Source: https://supreme.justia.com/cases/federal/us/279/421/
Timestamp: 2019-04-22 00:35:08+00:00

Document:
1. The issued capital stock of a foreign corporation may constitutionally be made the basis of a state franchise or license tax at a flat rate per share when apportioned to the property and business of the corporation within the state. P. 279 U. S. 426.
2. The kind and number of shares with which a foreign corporation is permitted to carry on its business within the state is a part of the privilege which the state extends to it and is a proper element to be taken into account in fixing a tax on the privilege. Id.
3. The measurement of such a tax upon a foreign corporation at a flat rate upon its issued stock, either par or nonpar, used within the state is reasonably related to the privilege granted by the state and to the protection of its own interest in the maintenance of its similar policy of taxation with respect to domestic corporations, and so does not infringe any constitutional immunity. P. 279 U. S. 427.
of the two kinds of shares, and is therefore consistent with the equal protection clause of the Fourteenth Amendment. P. 279 U. S. 428.
Appeal from a judgment of the circuit court of appeals affirming an order of the district court rejecting a claim for taxes made by the State of New York in a bankruptcy proceeding. The court below adopted the opinion of the district court. 26 F.2d 713.
This is an appeal under § 240 of the Judicial Code from a judgment of the Circuit Court of Appeals for the Third Circuit affirming, on the opinion of the court below, 26 F.2d 713, an order of the District Court for Delaware expunging the claim in bankruptcy of appellant, the State of New York, for unpaid taxes assessed by it against the bankrupt corporation.
employed; for stock of no par value, the fee is 6 cents per share. The tax, denominated a "license fee," is paid but once, purports to be imposed on the corporation "for the privilege of exercising its corporate franchises or carrying on its business in such corporate or organized capacity of this state," and the obligation to pay it is made a prerequisite to obtaining a certificate of authority from the state and to the continuance of business there. People ex rel. Griffith v. Loughman, 249 N.Y. 369. But the foreign corporation is permitted to transact business and make valid contracts within the state prior to payment of the tax, which of necessity cannot be computed or paid until after the first year has elapsed. The tax is evidently the complement of the organization fee, computed in like fashion on the authorized capital stock of domestic corporations by Chapter 143 of the Laws of 1886. See People ex rel. Elliott-Fischer Co. v. Sohmer, 148 App.Div. 514, aff'd, 206 N.Y. 634.
The bankrupt is a Delaware corporation whose authorized capital stock consists of 250,000 shares without par value, all of which has been issued at an average price of $2.32 per share. It commenced doing business in New York in November, 1924, and its total assets were used in its business in that state during the following year. The value of its tangible assets is alleged to have been but $280,000, or about $1.12 per share, and its intangible property to have been of no value. A tax of $15,000, computed at 6 cents per share, was assessed against it, and is the basis of the present claim.
court thought that, as the tax could not be regarded as a true admission fee imposed as a condition of entrance into the state, and the corporation was thus in a position to invoke the equal protection clause, see Hanover Ins. Co. v. Harding, 272 U. S. 494, 272 U. S. 510, the invalidity of the taxing statute was established by the decision of this Court in Air-Way Electric Appliance Corp. v. Day, 266 U. S. 71, 266 U. S. 83, since foreign corporations having the same amount of business and property, both within and without the state, but with a different number of issued nonpar shares, might be required to pay a tax differing from each other and from other foreign corporations with par value stock having like property within and without the state. The Court of Appeals of New York has since reached the opposite conclusion both as to the nature of the tax and its constitutionality. People ex rel. Griffith v. Loughman, supra.
For present purposes, we need not determine whether the tax may be sustained because imposed as a condition of entrance into the state, for, assuming that the bankrupt corporation was within the state, and thus entitled to equal protection (Hanover Ins. Co. v. Hardings, supra, Southern Ry. Co. v. Greene, 216 U. S. 400, 216 U. S. 417), we do not deem the decision in the Air-Way case controlling, nor the tax so unreasonable or discriminatory as to deprive the bankrupt of any constitutional immunity.
"While one factor in the computation of the tax was properly the proportion of the corporation's business done and property owned within the state, the other factor was the amount of its authorized capital stock, only a part of which had actually been issued. The authority to issue its capital stock was a privilege conferred by another state, and bore no relation to any franchise granted to it by the State of Ohio or to its business and property within that state. When authorized capital stock is taken as the basis of the tax, variations in the amount of the tax are obtained according as the corporation has a large or small amount of unissued capital stock. This was held, in the Air-Way case, to be an unconstitutional discrimination, since it resulted in a tax larger than the tax imposed on other corporations with like privileges and like business and property within the state, but with a smaller capital authorized under the laws of the state of their creation."
capital stock of foreign corporations may be made the basis of a franchise or license tax at a flat rate per share when apportioned to the property and business of the corporation within the state, and whether the taxing act may discriminate by placing in one class corporations having par value stock and in another corporations having stock without par value.
1. It is said that the tax computed on the number of nonpar shares at a flat rate may bear little relation to the property and business of the corporation within the state, and consequently corporations having like property and business within the state, but with a different nonpar capitalization, may be required to pay a different tax. But this is equally true of corporations having par value stock, even though full value be paid in on its issue. Par value and actual value of issued stock are not synonymous, and there is often a wide disparity between them. Par value has long been a familiar basis of computing a franchise tax upon foreign corporations, and, when otherwise unobjectionable, has been repeatedly upheld by this Court. See St. Louis Southwestern Ry. Co. v. Arkansas, 235 U. S. 350; Hump Hairpin Co. v. Emmerson, 258 U. S. 290; Cheney Brothers Co. v. Massachusetts, 246 U. S. 147.
We have likewise sustained a state franchise tax on foreign corporations, measured by a fixed percentage of its nonpar stock valued, as required by the statute, at $25 per share and apportioned to the property and business of the corporation within the state. Margay Oil Corp. v. Applegate, 273 U.S. 666, aff'g State v. Margay Oil Corp., 167 Ark. 614; Gilliland Oil Co. v. Arkansas, 274 U.S. 717, aff'g 171 Ark. 415.
is not deemed by the taxpayer to be a valuable privilege, it will reduce the number of shares as the statute permits. A state which has adopted a permissible scheme of franchise tax for domestic corporations, based on capital stock (Roberts & Schaefer Co. v. Emmerson, supra), has a legitimate interest in imposing a like burden on foreign corporations which it permits to carry on business there, and we can perceive no constitutional objection to its protecting that interest by such a tax where, as here, it is limited to shares actually issued, is not assailed as confiscatory, does not reach either directly or indirectly property beyond the state, and does not discriminate between foreign and domestic corporations or between foreign corporations of like organization and property.
There is nothing in the Constitution which requires a state to adopt the best possible system of taxation. Southwestern Oil Co. v. Texas, 217 U. S. 114, 217 U. S. 126; Delaware Railroad Tax Cases, 18 Wall. 206, 85 U. S. 231. Although permissible, a franchise tax need not be based solely on the amount of business done or property owned within the state. It may be rested on the nature of the business (Southwestern Oil Co. v. Texas, supra: Quong Wing v. Kirkendall, 223 U. S. 59; American Sugar Refining Co. v. Louisiana, 179 U. S. 89; Williams v. Fears, 179 U. S. 270, 179 U. S. 275; see Connolly v. Union Sewer Pipe Co., 184 U. S. 540, 184 U. S. 562), or the particular form in which it is carried on (see Home Insurance Co. v. New York, 134 U. S. 594, 134 U. S. 606), so long as it bears some real and reasonable relation to the privilege granted or to the protection of the interests of the state. See Roberts & Schaefer Co. v. Emmerson, supra, at 271 U. S. 57.
of its similar policy of taxation with respect to domestic corporations, and so does not infringe any constitutional immunity.
2. Nor is such a tax to be deemed a denial of equal protection because a different measure or method of computing the tax is applied to corporations having nonpar stock from that applied to corporations having stock of par value. In Roberts & Schaefer Co. v. Emmerson, supra, at 271 U. S. 56, it was pointed out that there were such differences between par and nonpar shares, both in their legal incidents and their actual use, and such practical difficulties in measuring a tax by the latter, except by assigning to them an artificial or fixed value or assessing them at a flat rate, as to justify the classification for purposes of franchise tax on domestic corporations. It was accordingly held that such a tax may be based on the par value of shares of corporations having par value stock, and on a fixed value assigned to nonpar shares, regardless of their actual value or the varying amounts paid in upon them.
discrimination is not arbitrary or prohibited by the Fourteenth Amendment.
* The use of nonpar stock, which may be issued at any price deemed wise at the particular time, by the directors or stockholders, see New York Stock Corporation Law § 69; Missouri Stock Corporation Law, § 5, or in many cases for property without fixing a price, and which has no fixed or designated amount dedicated to capital or surplus, respectively, makes difficult the determination of the true capital of the corporation which it is required to keep intact and the amount which any particular stockholder is bound to pay for his stock. See Berle, Problems of Nonpar Stock, 25 Columbia Law Rev. 43; Ballantine, Corporations (1927) § 217. Cf. Johnson v. Louisville Trust Co., 293 F. 857. Resulting difficulties in the enforcement by creditors of the liability of directors for improper diversion of capital or of stockholders for unpaid subscriptions have been often urged as arguments against any use of nonpar stock. 1 Cook, Corporations (1923) § 45d; Bonbright, Dangers of Shares without Par Value, 24 Columbia Law Rev. 449; Ripley, Railroads-Finance and Organization (1915) 91; Cook, Stock without Par Value, 19 Michigan Law Rev. 583.

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