other corporations -- none of which were allocated to New York -- resulted in the company's favor, and reduced the income allocated to New York to less than it otherwise would have been.
3. Furthermore, the statutory method of apportionment not being shown to be arbitrary or unreasonable, we think that the Court of Appeals rightly held that the tax imposed for the carrying on of the business in New York is not invalid merely because, in the preceding year, the business conducted in New York may have yielded no net income. There is no sufficient reason why a foreign corporation desiring to continue the carrying on of business in the state for another year, from which it expects to derive a benefit, should be relieved of a privilege tax because it did not happen to have made any profit during the preceding year. This is especially true where, as in the present case, the corporation is entirely relieved of any personal property tax. See U.S. Express Co. v. Minnesota, 223 U. S. 335, 223 U. S. 346.
as appears from the record, was not raised by the company either before the Commission or the state courts, in each of which its objections to the validity of the tax were phrased in terms having no reference to this specific question. And, not having been raised in the Court of Appeals or passed on by that court, it is not a question which can now be reviewed by this Court under an assignment of errors raising it here for the first time.
Consol.Laws of 1909, c. 60, as amended by the Laws of 1917, c. 726, and the Laws of 1918, cc. 271, 276, 417. See the opinion in the Gorham Mfg. Co. case, note 2, ante, 266 U. S. 266.
This section is entitled "Franchise tax on corporations based on net income."
The average value of the shares of stock is taken, the average monthly value of the other assets. The entire provision as to the allocation of net income, which is here broadly summarized, is set forth in the margin of the opinion in People v. Knapp, 230 N.Y. 48, 53.
This Article also provides that the corporation shall make a report to the Commission showing its net income as returned to the United States and the matters which are to enter into the allocation of the net income; that the Commission shall state the account and compute the tax, and that, if an application for revision is made, the Commission shall grant a hearing, upon evidence, and adjust the tax, "according to law and the facts." And it further provides for a review of the determination of the Commission, upon certiorari by the Supreme Court, both upon the law and the facts, and for an appeal from the Supreme Court to the Court of Appeals. These various provisions are set forth in the opinion in the Gorham Mfg. Co. case.
If the corporation is organized under the laws of another country, it is required to state its entire net income. § 211.
The statement in the opinion of the Court of Appeals that the company's "net income from the New York business was nothing" was apparently made inadvertently. There is no showing except as to the gross sales, and the "expenses," which were about one-fourth of the gross sales; nothing appearing as to manufacturing costs or other charges, and nothing from which the question of ultimate net profit or loss that entered either into the separate business in New York or into the total net income of the company accruing from the manufacture and sale of the ale, can be ascertained.

References: Art. 9
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 Art. 9
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 § 214
 § 219
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 § 211