Opinion ID: 1823570
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Heading: History of the Franchise Taxes

Text: To clarify the current relationship of the domestic and foreign corporation franchise taxes, we shall summarize their historical development. After the adoption of the Constitution of 1901, the legislature adopted a franchise tax only on foreign corporations. Ala.Code 1907, §§ 2391-2400. This Court affirmed an assessment of taxes under that act, Southern Ry. v. Greene, 160 Ala. 396, 49 So. 404 (1909), but the Supreme Court of the United States reversed, 216 U.S. 400, 30 S.Ct. 287, 54 L.Ed. 536 (1910), holding that the tax violated the Equal Protection Clause. The legislature responded by enacting a franchise tax on both domestic and foreign corporations, in the manner prescribed by the respective constitutional sections. Acts 1915, Act No. 464. In Louisville & N. R.R. v. State, 201 Ala. 317, 318, 78 So. 93, 94 (1918), [3] the Court held that the tax did not operate as an arbitrary discrimination against foreign corporations. The statute levied a tax on every domestic corporation, with exceptions as provided in § 229, of 40 cents per $1,000 of its paid-up capital stock and a tax on foreign corporations, with exceptions as provided in § 232, of 40 cents per $1,000 on the amount of capital actually employed in this state. The Court distinguished the tax from the one invalidated in Southern Ry. v. Greene, supra , and included the following discussion of the history of §§ 229 and 232: The act, both as to foreign and domestic corporations, employs the exact language of the Constitution, and if we look to the journal and debates of the constitutional convention upon the adoption of sections 229 and 232, we think it is well demonstrated that the difference between the two was made for the sole purpose of avoiding a discrimination against foreign corporations. The committee on corporations reported to the convention section 229 as it now appears in our Constitution, and section 232, as reported, contained the words `in proportion to the amount of its capital stock.' An amendment was offered by Mr. Kyle, changing the words as italicized so as to read, `shall be based on the actual amount of capital employed in this state.' In support of this amendment Mr. Kyle, among other things, said: `For instance, take the Tennessee Coal & Iron Co. They have a capitalization of $30,000,000. They have large property in Tennessee as well as in Alabama. Therefore it should not be required of them, or any other corporation of like character, to pay its franchise tax upon property they own in other states. Take the Southern Iron & Foundry Company. They have a capitalization of $600,000 and own a small plant in this state. The main plant is in Tennessee. This amendment would reach all the capital they had in use in Alabama, but they would not have to pay upon the entire capital stock. The Western Union Telegraph Company, with $80,000,000 capital, would have to pay on the capital of $80,000,000 instead of what she has in this state. So this reaches the matter and makes it the property in possession of the state. The committee will accept that I hope.' The section as amended was then adopted. Of course, this court is not bound by the debates of the constitutional convention, but they are often looked to, and the one in question is very persuasive that the framers of our organic law did not intend to discriminate against foreign corporations as to a franchise tax and adopted the foregoing amendment to section 232 for the sole purpose of avoiding a discrimination by fixing the basis for the franchise tax upon the amount of property actually employed in this state. The constitutional convention, therefore, expressly amended the corporation committee's proposal that became § 232, so that a foreign corporation's franchise tax would be calculated according to the portion of its capital employed in this state, but it did not make such a change in the same committee's identically worded proposal for the tax on domestic corporations. The convention clearly envisioned that, absent the offered amendment, the proposed tax in proportion to the amount of capital stock would be calculated on the entire capitalization of the corporation. No such amendment was offered for the proposal that became § 229, so that section of the constitution directs the legislature to impose the tax on a domestic corporation's capital stock and does not provide for a reduction of a domestic corporation's franchise tax in proportion to its out-of-state capital. [4] It can also be seen from the quoted portion of Louisville & N. R.R. that the Court considered the term paid-up capital stock to be synonymous to the term capital stock. The Court later upheld franchise taxes imposed on a domestic corporation with a paid-up capital stock of $7,400,000, even though the corporation was in receivership. State v. Bradley, 207 Ala. 677, 678, 93 So. 595, 596 (1922). The Constitution of 1901 (section 229, quoted ante) and the laws of Alabama impose `franchise taxes' upon all existing domestic corporations, aside from exceptions of classes of which this corporation is not a member. Given the existence of a domestic corporation, the rate and tax period being prescribed by law as has been done, the only possible inquiry is the amount of the paid-up capital stock of the corporation. No assessment of the charge or imposition of this `franchise tax' is required or even possible under the laws, organic and statutory, of this state. Assessment, for purpose of taxationa quasi judicial actwas defined in Perry County v. R.R. Co., 58 Ala. 552, as consisting of a listing and an appraisal of the value of the items of property listed. Neither of these acts is requisite to the imposition or exaction of a `franchise tax' on domestic corporations; the laws of the state themselves effecting to impose the charge and exact its payment in expressly stipulated circumstances. The ascertainment, in a concrete case, of the monetary measure of the `franchise tax' imposed and demandable, upon the basis of the domestic corporation's paid-up capital stock, is not a judicial, but a ministerial, act of the governmental authority charged with the duty of performing that service. Grider v. Tally, 77 Ala. 422, 424-426, 54 Am. Rep. 65. A duty `is ministerial when the law exacting its discharge prescribes and defines the time, mode, and occasion of its performance with such certainty that nothing remains for judgment or discretion. Official action, the result of performing a certain and specific duty arising from fixed and designated facts, is a ministerial act.' Grider v. Tally, supra . In ascertaining the sum of the paid-up capital stock for the calculation of the amount of the `franchise tax' demandable of a domestic corporation, no judicial discretion or judgment is left to the body charged with that duty. Id., 207 Ala. at 679, 93 So. at 596. Thus, in the course of discussing whether a corporation in receivership was subject to the franchise tax, the Court firmly established the interpretation that the franchise tax would be measured by the corporation's paid-up capital stock, with no other factors taken into consideration. In 1920, the Attorney General issued an opinion stating that surplus capital was not to be included within the term capital stock as used in § 229. Atty. Gen.'s Biennial Report for 1919-20, p. 570. We do not see that that interpretation is necessarily a correct interpretation of § 229. The Court in Ellis v. W.A. Handley Mfg. Co., 214 Ala. 539, 540, 108 So. 343, 344 (1926), a case involving the foreign corporation franchise tax, noted: We are, of course, aware of the fact that in some instances `capital' and `capital stock' are used interchangeably, but such cannot be the case here, as section 229 of the Constitution, in dealing with domestic corporations, expressly bases the franchise tax on the `capital stock,' while section 232 bases the franchise tax on foreign corporations on the `actual amount of capital employed in this state.' See, also, State v. Guaranty Savings Building & Loan Ass'n, 225 Ala. 481, 144 So. 104 (1932), holding a domestic building and loan association subject to a franchise tax on its paid-in (or paid-upthe two terms are synonymous) capital stock, and holding a statute declaring the contrary unconstitutional under § 229. That decision was overturned by Amendment 27, ratified in 1935, which exempted such institutions and retroactively ratified the statutes declaring such an exemption. In 1982, the Court of Civil Appeals followed State v. Bradley's holding that a domestic corporation in receivership is subject to the franchise tax. [5] State, Dep't of Revenue v. Forrester, 419 So.2d 231 (Ala. Civ.App. 1982). The Court also reiterated Bradley's statements that the tax on a domestic corporation is based on the amount of its capital stock, not on the value of its property: The franchise tax on domestic corporations is based upon the amount of capital stock of the corporation and not upon the value of the corporate property. Article XII, § 229, Constitution of Alabama (1901); §§ 40-14-40 and -41.1, Code 1975. Alabama's franchise tax upon Alabama corporations `is imposed upon corporate existence, not corporate activity or exerted corporate function.' State v. Bradley, 207 Ala. 677, 93 So. 595 (1922). In that case it was determined that the appointment of a receiver did not work a dissolution of the corporation and, although under receivership, the franchise tax was collectible. Id., 419 So.2d at 233. Again in 1987, the Court of Civil Appeals cited the principle that § 229 allows imposition of a tax only on the amount of a domestic corporation's capital stock. The court held that a nonstock member association is not subject to the tax because it has no capital stock on which the tax can be imposed. State v. Raymond M. Sims, D.M.D., P.A., 519 So.2d 523, 523 (Ala.Civ. App. 1987) (emphasis in original), writ quashed, 519 So.2d 524 (Ala.1987). Although these recent cases by the Court of Civil Appeals reaffirm the principle that a domestic corporation's franchise tax must be in proportion to the amount of its capital stock, they do not re-examine, in the light of the changed treatment of corporate stock, the old holdings that capital stock includes only paid-in capital stock. We see nothing in § 229 that necessarily limits the term capital stock to paid-in capital stock. Although that interpretation may have been appropriate at one time, there is nothing in § 229 that prevents the legislature, should it so choose, from assigning to capital stock a meaning other than paid-in value. There are many more cases applying the franchise tax on foreign corporations than there are applying the tax on domestic corporations, and they have concerned questions such as whether the property or business sought to be included in the tax base was in fact capital employed in this state by the foreign corporation, and, if so, how to measure its value and apportion it to the tax imposed in this state. See, e.g., Ellis, supra; State v. National Cash Credit Ass'n, 224 Ala. 629, 141 So. 541 (1932); State v. Anglo-Chilean Nitrate Sales Corp., 225 Ala. 141, 142 So. 87 (1932), reversed, 288 U.S. 218, 53 S.Ct. 373, 77 L.Ed. 710 (1933); Investors' Syndicate v. State, 227 Ala. 216, 149 So. 83 (1933); State v. Southern Natural Gas Corp., 233 Ala. 81, 170 So. 178 (1936), affirmed, 301 U.S. 148, 57 S.Ct. 696, 81 L.Ed. 970 (1937); State v. Pullman-Standard Car Mfg. Co., 235 Ala. 493, 179 So. 541 (1938); Alabama Textile Products Corp. v. State, 263 Ala. 533, 83 So.2d 42 (1955). At least partially in response to the holdings in some of the above cases, the legislature passed numerous amendments to the foreign corporation franchise tax, refining the definition of capital employed and providing certain exemptions. See, e.g., Acts 1935, No. 194; Acts 1955, Second Ex. Session, No. 74; Acts 1961, No. 912; Acts 1963, No. 255; Acts 1965, No. 764; Acts 1969, No. 1138; Acts 1971, First Ex. Session, No. 103; Acts 1971, No. 499; Acts 1973, Nos. 469 and 1173; Acts 1985, No. 85-412; Acts 1986, No. 86-214. In contrast, the only amendments to the domestic franchise tax before 1983 simply raised the millage rate in conjunction with equal increases in the millage rate of the foreign corporation franchise tax. Acts 1935, No. 194; Acts 1955, Second Ex. Session, No. 74; Acts 1971, First Ex. Session, No. 103. The legislature maintained the same rate on the two taxes until 1983, when it increased the rate for domestic corporations to $10 per $1000 of capital stock, or a minimum of $50. Acts 1983, No. 83-745. On the motions for summary judgment, the parties submitted the depositions of James Sizemore, the Commissioner of the Department of Revenue, and Ernest Broadhead, the Chief of the Department's Division of Franchise Tax. Broadhead explained the genesis of the increase in the domestic tax rate. He explained that in 1983, at the request of some legislators, he drafted a proposed amendment of the domestic franchise tax that would have imposed that tax in the same manner as the tax on foreign corporations. The draft included a bill that would have proposed an amendment to § 229. When it became clear that those bills would not pass, Broadhead said, he hastily drafted a substitute bill, which became Act No. 83-745. Long before these efforts to amend § 40-14-40, the legislature had passed a tax on the stock of domestic corporations that seems clearly to have been designed to offset the reduced base of the domestic franchise tax. Sections 40-14-40 and -41 trace back to the General Revenue Act of 1935, Act No. 194. In that same Act, the legislature imposed a tax on the stock of domestic corporations. [6] That stock tax is now codified at § 40-14-70 et seq. Its approach for valuing the stock is somewhat similar to the provisions in § 40-14-41 for valuing the capital employed in this state by a foreign corporation. Although the domestic corporate stock tax is nominally imposed on the stockholders, not the corporation, § 40-14-73 allows a corporation to avoid filing a list of its shareholders by agreeing to pay the tax itself. Commissioner Sizemore stated in his deposition that all domestic corporations pay the tax, and Broadhead stated the same thing in an affidavit. There was evidence presented on the summary judgment motions showing the relationships among the foreign corporation franchise tax, the domestic corporation franchise tax, and the domestic corporation stock tax, as we shall show below. The following overview of corporate franchise/capital stock taxes was published in 1965 as Chapter 29 of the Report of the Special Subcommittee on State Taxation of Interstate Commerce of the Committee on The Judiciary, House of Representatives, June 30, 1965, Vol. 3, Part IV. It provides an informative background to the detailed history of such taxes in Alabama. The excerpts here are from pp. 903-911: At the present time thirty-six States [fn. 1] and the District of Columbia [fn. 2] raise revenue from businesses in corporate form through taxes measured in one way or another by the amount of the corporation's capital. Thus, in terms of the number of States employing it, the capital stock tax is comparable to the corporate net income tax and the sales tax. .... At the outset, it should be noted that taxes on or measured by corporate capital are levied under various names, such as `Corporation Franchise Tax,' `Corporation License Tax,' or `Corporation Business Tax.' Although they employ a wide range of techniques for valuing the tax base, all are annually recurring levies measured by the value of a corporation's capital, as distinct from its property. These taxes will be treated together in this report under the term `capital stock taxes.' They have been selected for study as a group because they raise a common problem for multistate business. Since the tax is computed by reference to the entire value of the corporation's capital, it becomes necessary to determine what proportion of that value is taxable in each State. It is this common problem of division of the base which more than any other makes these taxes suitable for study as a group. Despite the wide variety among capital stock taxes in techniques for valuing the tax base, the bases employed fall readily into two general categories. In one category are narrow bases taken from the corporation's statement of capital, either authorized shares or outstanding (or issued) shares, generally valued at par in the case of par-value shares and at various arbitrary amounts, such as $100 a share, in the case of no-par shares. Tax bases of this type will be classified under the term `capital-account' bases. In the other category are broader bases reflecting in a variety of ways historical earning capacity or value as a continuing business enterprise. These bases are generally defined in terms of balance sheet items with some adjustments for more realistic valuation. They may be measured by corporate net worth ( i.e., the excess of assets over liabilities); or by the market value of the corporation's shares. All of these bases will be classified under the term `capital-value' bases. Also included with the capital-value bases are the so-called `corporate excess' taxes, although their closer relation to property taxes requires separate historical treatment in this chapter. .... Beginning about the turn of the century, the number of capital stock tax States grew rapidly. In 1902, there were thirteen such States. By 1912, the number had reached twenty-five, and by 1929 it was thirty-three. The surge of capital stock taxes appears to have crested by 1929; since then the total has increased by only four. .... This brief history demonstrates how the capital stock tax grew out of two very distinct forms of tax, each of which has left traces that are important in any appraisal of the present system. On the one hand, there were the one-time incorporation and entrance fees exacted for the privilege of existence or operation as a corporation. These fees, even if not flat amounts, are measured with reference only to the technical corporate structure. The capital account taxes today appear to be such fees made annually recurring. This form of tax base is readily ascertainable, but takes no account of the going-concern value of the corporation. On the other hand, there were the ad valorem property taxes. Today's capital value taxes appear to have evolved from these property taxes, and are measured by a base which is essentially the entire corporation valued as an entity. Tax bases of this kind are not calculable according to precise statutory rules, but instead their definition consists of no more than a generalized standard for valuation. Indeed, in many States the tax authorities have power to consider any facts found relevant in reaching a correct valuation and to revise the taxpayer's valuation and make an additional assessment. .... The capital stock tax has retained features which inhibit its revenue-producing potential. The most important of these is the continued use by half of the States of capital-account bases, which fail to reflect any element of going-concern value. 1 Alabama, Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Idaho, Illinois, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Missouri, Nebraska, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Virginia, Washington, and West Virginia. 2 As in other parts of this report, the District of Columbia is treated hereafter as a State. In the terms of that report, one could say that § 40-14-40 imposes on domestic corporations a capital-account tax, and that §§ 40-14-41 and -70 impose capital-value taxes. Given these facts, we now turn to a discussion of the standards that have been developed by the United States Supreme Court for applying the Equal Protection and Commerce Clauses to questions similar to the ones presented here.