Case Name: SHAFFER v. HOWARD, State Auditor, et al.
Court: United States District Court for the Eastern District of Oklahoma
Jurisdiction: United States
Decision Date: 1918-02-04
Citations: 250 F. 873
Docket Number: No. 2444
Parties: SHAFFER v. HOWARD, State Auditor, et al.
Judges: 
Reporter: Federal Reporter
Volume: 250
Pages: 873–890

Head Matter:
SHAFFER v. HOWARD, State Auditor, et al.
(District Court, E. D. Oklahoma.
February 4, 1918.)
No. 2444.
1. Taxation <&wkey;G08(9)~-Con.EciioN or Tax — Injunction-Adequate Remedy at Law.
A suit to enjoin the collection of income taxes levied against a nonresident under Oklahoma Income Tax (Laws 1915, c. 1(54), cannot he dismissed on the ground that section 9 made applicable provisions of Laws 1915, c. 107, relating to ad valorem taxes, and thus furnished a complete and adequate remedy at law, the provisions of chapter 107 in any event giving no relief against the liens created, by the income tax statute.
2. Taxation &wkey;>54—State Income Taxes—Validity.
In view of the several federal income tax acts, Okl. Laws 1915, c. 164, § 1, declaring that each and every person in the state shall be liable to an annual tax on the entire net income of such person arising and accruing from all sources, and that a like tax shall be levied, assessed, and collected and paid upon the entire net income from all property owned, and of every business, trade, or profession carried on in the state by person's residing elsewhere, is not invalid as to a nonresident who received an income from Oklahoma oil wells operated under a lease, on the ground that the income is made up from two inseparable elements, the property and the owner’s management or intelligence.
Campbell, District Judge, dissenting in part
In Equity. Suit by Charles B. Shaffer against E. B. Howard, State Auditor, and John B. Woofter, Sheriff. Motion for temporary injunction denied.
Ramsey, De Mettles, Rosser, Martin & King, of Tulsa, Old., for plaintiff.
S- P. Ereeling, Atty. Gen., for defendants.

Opinion:
STONE, Circuit Judge.
This case is an injunction brought by a nonresident of the state of Oklahoma, seeking to enjoin as invalid the enforcement of the state income law taxing that portion of the income of nonresidents which is derived from sources within the state. The instant decision arises upon an application for a preliminary injunction.
That state statute (Session Raws 1915, p. 282) provides in section 1 that:
"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 calender 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 ca'rried on in this state by persons residing elsewhere."
The tax here involved was imposed under authority of the latter part of this section upon the income derived by the plaintiff from the production of certain oil wells operated under an oil lease. The plaintiff lives in Chicago, Ill., from which place he directs this business.
At tire threshold of the case is the claim of want of equity because of an adequate legal remedy. This point is not well taken. Also the petition raised a point that the later gross production tax law of the state had displaced the income tax law in so far as incomes from oil properties. This point was not pressed at the hearing, and, presuming it abandoned, we pass it by.
This leaves the question of the validity of the law. This is based on the claims that an income tax is a kind of taxation differing in its basic principles from all other taxation; and, as such, being a tax levied against the person who receives the income, is invalid because he. is a nonresident; or, if levied against the income, is still void because the income is made up from two inseparable elements— the property and the owner's management or intelligence—and the latter of these is outside the state.
It is claimed that income taxation is a generic kind of taxation, different from all other taxation, and resting upon an entirely different basis. That income taxation is a separate and distinct form of exercising the sovereign power of taxation is evident. That the right to its employment rests upon a basis different from that of other modes of raising revenue does not follow. Laying aside, political considerations, such as gave rise to the War of the Revolution, there is but one theory of right to tax underlying all taxation — that of protection or benefit rendered by the state to persons, property, or business. Union Refrigerator Transit Co. v. Kentucky, 199 U. S. 194, 202, 26 Sup. Ct. 36, 50 L. Ed. 150, 4 Ann. Cas. 493; Cleveland, P. & A. R. Co. v. Pennsylvania, 15 Wall. 300, 319, 21 L. Ed. 179. Within constitutional limits, the choice of any particular form of taxation is a practical legis - lative problem. Certain classes of taxation have adherents who urge certain consideration, based upon their ideas of just and practical results in taxation. One such class is income taxes, and its sponsors urge its employment on the theory that it places the burden of government upon those most able to bear it. This may be a reason why the Legislature should choose income taxation as a revenue-raising method. It forms no new basis for a right of taxation itself. It refers solely to a choice of methods, all of which rest upon a common basis. The right to tax an income rests upon the protection or benefit given that income by the state.
The next contentions of plaintiff are related in thought, and will be considered together. They are based upon the idea that the entire income, or at least a material, inseparable, component part thereof (the directing or managing intelligence), is without the jurisdiction of the state of Oklahoma. The income here involved arose solely from production of oil wells and appliances within the state of Oklahoma, managed by plaintiff from his city of residence, Chicago, Ill. Unless the state has given protection or benefit to this income, it has no reason or right to ask contribution therefrom. McCulloch v. Maryland, 4 Wheat. 316, 429, 4 L. Ed. 579; Cleveland, P. & A. R. Co. v. Pennsylvania, 15 Wall. 300, 319, 21 L. Ed. 179; Union Refrigerator Transit Co. v. Kentucky, 199 U. S. 194, 202, 26 Sup. Ct. 36, 50 L. Ed. 150, 4 Ann. Cas. 493.
Plaintiff says no such protection has here been given because the levy is "a tax on this plaintiff because of his income." In one sense all taxes might be said to be a tax on the taxpayer because of his land or of his personalty or of liis business or of some privilege. Ihit what the plaintiff means, as he says further in hi,s brief, is that "the tax is directed against the individual and not against the property." By way of further elucidation, he quotes with approval from State ex rel. Sallie F. Moon Co. v. Wisconsin Tax Commission (Wis.) 163 N. W. 639, a portion of which is that:
"It is the recipient of the income [tax] that is taxed, not his property. The tax is upon the right or ability to produce, create, receive, and, enjoy, and not upon specific property."
It does not necessarily follow from this definition that the plaintiff is subject to income tax only in the state of his residence. It means, rather, that he is subject to income taxation only in those jurisdictions which protect him in the production, creation, receipt, and enjoyment of his income. If he lives in Illinois, and has in Oklahoma the property or the business from which his income flows, does not the latter state truly protect him in jhe privilege of producing, creating, receiving, and enjoying that income when it permits 'and protects his business from which the income flows? How is that affected by his residence? Both, the property in Oklahoma and the intelligence in Illinois contributed to this income. Each was necessary to the result. Each had protection from the state in which it was. It is impossible to separate the two elements for taxation purposes. It is'impossible, if material, to determine which was most potent in the result. Can either state be told it cannot be compensated for its protection of a necessary component element of this income, or that it cannot measure such compensation by that income? If, through accident or design, an individual dwells in one state, while his business is in part or wholly located, in other states, so that he needs, commands, and receives the protection of several states, can his income therefrom escape imposition ? It may be true that the state which protects the person of the one who creates, receives, or enjoys an income may require of him therefor a tax measured by his ability to pay from his entire income. That is no reason why the state which protects the business which contributes to his income may not also demand, as pay for that protection, a tax measured by that part of his income which came from that business. If in the one case the state of residence can tax the right to create, receive, and enjoy an income, why cannot another state tax his right to create and receive an income from business within its borders?
A tax upon an income of the instant character (from a business) is directed at neither the person who receives nor the property from which the income arises, but at the privilege of making, producing, creating, receiving, and enjoying the income itself. The right to lay such tax depends upon the protection of the person who receives or of the business which helps create that income.
There is nothing new in this conception of a nonresident being taxed for rights or privileges he exercises under the protection of another state. Inheritance taxes are illustrations. Mager v. Grima, 8 How. 490, 12 L. Ed. 1168; Scholey v. Rew, 23 Wall. 331, 23 L. Ed. 99. Such a tax is levied against the nonresident as well as the resident because of his inheritance — the state protects him in that privilege. Occupation or business taxes are also illustrative. And this would be so because the state of Oklahoma permits him to carry on his business within the state, and protects him therein, irrespective of whether he lives within or without the state, or manages the business from within or without the state. When he can be properly taxed for the privilege of inheriting the property or carrying on a business within another state, why cannot he. be taxed upon an income he derives from business within the state, when a tax upon such an income as this is a levy on the privilege of producing, creating, receiving, and enjoying an income? It is true the tax on the income is not upon the busi ness conducted, but it is also true that the income springs therefrom, and, following the situs thereof, as the child takes legally the residence of the parent, it carries the right of taxation with it.
Such an income of a nonresident is taxable not only because it fits in with the theory of the right of all taxation, i. e., protection, but for another reason. The situs of things and dioses in action and legal rights rests in many cases upon a legal fiction. The necessity of avoiding' confusion, inconvenience, or injustice arises in some instance, and the law settles upon a so-called situs. Familiar illustrations are: A married woman ordinarily partakes of her husband's nationality and domicile; the law of the domicile controls the descent of personalty; and many others to be found in the realm of private international law. These questions arise where there are conflicting claims of jurisdiction. Their settlement depends often, if not usually, upon broad considerations of public policy and justice. One main test in determining the public policy and justice of a situation is to examine the possible or probable effect of a particular holding. If the above view of this tax taken by the court does not prevail, there will result the possibility of avoidance of state income taxes. This latter through the possibility of taking up residence in a state with little or no taxation of that sort. Income taxation is too valuable and important a method of exercising the sovereign power of taxation to risk any diminution through a choice of residence at the hands of the party taxed who at the same time maintains his property and business as before. The public good requires its preservation in its entirety. As said by Mr. Justice Field (Delaware Railroad Tax, 18 Wall. 206, 226, 21 b. Ed. 888):
"The power of taxation is an attribute of sovereignty, and is essential to every independent government. As tliis court has said, the whole community is interested in retaining it tmdim'inished. "
In addition to the above theory of taxation and public policy considerations there is another thought which, while not controlling, has a persuasive force. That is the history of our national income laws. Our first income tax law sprang from the early exigencies of the Civil War. The act of August 5, 1861, c. 45, § 49 (12 St. 292, 309), taxed incomes of residents and those derived from property in United States belonging to citizens of United States residing abroad. That of July 1, 1862, c. 119, § 84 (12 St. 432) provides for tax on gross receipts for insurance premiums, "and like duty shall be paid by the agent of any foreign insurance company having an office or doing business in the United States." The act of June 30, 1864 (13 St. 223, c. 173, § 105, 116), followed the two preceding laws. The act of July 4, 1864 (13 St. 417), continued the tax as to residents and nonresident citizens. The act of July 13, 1866 (14 St. 98, c. 184, § 9), amended section 116, supra, "and a like tax shall be levied, collected, and paid annually upon the gains, profits, and income of every business, trade, or profession carried on in the United States by persons residing without the United States, and not citizens thereof." This act also amended section 122 of the June 30, 1864, act, which taxed bond coupons, interest, and dividends of railroads, canals, turnpike, etc., companies by inserting as to bond or stockholders the words "including- nonresidents whether citizens or aliens." The act of March 2, 1867 (14 St. 471, 477, c. 169, § 13), followed section 166, supra, as amended "and a like tax shall be levied, collected, and paid annually upon the gains, profits, and income of every business, trade, or profession carried on in the United States, by persons residing without the United States, and not citizens thereof." The act of July 14, 1870 (16 St. 256, 257, c. 255, § 6), covered incomes of residents, nonresident citizens, "any business, trade, or profession carried on in the United States by any person residing without the United States and not a citizen thereof," and "rents of real estate within the United States owned by any person residing without the United States, and not a citizen thereof." Section 15 of this act provided for a tax on coupons, interest, and dividends "to whatsoever person the same may be due, including nonresidents, whether citizens or aliens." There followed an hiatus in this sort of taxation until the act of August 27, 1894 (28 St. 509, c. 349), which provided (section 27) for a tax on incomes of citizens, whether resident or nonresident, and on "all property owned aijd of every business, trade, or profession carried on in the United States by persons residing without the United States." Section 31 provides that "any nonresident" may have benefit of certain exemptions by filing tax statement, and "in computing income he shall include all income from every source, but unless he be a citizen of the United States he shall only pay on that part of the income which is derived from any source in the United States." Nonresident corporations were under same liability as resident. The act of August 5, 1909 (36 St. 112, c. 6, § 38) covers income of corporations, "or, if organized under the laws of any foreign country, upon the amount of net income over and above five thousand dollars received by it from business transacted and capital invested within the United States and its territories." The act of October 3, 1913 (Act Oct. 13, 1913, c. 16, 38 Stat. 114), taxed incomes of citizens (resident or nonresident), of residents, and from property, business, etc., in Unitéd States of nonresidents (not citizens). The act of September 8, 1916 (39 St. pt. 'I, p. 756, c. 463, § 1, subd. a [Comp. St. 1916, § 6336a]), imposes such tax on the income of citizens and of residents of the United States and upon income received "from all sources within the United States by every individual a nonresident alien." The act of October 3, 1917 (40 Stat. 300, c. 63), continues the tax of the act of 1916, increasing it as to some classes, and by section 200, defining the terms used in connection with war excess profits tax, provides that "the term 'net income' means, in the case of .a foreign corporation or partnership or a nonresident alien individual, the net income received from sources within the United States." While some of the above references go outside of income taxes, such exceptions are illustrations in kindred fields. And all show an unbroken legislative policy (beginning with the act of July 13, 1866, and extending through the act of 1917) to tax the incomes of nonresident aliens in so far as derived from sources within the United States. There has been but one judicial challenge of this asserted right. In Railroad Co. v. Jackson, 7 Wall. 262, 19 I,. Ed. 88, although the validity of the income tax law of June 30, 1864, was questioned, in so fai as reduction of interest was concerned, by a nonresident alien railroad bondholder, the court held that the act under consideration did not include such a person within its terms, saying:
"It is not important, however, to pursue the argument, as Congress has since, in express terms by the acts of March 10 and July IS, 1866, imposed a tax on alien nonresident bondholders. The question hereafter will be, not whelher the laws embrace the alien nonresident holder, but whether It Is competent for Congress to impose it, upon which wo express no opinion."