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Shaffer v. Carter (full text) :: 252 U.S. 37 (1920) :: Justia U.S. Supreme Court Center Log In
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Shaffer v. Carter 252 U.S. 37 (1920)
U.S. Supreme CourtShaffer v. Carter, 252 U.S. 37 (1920)Shaffer v. CarterNos. 531, 580Argued December 11, 12, 1919Decided March 1, 1920252 U.S. 37APPEALS FROM THE DISTRICT COURT OF THE UNITED STATES
Governmental jurisdiction in matters of taxation depends upon the power to enforce the mandate of the state by action taken within its borders either in personam or in rem. P. 252 U. S. 49. Page 252 U. S. 38
The case is stated in the opinion. Page 252 U. S. 43
A previous suit having the same object was brought by him in the same court against the officials then in office, in which an application for an interlocutory injunction heard before three judges pursuant to § 266, Judicial Code, was denied, one Judge dissenting. Shaffer v. Howard, 250 F. 873. An appeal was taken to this Court, but, pending its determination, the terms of office of the defendants expired, and, there being no law of the Page 252 U. S. 44 state authorizing a revival or continuance of the action against their successors, we reversed the decree and remanded the cause with directions to dismiss the bill for want of proper parties. 249 U. S. 249 U.S. 200.
"Each and every person in this state shall be liable to an annual tax upon the entire net income of such person arising or accruing from all sources during the preceding calendar year, and a like tax shall be levied, assessed, collected, and paid annually upon the entire net income from all property owned, and of every business, trade, or profession carried on in this Page 252 U. S. 45 state by persons residing elsewhere."
Plaintiff, a nonresident of Oklahoma, being a citizen of Illinois and a resident of Chicago in that state, was at the time of the commencement of the suit and for several years theretofore (including the years 1915 and 1916) engaged in the oil business in Oklahoma, having purchased, owned, developed and operated a number of oil and gas mining leases, and being the owner in fee of certain oil-producing land in that state. From properties thus owned and operated during the year 1916, he received a net income exceeding $1,500,000, and of this he made, under protest, a return which showed that, Page 252 U. S. 46 at the rates fixed by the act, there was due to the state an income tax in excess of $76,000. The then State Auditor overruled the protest and assessed a tax in accordance with the return; the present auditor has put it in due course of collection, and plaintiff resists its enforcement upon the ground that the act, insofar as it subjects the incomes of nonresidents to the payment of such a tax, takes their property without due process of law and denies to them the equal protection of the laws in contravention of § 1 of the Fourteenth Amendment, burdens interstate commerce, in contravention of the commerce clause of § 8 of Article I of the Constitution, and discriminates against nonresidents in favor of residents, and thus deprives plaintiff and other nonresidents of the privileges and immunities of citizens and residents of the State of Oklahoma, in violation of § 2 of Article IV. He also insists that the lien attempted to be imposed upon his property pursuant to § 11 for taxes assessed upon income not arising out of the same property would deprive him of property without due process of law.
This contention is based, first, upon the provision of § 9 of c. 164, giving to the State Auditor the same power to correct and adjust an assessment of income that is given to the county board of equalization in cases of ad Page 252 U. S. 47 valorem assessments, taken in connection with c. 107 of the Laws of 1915, which provides (Article 1, Subd. B, § 2) for an appeal from that board to the district court of the county. In a recent decision (Berryhill v. Carter, 185 P. 93), the supreme court of the state held that an aggrieved income taxpayer may have an appeal under this section, and that thus "all matters complained of may be reviewed and adjusted to the extent that justice may demand." But the case related to "correcting and adjusting an income tax return," and the decision merely established the appeal to the district court as the appropriate remedy, rather than an application to the Supreme Court for a writ of certiorari. It falls short of indicating -- to say nothing of plainly showing -- that this procedure would afford an adequate remedy to a party contending that the income tax law itself was repugnant to the Constitution of the United States.
Secondly, reference is made to § 7 of Subd., Art. 1, c. 107, Laws Okl. 1915, wherein it is provided that, where illegality of a tax is alleged to arise by reason of some action from which the laws provide no appeal, the aggrieved person, on paying the tax, may give notice to the officer collecting it, stating the grounds of complaint and that suit will be brought against him, whereupon it is made the duty of such officer to hold the tax until the final determination of such suit, if brought within 30 days, and if it be determined that the tax was illegally collected, the officer is to repay the amount found to be in excess of the legal and correct amount. But this section is one of several that have particular reference to the procedure for collecting ad valorem taxes, and they are prefaced by this statement (p. 147): "Subdivision B. To the existing provisions of law relating to the ad valorem or direct system of taxation the following provisions are added." Upon this ground, in Gipsy Page 252 U. S. 48 Oil Co. v. Howard and companion suits brought by certain oil-producing companies to restrain enforcement of taxes authorized by the gross production tax law (Sess.Laws 1916, p. 102), upon the ground that they were an unlawful imposition upon federal instrumentalities, the United States District Court for the Western District of Oklahoma held that the legal remedy provided in § 7 of c. 107 applied only to ad valorem taxes, and did not constitute a bar to equitable relief against the production taxes. Defendants appealed to this Court and assigned this ruling for error, inter alia, but they did not press the point, and the decrees were affirmed upon the merits of the federal question. Howard v. Gipsy Oil Co., 247 U.S. 503.
We deem it unnecessary to pursue further the question whether either of the statutory provisions referred to furnishes an adequate legal remedy against income taxes assessed under an unconstitutional law, since one of the grounds of complaint in the present case is that, even if the tax itself be valid, the procedure prescribed by § 11 of the Income Tax Law for enforcing such a tax by imposing a lien upon the taxpayer's entire property, as threatened to be put into effect against plaintiff's property for taxes not assessed against the property itself and not confined to the income that proceeded from the same property, is not "due process of law," within the requirement of the Fourteenth Amendment. For removal of a cloud upon title caused by an invalid lien imposed for a tax valid in itself, there appears to be no legal remedy. Hence, on this ground, at least, resort was properly had to equity for relief, and since a court of equity does not "do justice by halves," and will prevent, if possible, a multiplicity of suits, the jurisdiction extends to the disposition of all questions raised by the bill. Camp v. Boyd, 229 U. S. 530, 229 U. S. 551-552; McGowan v. Parish, 237 U. S. 285, 237 U. S. 296. Page 252 U. S. 49
The contention that a state is without jurisdiction to impose a tax upon the income of nonresidents, while raised in the present case, was more emphasized in Travis v. Yale & Towne Mfg. Co., ante, 252 U. S. 60, involving the Income Tax Law of the State of New York (Laws 1919, c. 627). There it was contended, in substance, that, while a state may tax the property of a nonresident situate within its borders, or may tax the incomes of its own citizens and residents because of the privileges they enjoy under its Constitution and laws and the protection they receive from the state, yet a nonresident, although conducting a business or carrying on an occupation there, cannot Page 252 U. S. 50 be required through income taxation to contribute to the governmental expenses of the state whence his income is derived; that an income tax, as against nonresidents, is not only not a property tax, but is not an excise or privilege tax, since no privilege is granted, the right of the noncitizen to carry on his business or occupation in the taxing state being derived, it is said, from the provisions of the federal Constitution.
This radical contention is easily answered by reference to fundamental principles. In our system of government, the states have general dominion, and, saving as restricted by particular provisions of the federal Constitution, complete dominion over all persons, property, and business transaction within their borders; they assume and perform the duty of preserving and protecting all such persons, property, and business, and, in consequence, have the power normally pertaining to governments to resort to all reasonable forms of taxation in order to defray the governmental expenses. Certainly they are not restricted to property taxation, nor to any particular form of excises. In well ordered society, property has value chiefly for what it is capable of producing, and the activities of mankind are devoted largely to making recurrent gains from the use and development of property, from tillage, mining, manufacture, from the employment of human skill and labor, or from a combination of some of these, gains capable of being devoted to their own support, and the surplus accumulated as an increase of capital. That the state, from whose laws property and business and industry derive the protection and security without which production and gainful occupation would be impossible, is debarred from exacting a share of those gains in the form of income taxes for the support of the government is a proposition so wholly inconsistent with fundamental principles as to be refuted by its mere statement. That it may tax the land but not the crop, the tree but not the Page 252 U. S. 51 fruit, the mine or well but not the product, the business but not the profit derived from it, is wholly inadmissible.
"We have had frequent occasion to consider questions of state taxation in the light of the federal Constitution, and the scope and limits of national interference are well settled. There is no general supervision on the part of the nation over state taxation, and in respect to the latter the state has, speaking generally, the freedom of a sovereign both as to objects Page 252 U. S. 52 and methods. That a state may tax callings and occupations as well as persons and property has long been recognized."
That a state, consistently with the federal Constitution, may not prohibit the citizens of other states from carrying on legitimate business within its borders like its own Page 252 U. S. 53 citizens, of course, is granted, but it does not follow that the business of nonresidents may not be required to make a ratable contribution in taxes for the support of the government. On the contrary, the very fact that a citizen of one state has the right to hold property or carry on an occupation or business in another is a very reasonable ground for subjecting such nonresident, although not personally, yet to the extent of his property held, or his occupation or business carried on therein, to a duty to pay taxes not more onerous in effect than those imposed under like circumstances upon citizens of the latter state. Section 2 of Art. IV of the Constitution entitles him to the privilege and immunities of a citizen, but no more -- not to an entire immunity from taxation, nor to any preferential treatment as compared with resident citizens. It protects him against discriminatory taxation, but gives him no right to be favored by discrimination or exemption. See Ward v. Maryland, 12 Wall. 418, 79 U. S. 430.
Oklahoma has assumed no power to tax nonresidents with respect to income derived from property or business beyond the borders of the state. The first section of the act, while imposing a tax upon inhabitants with respect to their entire net income arising from all sources, confines the tax upon nonresidents to their net income from property owned and business, etc., carried on within the state. A similar distinction has been observed in our federal income tax laws from one of the earliest down to the present. * The acts of 1861 (12 Stat. 309) and 1864 (13 Stat. Page 252 U. S. 54 281, 417) confined the tax to persons residing in the United States and citizens residing abroad. But, in 1866 (14 Stat. 137, 138), there was inserted by amendment the following:
It is insisted, however, both by appellant in this case and by the opponents of the New York law in Travis v. Yale & Towne Mfg. Co., that an income tax is in its nature a personal tax, or a "subjective tax imposing personal liability upon the recipient of the income," and that, as to a Page 252 U. S. 55 nonresident, the state has no jurisdiction to impose such a liability. This argument, upon analysis, resolves itself into a mere question of definitions, and has no legitimate bearing upon any question raised under the federal Constitution. For where the question is whether a state taxing law contravenes rights secured by that instrument, the decision must depend not upon any mere question of form, construction, or definition, but upon the practical operation and effect of the tax imposed. St. Louis S.W. Ry. v. Arkansas, 235 U. S. 350, 235 U. S. 362; Mountain Timber Co. v. Washington, 243 U. S. 219, 243 U. S. 237; Crew Levick Co. v. Pennsylvania, 245 U. S. 292, 245 U. S. 294; American Mfg. Co. v. St. Louis, 250 U. S. 459, 250 U. S. 463. The practical burden of a tax imposed upon the net income derived by a nonresident from a business carried on within the state certainly is no greater than that of a tax upon the conduct of the business, and this the state has the lawful power to impose, as we have seen.
The contention that the act deprives appellant and others similarly circumstanced of the privileges and immunities enjoyed by residents and citizens of the State of Oklahoma, in violation of § 2 of Art. IV of the Constitution, Page 252 U. S. 56 is based upon two grounds, which are relied upon as showing also a violation of the "equal protection" clause of the Fourteenth Amendment.
Appellant contends that there is a denial to noncitizens of the privileges and immunities to which they are entitled, and also a denial of the equal protection of the laws, in that the act permits residents to deduct from their gross income not only losses incurred within the State of Oklahoma, but also those sustained outside of that state, while nonresidents may deduct only those incurred within the Page 252 U. S. 57 state. The difference, however, is only such as arises naturally from the extent of the jurisdiction of the state in the two classes of cases, and cannot be regarded as an unfriendly or unreasonable discrimination. As to residents, it may, and does, exert its taxing power over their income from all sources, whether within or without the state, and it accords to them a corresponding privilege of deducting their losses, wherever these accrue. As to nonresidents, the jurisdiction extends only to their property owned within the state and their business, trade, or profession carried on therein, and the tax is only on such income as is derived from those sources. Hence, there is no obligation to accord to them a deduction by reason of losses elsewhere incurred. It may be remarked, in passing, that there is no showing that appellant has sustained such losses, and so he is not entitled to raise this question.
Reference is made to the gross production tax law of 1915 (c. 107, Art. 2, subd. A, § 1, Sess.Laws 1915, p. 151), as amended by c. 39 of Sess.Laws 1916 (p. 104), under which every person or corporation engaged in producing oil or natural gas within the state is required to pay a tax equal to 3 percentum of the gross value of such product in lieu of all taxes imposed by the state, counties, or municipalities upon the land or the leases, mining rights, Page 252 U. S. 58 and privileges, and the machinery, appliances, and equipment, pertaining to such production. It is contended that payment of the gross production tax relieves the producer from the payment of the income tax. This is a question of state law, upon which no controlling decision by the supreme court of the state is cited. We overrule the contention, deeming it clear, as a matter of construction, that the gross production tax was intended as a substitute for the ad valorem property tax, but not for the income tax, and that there is no such repugnance between it and the income tax as to produce a repeal by implication. Nor, even if the effect of this is akin to double taxation, can it be regarded as obnoxious to the federal Constitution for that reason, since it is settled that nothing in that instrument or in the Fourteenth Amendment prevents the states from imposing double taxation, or any other form of unequal taxation, so long as the inequality is not based up on arbitrary distinctions. St. Louis S.W. Railway v. Arkansas, 235 U. S. 350, 235 U. S. 367-368.
But the facts of the case do not raise this question. It clearly appears from the averments of the bill that the whole of plaintiff's property in the State of Oklahoma consists of oil-producing land, oil and gas mining leaseholds, and other property used in the production of oil and gas, and that, beginning at least as early as the year 1915, Page 252 U. S. 59 when the act was passed, and continuing without interruption until the time of the commencement of the suit (April 16, 1919), he was engaged in the business of developing and operating these properties for the production of oil, his entire business in that and other states was managed as one business, and his entire net income in the state for the year 1916 was derived from that business. Laying aside the probability that from time to time there may have been changes arising from purchases, new leases, sales, and expirations (none of which, however, is set forth in the bill), it is evident that the lien will rest upon the same property interests which were the source of the income upon which the tax was imposed. The entire jurisdiction of the state over appellant's property and business and the income that he derived from them -- the only jurisdiction that it has sought to assert -- is a jurisdiction in rem, and we are clear that the state acted within its lawful power in treating his property interests and business as having both unity and continuity. Its purpose to impose income taxes was declared in its own Constitution, and the precise nature of the tax and the measures to be taken for enforcing it were plainly set forth in the Act of 1915, and plaintiff having thereafter proceeded, with notice of this law, to manage the property and conduct the business out of which proceeded the income now taxed, the state did not exceed its power or authority in treating his property interests and his business as a single entity, and enforcing payment of the tax by the imposition of a lien, to be followed by execution or other appropriate process, upon all property employed in the business.